Opinion

Alison Frankel

How a contrarian appellate judge helped brokers in Merrill race case

By Alison Frankel
August 28, 2013

In a historic decision in June 2011, the U.S. Supreme Court ruled that female employees of Wal-Mart could not sue the company for gender discrimination as a nationwide class. The court said in Wal-Mart v. Dukes that the women could not attribute any discrimination they’d supposedly suffered to corporate policies because those policies were implemented by local managers. I’m ignoring the subtleties of a long and complex decision, but, in essence, the Supreme Court concluded that Wal-Mart’s nationwide policies weren’t strong enough glue to bind together women with individual employment histories. A sweeping class action, the court said in a decision written by Justice Antonin Scalia, could not provide “a common answer to the crucial discrimination question.”

Dukes was widely viewed as a death knell for nationwide employment discrimination class actions (not to mention other broadly formulated class actions). So how is it that two years after the Supreme Court’s ruling, 700 African-American brokers who claim to have suffered race discrimination at Merrill Lynch have obtained a $160 million class action settlement from Bank of America, Merrill’s successor?

The answer lies in a bold reading of Dukes by the brokers’ lawyers at Stowell & Friedman – and a surprising endorsement of that interpretation by the 7th Circuit Court of Appeals, in an opinion written by a free-thinking judge who has shown no hesitation to tangle with Dukes author Scalia. Had it not been for Judge Richard Posner and his colleagues on the 7th Circuit panel that heard the Merrill brokers’ appeal, this case would not have resulted in what The New York Times reported to be the biggest-ever race discrimination payout by a U.S. employer. But don’t get too excited: According to the lawyer who won the Dukes case at the Supreme Court, Posner’s ruling in the Merrill class action isn’t going to help other employees who want to band together to bring discrimination claims.

As the Times reported in its scoop on the proposed settlement, Merrill broker George McReynolds embarked on what seemed to be a lonely journey when he first sued Merrill for race discrimination in federal court in Chicago in 2005. A longtime Merrill broker in Nashville, Tennessee, he was the only name plaintiff when the case launched, and, according to the Times, had trouble persuading colleagues to join him. Eventually 16 others signed on as name plaintiffs, claiming a disparate racial impact from Merrill’s policies of permitting brokers to form their own teams and of permitting managers to distribute client accounts to brokers based on past successes and failures.

In August 2010, U.S. District Judge Robert Gettleman denied a motion to certify a class of about 700 current and former African-American Merrill brokers. Gettleman said that the case didn’t satisfy the commonality requirement for class actions because the brokers had such varying experiences under hundreds of different managers. “Plaintiffs’ position essentially is that all of these decisions were made by racist employees of a racist company,” the judge wrote. “As numerous decisions from this district demonstrate, however, class certification should be denied when the plaintiffs’ class definition implicates numerous, independent decision-makers resulting in the need for numerous individual inquiries.” In February 2011, Gettleman once again refused to certify the class, denying a motion for reconsideration by the brokers. Four months later, the Supreme Court issued its ruling in Dukes, which seemed on its face to ratify Judge Gettleman’s reasons for denying class certification.

But Linda Friedman and Suzanne Bish of Stowell & Friedman saw hope in a decision that most class action lawyers regarded as a disaster. “We sat down with the opinion and read it line by line,” Bish told my Reuters colleague Amanda Becker. “We both came to the same conclusion: The language in the opinion actually favored and gave additional reasons for certifying our case. Merrill Lynch, at the highest level, devised, implemented and approved these policies, which were written documents that went to every manager…. There was no discretion; you had to follow this policy.”

In a renewed, post-Dukes motion for class certification, the Stowell lawyers argued that their case was different from the Dukes nationwide gender discrimination suit against Wal-Mart because the discriminatory impact of Merrill’s policies wasn’t the result of discretionary decisions by individual managers, but of across-the-board corporate rules. A common question – did nationwide Merrill policies on teaming and account distribution unfairly impede African-American brokers? – bound the class, according to the brief.

Gettleman once again refused to certify the class but he was intrigued enough by the brokers’ argument that he invited Stowell & Friedman to appeal his decision. The 7th Circuit, which can accept or reject appeals of class certification rulings, agreed to take up the case. In January 2012, Judges Posner, Diane Wood and David Hamilton heard arguments from Friedman for the class and from Timothy Bishop of Mayer Brown for Merrill. (Weil, Gotshal & Manges also represented the brokerage.)

A mere month later, Posner’s opinion for the 7th Circuit came down, and it was a stunner: Posner agreed with the brokers that the Supreme Court’s Dukes decision supported the certification of their class. Merrill’s teaming and account distribution policies, he said, applied across the company. And whether they resulted in racial discrimination was an issue common to the entire proposed class of black brokers, “and therefore appropriate for classwide determination,” Posner wrote.

A noted economic rationalist who openly challenges Justice Scalia’s strict textualist approach to the law, Posner said in the 7th Circuit Merrill opinion that the best way to determine whether the brokerage’s policies actually had a disparate racial impact would be through a class action requesting injunctive relief. “We are not suggesting that there is in fact racial discrimination at any level within Merrill Lynch, or that management’s teaming and account distribution policies have a racial effect,” he said. “The fact that black brokers have on average lower earnings than white brokers may have different causes altogether. The only issue at this stage is whether the plaintiffs’ claim of disparate impact is most efficiently determined on a classwide basis rather than in 700 individual lawsuits.”

If there were a classwide determination that Merrill’s policies had a racial impact, Posner said, each broker would subsequently have to prove that his or her compensation had suffered, but claims for back pay could be decided in individual mini-trials after the threshold question of liability was answered. (Posner used similar reasoning on the efficiency of classwide answers to threshold questions last week, when he wrote an opinion affirming the 7th Circuit’s previous decision to certify two classes of consumers who bought allegedly defective clothes dryers. The Supreme Court had vacated and remanded the class certification for reconsideration in light of Comcast v. Behrend, another Scalia opinion that raises the bar for class actions. Posner said that “it would drive a stake through the heart of the class action device” to require that every class member have identical damages.)

Merrill brought in O’Melveny & Myers to ask the Supreme Court to review the 7th Circuit opinion on class certification for the African-American brokers. The brokerage’s petition for certiorari argued that the 7th Circuit not only misconstrued Dukes, but also opened a Pandora’s box by certifying a class to address “a discrete sub-issue when … hundreds of individual trials would be needed to determine liability.” Merrill cited a supposed three-way split in the federal circuits on the latter question of certifying a class to determine classwide liability. It also attracted amicus briefs from the usual array of pro-business interest groups. The Supreme Court nevertheless denied the cert petition last October.

That leaves the 7th Circuit’s contrarian reading of Dukes in place. But how helpful is the appellate ruling for other employees? I emailed that question to the lawyer who won the Dukes case at the Supreme Court, Theodore Boutrous of Gibson, Dunn & Crutcher. Boutrous said that Posner and his colleagues appear to be the only appellate judges to have affirmatively relied on Dukes to certify an employment class. “That was a real stretch,” Boutrous said. He also said that the “unique fact pattern” in the Merrill class action will limit the ruling’s impact in other employment suits, and noted that even the 7th Circuit conceded that if the Merrill brokers had not filed their case as an injunctive action,  the class would not have satisfied the commonality requirement.

The result in this case will probably entrench both camps in the broader debate over class actions: Class action opponents will say that Bank of America was forced into a deal to avoid the risk of an adverse ruling on the discriminatory impact of its policies, while those who favor the device will say class certification brought justice to people who suffered a common harm. Either way, I suspect we haven’t seen the end of the Scalia v. Posner dialogue on class actions.

(This post has been corrected to clarify the type of class certification the brokers obtained.)

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