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Costco Employment Class Undone by Wal-Mart

Thursday, September 22, 2011

Michael F. Bahler | Bloomberg Law Ellis v. Costco Wholesale Corp., No. 07-15838, 2011 BL 237414 (9th Cir. Sept. 16, 2011) The U.S. Court of Appeal for the Ninth Circuit overturned the grant of class certification in a nationwide case against Costco Wholesale Corp., alleging that the warehouse club chain discriminates against its female employees in violation of Title VII of the Civil Rights Act of 1964, Pub. L. No. 88-352, 78 Stat. 241. The Court remanded the case for new Federal Rule of Civil Procedure 23 determinations consistent with the U.S. Supreme Court's decision in Wal-Mart Stores, Inc. v. Dukes, No. 10-277, 2011 BL 161238, (June 20, 2011). See Bloomberg Law Reports®, Federal Practice, Vol. 5, No. 26, Wal-Mart Gender Bias Suit Up-Ended by Supreme Court (June 27, 2011).

Costco Management Structure

Costco, headquartered in Issaquah, Washington, operates more than 350 warehouse-style retail stores. Each warehouse is run by a general manager (GM), two to three assistant general managers (AGM), and three to four senior staff managers. GMs are paid roughly $116,000 a year while AGMs earn approximately $73,000. Costco hires its GMs and AGMs almost entirely from within the company but has no written policy or guidelines setting out the criteria for promotion eligibility. While it does generate a list of "promotable" candidates, employees are not always told of the existence of the lists and Costco does not mandate that more than one candidate be considered for any specific opening or that performance reviews be considered before a candidate is promoted. Costco also does not retain records from its selection process. In August 2004, Shirley "Rae" Ellis filed a Title VII suit against Costco in California federal court, alleging that only one in six of the company's GMs and AGMs were women and that promotion decisions at Costco were based on the discriminatory attitudes of its CEO and upper management. Ellis had joined the company in 1998 as an AGM after working as a Sam's Club general manager. She informed the company that she was willing to relocate for a GM position and she also wrote to her supervisors expressing a "burning desire" to advance in the company and asking what she could to do to be promoted to a GM. Despite her efforts, Costco did not promote her. She also did not learn of GM openings until after the positions were filled.

Class Certification

Ellis sought injunctive relief, lost pay, and compensatory and punitive damages on behalf of a nationwide class of current and former female Costco employees who had been employed as an AGM or senior staff manager. She moved for certification under Rule 23(b)(2) and 23(b)(3), submitting employee declarations and expert testimony to show that women at Costco were promoted at slower rates and their male peers fill most of the AGM and GM positions, that they were underrepresented in managerial positions compared to female employees at comparable companies, and that Costco's corporate culture was pervaded by gender stereotyping and paternalism. In opposition to class certification, Costco offered the expert testimony of a statistician and labor economist, who posited that any gender discrepancies at the company, if they existed, were limited to two regions. Costco also submitted expert evidence to show that any possible gender disparities could be due to non-discriminatory factors such as women's lack of interest in jobs with early morning hours because of family responsibilities.

Commonality Requirement

In January 2007, the district court certified an injunctive relief class under Rule 23(b)(2) but did not rule on the propriety of 23(b)(3) certification. Costco appealed the ruling to the Ninth Circuit. Before the appeal was decided, the U.S. Supreme Court issued Wal-Mart, ruling that approximately 1.5 million current and former female Wal-Mart employees who were allegedly the victims of sex discrimination could not proceed as a class. The justices unanimously held that the Title VII suit should not have been certified under Federal Rule of Civil Procedure 23(b)(2)'s injunctive relief provision and a five-justice majority ruled that the employees also failed to meet Rule 23(a)(2)'s commonality requirement. Reviewing Costco's appeal, the Ninth Circuit faulted the district court for not resolving a key issue with respect to the commonality requirement, namely whether the alleged gender disparity only existed in the two regions, as asserted by Costco, or was company-wide. Citing Wal-Mart, the Court stated "it is not correct to say a district court may consider the merits to the extent that they overlap with class certification issues; rather, a district court must consider the merits if they overlap with the Rule 23(a) requirements." (Emphasis in original.) It added that "if there is no evidence that the entire [nationwide] class was subject to the same allegedly discriminatory practice, there is no question common to the class." Concluding that district court failed to conduct a "rigorous analysis" of the commonality requirement as required under Wal-Mart and resolve whether gender disparity pervades the company, the Court instructed the district court to conduct new Rule 23(a) determinations. It stated that "[i]f, as Plaintiffs allege, promotion decisions are based on the biased attitudes of the CEO and upper management, one would expect disparities in all, or at least most, regions."

Rule 23(b)(2) Certification

The Ninth Circuit also observed that Wal-Mart rejected the practice of certifying Rule 23(b)(2) classes that include claims for monetary damages if such damages are incidental to the litigation. The new inquiry looks to what due process safeguards are required for the type of relief sought, and the putative class members' rights to be notified of the suit and to opt out (mandatory in Rule 23(b)(3) classes) are not nullified just because plaintiffs chose to combine injunctive relief and monetary claims, even when the injunctive relief claims are primary. The Court stated that Wal-Mart made clear that the key to a 23(b)(2) class is the "indivisible" nature of the relief sought, and it ruled that the district court erred by not focusing on whether the requested monetary relief could be granted absent individual inquiries with respect to each employee's claims. The Court further instructed the district court on remand to consider whether: (1) the plaintiffs' claim for punitive damages may properly be included in a 23(b)(2) class, (2) the compensatory damages and back pay claims may alternatively be certified under Rule 23(b)(3), and (3) the case should be divided into sublcasses for standing purposes given that Wal-Mart held that only current employees possess standing to seek injunctive relief. Accordingly, the Court decertified the class and remanded the case. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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