Seventh Circuit Deals a Blow to Defense Reliance on Wal-Mart v. Dukes
One of the pro-defense takeaways from the Supreme Court’s 2011 Wal-Mart Stores, Inc. v. Dukes decision was that the presence of a companywide policy delegating employment decisions to the discretion of local managers meant the absence of a common issue justifying class treatment under Rule 23(a)(2). Or so we thought.
The Seventh Circuit’s decision in McReynolds v. Merrill Lynch by Judge Posner upends such a facile conclusion. In McReynolds, the plaintiff Merrill Lynch brokers claimed that two companywide policies – both of which impacted broker compensation – exacerbated racial discrimination. The district court, following Wal-Mart, denied class certification, finding that Merrill Lynch, like Wal-Mart, delegated discretion over broker compensation decisions to local managers, and within each branch office, the brokers exercised autonomy within the framework established by the company: “The two policies in question…depend in their implementation on discretionary decisions that affect each of the class members…Consequently, even though plaintiffs might be able to raise a common question or questions, there is no capacity of a class-wide proceeding to generate common answers apt to drive the resolution of the litigation.”
Taking a hard look at the challenged policies and how they were implemented, the Seventh Circuit reversed the district court’s denial, holding instead that the two challenged companywide policies influence how the localized compensation discretion is exercised. Accordingly, the court held that these policies took the case outside of the rule set forth in Wal-Mart.
The first challenged policy, “teaming,” permits brokers in the same office to form teams. Notably, teaming is optional, and management does not select team members. However, the Seventh Circuit analogized teams to fraternities – wherein the brokers, like fraternity members, tend to choose team members who are most like themselves. And as with fraternities, the Court found that teaming may be beneficial: team members share clients with an eye toward increasing access to additional clients, securing client loyalty, and increasing client investment: “[T]here is no doubt that for many brokers team membership is a plus; certainly the plaintiffs think so.” Therefore, if the “teaming policy causes racial discrimination and is not justified by business necessity, then it violates Title VII as ‘disparate impact’ employment discrimination and whether it nonetheless is justified by business necessity are issues common to the entire class and therefore appropriate for class-wide determination.”
The second challenged policy, “account distribution,” involves the distribution of client accounts to other brokers when a broker leaves Merrill Lynch through a competition based on the generation of revenue and client base. But once a black broker is unable to join a profitable team, he will generate less revenue and have a smaller client base, and “a vicious cycle will set in.” The court held that this “spiral effect attributable to company-wide policy and arguably disadvantageous to black brokers presents another question common to the class.”
On the one hand, the Merrill Lynch supervisors can veto teams and can supply company criteria for distributions. Thus, “to the extent [supervisors] exercise discretion regarding the compensation of the brokers whom they supervise, the case is indeed like Wal-Mart.” But for the Seventh Circuit, the similarities between McReynolds and Wal-Mart ended there because, unlike in Wal-Mart, “the exercise of that discretion is influenced by the two company-wide policies at issue.” The companywide policies are practices of Merrill Lynch, not of local supervisors. Therefore, the Seventh Circuit concluded, challenging those policies is not “forbidden by the Wal-Mart decision.”
The question now becomes: After McReynolds, can an employer rely on its decentralization of employment decisions to defeat class certification where plaintiffs argue that a top-down policy of delegation in and of itself creates a disparate impact? After McReynolds, the answer may depend, in the words of the Seventh Circuit, on “which side of the line…separat[ing] a company-wide practice from an exercise of discretion by local managers” your case falls.
