Imagine being hit with a discrimination case that involves millions of class members and potential damages in the billions of dollars. In the wake of a recent 9th Circuit decision upholding certification of the largest discrimination class action in history, Wal-Mart faces just that nightmare.

The case, originally filed in 2001 by six female Wal-Mart workers led by Betty Dukes, an employee at a Pittsburg, Calif., store, now includes all women who worked at any of the 3,400 U.S. Wal-Mart stores at any time since 1998. That’s potentially 2 million women, whom the suit alleges received lower pay and less opportunities than men.

While Wal-Mart is the immediate target, the gravity of the case extends far beyond the retail giant. In its long-awaited decision, the 9th Circuit bulldozed through barriers to class certification set up in Rule 23 of the Federal Rules of Civil Procedure. If upheld, the decision will make it far easier to bring employment mega-class actions, potentially setting off a feeding frenzy in the plaintiffs’ bar.

Wal-Mart immediately said it would seek en banc review from the full 9th Circuit and pledged to take the case to the U.S. Supreme Court if necessary, which could resolve differences between the 9th Circuit ruling and other circuits’ more restrictive standards for certifying large class actions. But for now, the 9th Circuit has changed the rules.

“If you were bringing a class action like this, I don’t know why you wouldn’t follow the Wal-Mart blueprint and structure your case the same way,” says Allan King, shareholder in Littler Mendelson.

Experts Examined

The Wal-Mart blueprint focused on identifying new approaches to satisfying Rule 23 of the Federal Rules of Civil Procedure, which sets out the elements for certifying a class. One key element involved Rule 23 (a)(2), which requires class members to demonstrate that they are seeking resolution of a common question of law or fact.

Wal-Mart claimed the proposed class failed to meet this commonality requirement because the company had a “hands-off” policy, allowing local store managers to make salary and promotion decisions, and therefore no common policy impacted women employees in different locations. But the plaintiffs said this hands-off approach itself constituted the common policy that impacted class members–arguing it fostered discrimination by allowing individual managers to make excessively subjective decisions based on gender stereotypes.

In support of this argument, the plaintiffs presented a sociologist who employed a “social framework analysis” to identify a strong corporate culture he said promoted gender bias.

Wal-Mart challenged his testimony, saying it did not meet the standards of reliability and relevance the Supreme Court established for expert testimony in Daubert v. Merrell Dow Pharm. The 9th Circuit rejected this argument, holding that Daubert does not apply at the class certification stage, and that even if it did, the sociologist’s testimony was admissible because “he employed a well-accepted methodology and his testimony had reliable basis in the knowledge ?? 1/2 of the discipline.”

Typically, courts have accepted expert testimony in class actions from statisticians and economists, but not sociologists. But the 9th Circuit gave its blessing to sociologists, stating that “social science statistics may add probative value to plaintiffs’ class action claims.” Experts from other disciplines take issue with that.

“There is no such thing as social framework analysis,” says King, who has a doctorate in labor economics in addition to a law degree. “But it will be a challenge for defendants to persuade the court that what they regard as a methodology is not.”

The 9th Circuit used the sociologist’s testimony to support a finding that the class had demonstrated commonality. The court wrote, “Evidence of Wal-Mart’s subjective decision-making policy raises an inference of discrimination and provides further evidence of a common practice.”

Punatives Permitted

Even more troubling to employers is that the 9th Circuit made it much easier for class action plaintiffs to seek punitive damages by lowering the bar for certification under Rule 23(b)(2). Under that rule, courts may certify cases as class actions only if the primary relief sought is injunctive rather than monetary.

The 9th Circuit relied on the plaintiffs’ assertion that their primary objective was injunctive relief, even though they also sought punitive damages. The fact that those damages amount to billions of dollars does not mean that money was the “predominant” relief requested, the court ruled. Instead, “The predominance test turns on the primary goal of the litigation, not the theoretical or possible size of the damage award.”

Other circuits have denied class certification when plaintiffs sought punitive damages because class members’ damages differ depending on their situation. For example, in 2006 the 5th Circuit denied certification in Colindres et al v. Goodman Manufacturing, saying that individuals “suffered differently under alleged discriminatory practices, [thereby making] class-wide punitive damages inappropriate.”

“The Dukes decision says that punitive damages can be determined in a class-wide setting. That’s pretty revolutionary,” says Gerald Maatman, partner in Seyfarth Shaw. “I suspect it will embolden the plaintiffs’ bar to seek wide-ranging and very significant damages in employment class action cases.”

The 9th Circuit also rejected Wal-Mart’s claim that the burdens of defending such a massive suit violated its due process rights. Wal-Mart argued it was entitled to individual hearings to offer specific defenses to specific claims and to contest claims for damages.

But the 9th Circuit found a class action preferable to “clogging the federal courts” with numerous suits over the same issues.

Constitutional Issues

The due process question and the issue of whether punitive damages are incidental or predominant are among several points that could propel this case to the Supreme Court.

“The basis on which you determine if money predominates is a question of constitutional dimensions,” says Jacqueline Jauregui, partner in Sedgwick, Detert, Moran & Arnold.

Pointing to the recent Supreme Court focus on limiting punitives in cases such as Philip Morris USA v. Williams, she adds, “I suspect [Dukes] would catch their eye, if it stands.”

Meanwhile, employers can use the findings in Dukes to assess their vulnerabilities. For example, companies could test how their corporate culture would stand up to a sociologist’s analysis. They also could look at how their decision-making processes can be made more objective and whether they have processes in place to ensure their managers implement non-discrimination policies.

“Companies don’t want to find themselves in the caption of a case such as Dukes,” says Meg Campbell, shareholder in Ogletree, Deakins, Nash, Smoak & Stewart. “If they take the lesson of this court’s analysis and look at what they are doing and how they can do it better, they’ll put themselves in the best defensive posture in the event of litigation.”