Does McReynolds Provide a Path to Class Certification in ERISA Cases?

Brent Austin and David Simon

Corporate Counsel

07-25-2012

Wal-Mart Stores, Inc. v. Dukes (2011) changed the landscape for class actions. The U.S. Supreme Court denied class certification for discrimination claims based on discretionary compensation decisions by local managers, holding that the claims lacked a common issue subject to class-wide proof. There was no “significant proof that an employer operated under a general policy of discrimination.”

Dukes makes traditional damages classes more difficult to certify. Plaintiffs are responding by exploring different class certification strategies, including issue certification. A recent Seventh Circuit decision, McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (2012), highlights this approach. Federal rules permit courts to certify a class only to decide particular issues on a class-wide basis, while reserving other issues for later individual trials.

Issue certification requests may involve either Rule 23(b)(2) injunction classes or Rule 23(b)(3) damages classes. Plaintiffs may prefer injunction classes because the Rule 23(b)(3) predominance requirement does not apply and, when seeking only equitable relief, they avoid concerns over jury instructions and jury confusion by having courts, not juries, decide the certified issues.

Issue certification requests have a checkered history. In McReynolds, however, the Seventh Circuit embraced this idea. There, plaintiffs assert that Merrill Lynch engages in practices that have a racially disparate impact on a class of 700 current and former black brokers. As in Dukes, the company delegates discretion over compensation decisions for 15,000 brokers to 135 directors. Without more, Dukes would have precluded class certification, because discrimination claims involving decentralized discretionary compensation decisions ordinarily lack a common issue subject to class-wide proof.

Plaintiffs, however, assert that two facially neutral company-wide policies are factors in the directors’ discretionary compensation decisions and result in racial discrimination. They asked the district court to certify a class to decide whether the policies have a discriminatory influence on discretionary compensation decisions, notwithstanding that this class-wide decision would leave for hundreds of later individual trials the questions of whether and how much the policies adversely affected each class member.

The district court denied class certification based on Dukes, but the Seventh Circuit reversed. Judge Richard Posner wrote that Dukes did not bar class treatment because the policies, as factors in the discretionary process, may have “increase[d] the amount of discrimination.” “This incremental causal effect (overlooked by the district judge) of those company-wide policies—which is the alleged disparate impact—could be most efficiently determined on a class-wide basis.” Hundreds of trials might later be required to determine whether each class member “had been adversely affected by the corporate policies, and by how much,” but “at least it wouldn’t be necessary in each of those trials to determine whether the challenged practices were unlawful.”

The Seventh Circuit (and Judge Posner) previously embraced issue certification in Mejdrech v. Met-Coil Systems Corp. (2003), an environmental property damage class action. McReynolds and Mejdrech highlight a potential path to post-Dukes class certification, at least in employment discrimination and single-source pollution cases. Do they provide a path to class certification in other contexts? Maybe. Following Dukes, some commentators anticipated a greater interest in issue classes.

Two months after McReynolds was decided, plaintiffs in an Employee Retirement Income Security Act (ERISA) case (in federal court in Chicago) made McReynolds the basis for their renewed argument for class certification. In Pennsylvania Chiropractic Association v. Blue Cross Blue Shield, plaintiffs originally sought certification of ERISA claims against numerous health insurers for damages and injunctive and declaratory relief by a class of health care providers.

Plaintiffs assert that the insurers violate ERISA by falsely accusing providers of overcharging for their services, when in fact the insurers actually are making ERISA-adverse retrospective benefit determinations based on arbitrary and capricious findings. The insurers then allegedly demand immediate repayment of past benefits, fail to “provide full and fair review” of the decisions as required by ERISA, and compel repayment by withholding unrelated benefit payments.

The district court denied plaintiffs’ original motion for certification of a class against all of the insurers, but in April 2012, plaintiffs filed new motions seeking certification of a separate class for each insurer. This time, plaintiffs cite McReynolds and seek just the following class-wide decisions: (a) declaratory relief providing that class members are entitled to—and have been deprived of—ERISA rights relating to the recoupment demands; and (b) injunctive relief requiring the insurers to offer “full and fair review” procedures.

The district court has not yet ruled, but the plaintiffs’ approach ignores many significant issues required for a final judgment: whether ERISA governs each insurance plan and recoupment; each class member’s patient assignments and standing; contractual anti-assignment provisions; whether each insurer’s practices substantially comply with ERISA; and pre-litigation settlements. Each class member, moreover, also must prove an adverse impact by the recoupment practices, the impropriety of each recoupment demand, and the amount of improper recoupment—potentially requiring fact and expert evidence regarding each charge and service.

Plaintiffs would reserve all of these issues for numerous subsequent individual trials. That request raises the question of where the line is to be drawn under decisions like McReynolds between issue class trials that might advance the litigation through a meaningful decision on a key question, and those that do not. McReynolds offers no clear answer.

Earlier federal decisions have raised serious questions about the efficiency of certifying just a sliver of an issue of liability for a class-wide trial. For example, issue certification may result in a class-wide determination of only part of the causation issue, leaving the rest for later individual trials.

While McReynolds appears untroubled by that result, cases such as In re Agent Orange (1987) have rejected issue certification for this very reason. The Seventh Amendment’s Reexamination Clause (“no fact tried by a jury shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law”) also may preclude issue certification if the later individual trials will decide issues that overlap the issue decided in the earlier class-wide trial. See, e.g., In re Rhone-Poulenc Rorer, Inc. (1995).

The purportedly common issues in McReynolds and Pennsylvania Chiropractic Association, moreover, arise in cases involving, fundamentally, classes seeking monetary relief—with monetary issues being among the many issues reserved for post-class trials. Rule 23(b)(2), which governs injunction classes, ought not provide a basis for certification, because plaintiffs’ claims for monetary relief are not incidental components of their claims (as Dukes requires for certification under Rule 23[b][2]).

Merely invoking the phrase “company-wide policy” is emphatically not synonymous with identifying truly common issues. As Justice Antonin Scalia wrote in Dukes, “[a]ny competently crafted class complaint literally raises common ‘questions.’ ” Dukes makes whether to certify a class an exacting standard that requires careful scrutiny. That usually involves a necessarily fact-intensive inquiry. Federal courts have become much more rigorous in evaluating the plausibility of a complaint’s allegations. There is no reason why the concepts expressed in the Supreme Court’s Twombly and Iqbal decisions cannot be exported into an early motion to strike class allegations.

Assuming a complaint survives past the pleading stage, parties supporting class treatment should be held to a strict standard of making a factual showing supporting certification. The opponents of class treatment likewise must be prepared to develop their own record evidence rebutting the presence of common issues.

The ability to bifurcate between merits and class discovery will become increasingly more difficult. After Dukes, class certification decisions will most likely turn heavily on expert evidence. Dukes does not directly rule on whether expert witnesses can or should be challenged at the class stage under the Supreme Court’s decision in Daubert, but the Supreme Court recently granted certiorari in Comcast Corp. v. Behrend (2012) to decide this issue.

Issue certification accordingly is likely to remain controversial, in employment cases, in ERISA cases, and, indeed, in virtually all class action cases.

Brent Austin is a partner in the litigation department of Edwards Wildman, and co-chair of the firm’s U.S. complex commercial litigation practice group. He concentrates on complex litigation in state and federal courts nationwide, with an emphasis on class actions. David Simon is also an Edwards Wildman litigation partner. His experience includes cases involving antitrust, securities fraud, lender liability, class actions, complex contracts and business tort claims, statutory and regulatory violations, and corporate governance, SEC investigations, and management of related complex electronic discovery issues.