ERISA Plaintiffs 'Duke' it Out: Class Certification in the Wake of Wal-Mart

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Tracey S. Bellapianta | Bloomberg Law In June 2011, the Supreme Court struck down the certification of a nationwide class of approximately 1.5 million current and former female employees of Wal-Mart Stores in the landmark decision Wal-Mart Stores, Inc. v. Dukes.1 In Dukes, plaintiffs alleged that Wal-Mart discriminated against women in making pay and promotion decisions in violation of Title VII of the Civil Rights Act of 1964.2 The Supreme Court found that allegations that Wal-Mart had a policy of permitting local managers to use discretion to make employment decisions based upon subjective factors did not satisfy the commonality requirement of Rule23(a)(2). This Dukes decision has already impacted the fate of class actions brought pursuant to the Employee Retirement Income Security Act (ERISA).3 To date, five district courts and one circuit court have relied on the Dukes decision and have denied class certification. Only one district court has upheld the granting of certification to an ERISA class after reconsidering its decision in light of Dukes. The types of cases range from typical stock drop litigation to the imposition of a cost transfer subsidy fee rate by a plan administrator. District court judges are now forced to carefully examine whether cases truly involve uniform issues suitable for class treatment or whether individual issues such as proof of causation, harm and reliance predominate. In "circumstances where participants are required to make individualized showings of reliance — or at least some showing of individualized harm — as a condition for prevailing, the chances of defeating class action certification will be substantially enhanced."4 Based on these rulings, one thing is clear: after Dukes, it appears to be more difficult to obtain class certification and motions to certify classes in ERISA actions will receive greater scrutiny in the future. The court rulings below will be explored in chronological order.

The Dukes Decision

In Dukes, plaintiffs sought to certify a class consisting of "[a]ll women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart's challenged pay and management track promotions, policies and practices."5 The district court granted certification6 of the proposed class under Rule 23(b)(2) of the Federal Rules of Civil Procedure based on plaintiffs' claims seeking back pay lost as a result of sex discrimination effectuated by local and regional managers' exercising of discretion in various decisions.7 A divided en banc Ninth Circuit Court of Appeals substantially affirmed the district court's certification order.8 The majority concluded that plaintiffs' evidence was sufficient to "raise the common question whether Wal-Mart's female employees nationwide were subjected to a single set of corporate policies (not merely a number of independent discriminatory acts) that may have worked to unlawfully discriminate against them."9 In a 5-4 decision, the Supreme Court reversed, holding that plaintiffs were unable to meet the commonality requirement under Rule 23(a)(2) because there was no "significant proof" that Wal-Mart had a "common" corporate policy of discriminating against women because the decisions were generally within the discretion of individual managers of Wal-Mart's 3,400 stores. The Supreme Court further held that the commonality requirement was not met by generalized questions that did not meaningfully advance the litigation and was not met where named plaintiffs and putative class members had not suffered the "same injury."10 Two main principles from the Dukes decision have emerged in subsequent ERISA (and other) class action jurisprudence. First, the Supreme Court rejected the argument that a district court must accept plaintiffs' allegations as true and avoid any factual considerations of the merits in ruling on class certification.11 The Supreme Court clarified that a district court judge must engage in a "rigorous analysis" before certifying a class action and is required to consider the merits of plaintiffs' claims if they overlap with issues related to certification.12 Second, the Supreme Court held that, although a single common question could be sufficient to establish commonality, recitation of basic common questions — in this case, whether Title VII had been violated — would not be sufficient. Further, it held that "commonality requires the plaintiff to demonstrate that the class members have suffered the same injury."13

Post-Dukes ERISA Decisions

Bacon v. Stiefel Laboratories14 The first court to reference the Dukes decision within the context of an ERISA class action was the Southern District of Florida in Bacon v. Stiefel Laboratories. In Bacon, the court denied plaintiffs' motion for class certification in a lawsuit alleging that plan fiduciaries and the corporate plan sponsor breached their fiduciary duties under ERISA and federal securities law by allegedly engaging in a fraudulent scheme to convince plaintiffs to sell their share in the company to defendants in advance of a merger that would yield large profits to shareholders. Plaintiffs alleged that defendants breached their fiduciary duties under ERISA by making several misstatements and omissions as part of a "pervasive and fraudulent pattern of behavior by defendants, which was allegedly designed to prevent Plan participants from realizing the value of their shares in the privately-held company."15 Specifically, plaintiffs alleged that the appraisal procured by the Plan fiduciaries undervalued the participants' accounts. The court referenced the two main principles espoused in Dukes: (1) that Rule 23 was more than a mere pleading standard and instead a party seeking class certification must affirmatively demonstrate its compliance with Rule 23; and (2) that a court may consider some of the merits of the case to determine whether the requirements of Rule 23 have been met.16 Unlike Dukes, the court found that plaintiffs did satisfy the four criteria set forth in Rule 23(a). Specifically, the court held that the commonality prerequisite was met because plaintiffs satisfied the minimal threshold of having at least a common question upon which certification could be granted — in this instance, whether defendants breached their fiduciary duty to plan participants by failing to hire an independent appraiser to properly value the company's stock price and failing to disclose to participants that other valuations performed had estimated the company's value at much greater than what had been communicated. Instead, the Bacon court held that plaintiffs failed to satisfy the requirement of Rule 23(b)(3), which requires that plaintiffs prove: (1) the predominance of the questions of law or fact common to the members of the class over any questions affecting any individual members; and (2) the superiority of the class action device for the fair and efficient adjudication of the controversy. The rule also requires an analysis of four specific areas of inquiry relevant to both predominance and superiority.17 Although defendants' misrepresentations may have been uniform, the court held that plaintiffs' subsequent actions in reliance on those misrepresentations could not be similarly uniform across the proposed classes and questions of reliance, investment strategy, and damages necessitated individual inquiry. Despite the differing bases upon which the court declined to certify the class, practitioners have argued that the ruling is "consistent with the principles recently enunciated by the Supreme Court in [Dukes] wherein the Supreme Court emphasized the need for class claims to be cohesive, and, therefore, that the need for individual evaluations of claims can defeat class actions."18Pipefitters Local 636 Insurance Fund v. Blue Cross Blue Shield of Michigan19 The Sixth Circuit is the only appellate court to rely on the Dukes decision within the ERISA context to date. On interlocutory appeal, the court held that certification of a class of entities that had service contracts with Blue Cross Blue Shield of Michigan (Blue Cross) was inappropriate under Rule 23(b)(3) because it was not the superior method of adjudication and did not present the risk of inconsistent adjudications required under Rule 23(b)(1)(A). The Pipefitters Local 636 Insurance Fund, a multiemployer health and welfare benefits trust fund, was an insured Blue Cross group customer. In 2002, the Fund converted to a self-funded plan and entered into an administrative services contract with Blue Cross, pursuant to which Blue Cross processed and paid the amounts billed for participants' health care claims. The fund then reimbursed Blue Cross. Blue Cross also began collecting an "other-than-group" subsidy, a cost transfer subsidy fee, from the fund to subsidize coverage for non-group clients. The fund sued Blue Cross claiming that it breached its ERISA fiduciary duties by imposing and not disclosing the fee and that the fee violated a Michigan law barring certain cost transfers.20 The district court certified a class pursuant to Rules 23(b)(3) or 23(b)(1)(A) consisting of all entities which had or have administrative-services contracts with Blue Cross and which were or were assessed the other-than-group fee on the following issues: (1) whether Blue Cross acted as an ERISA fiduciary by imposing the fee; and (2) whether it breached a fiduciary duty owned to plaintiffs by imposing the fee.21 Blue Cross argued that the district court abused its discretion by certifying the class because the main issue was whether Blue Cross was acting as an ERISA fiduciary when it collected the fee and that individualized inquiries into each contract's terms and funding arrangement would be necessary to assess whether Blue Cross sufficiently controlled plan assets to qualify as an ERISA fiduciary.22 The fund, on the other hand, contended that the main issue was whether the fee violated Michigan law and that this common issue satisfied Rule 23. The Sixth Circuit held that plaintiffs did not meet the standard required under 23(a) because, despite common issues, the issues actually certified would require individualized attention. In so ruling, the Court relied on the Dukes decision to conclude that, since the common questions had already been decided on summary judgment, there was "no common contention capable of classwide resolution such 'that determination of its truth or falsity [would] resolve an issue that [was] central to the validity of each one of the claims in one stroke."23

The Seventh Circuit Weighs In

George v. Kraft Foods Global, Inc.24 ERISA practitioners have been watching the Seventh Circuit closely, as three25 decisions from the Northern District of Illinois have already applied the Dukes decision to deny class certification to ERISA class actions.26 In Kraft Foods, the Northern District of Illinois held that plaintiffs were not entitled to class certification of their claim that Kraft Foods Global, Inc. breached its fiduciary duty under ERISA § 502(a)(2)27 by retaining two actively managed mutual funds as plan investment options although defendants had previously eliminated all actively managed investments from their defined benefit plans. The proposed plaintiffs in Kraft Foods were current or former participants of the Kraft-sponsored defined benefit 401(k) pension plan that had 28,000 to 55,000 participants between 1994 and 2010. The plan offered eleven investment fund options, including two mutual funds, which were actively managed by an investment manager with the intent that they outperform a particular index. The remaining funds were passively managed mutual funds designed to equal the performance of a given index. When the actively managed funds underperformed, plaintiffs sued alleging that they breached their fiduciary duties by retaining the funds as Plan investment options although defendants had eliminated all actively managed investments from their defined benefit plans years earlier. The court initially certified a plan-wide class, pursuant to Rule 23(a)(1)(B)28 of "[a]ll persons who were participants or beneficiaries in the plan, all current participant or beneficiaries in the plan, and those who will become participants or beneficiaries of the plan in the future."29 The court subsequently vacated the class in light of the Seventh Circuit's decision in Spano v. The Boeing Company.30 In its decision, the Kraft Foods court quoted Dukes for the legal standard for attaining class certification, noting that the plaintiff held the burden of proving that the class met the requirements of Rule 23, by "affirmatively demonstrat[ing]"31 compliance with the rule and noting that a district court judge should make whatever factual and legal inquiries were necessary under Rule 23, even if those considerations overlapped the merits of the case.32 The Kraft Foods court ruled that, although the proposed class was "better defined and more targeted" than the one that had been decertified in light of theSpano decision,33 plaintiffs' choice of Vanguard Funds (passively managed funds) as comparators improperly incorporated assumptions regarding unresolved issues of loss and causation. Of particular importance was the court's ruling that the plaintiffs failed to address whether class treatment was warranted in light of causation issues related to the breach of fiduciary duty claim. The court held that, even if defendants had breached their fiduciary duties, plaintiffs were not able to show that such breaches caused their losses because plan participants made individual investment choices in their accounts. Thus, the court held that plaintiffs did not "affirmatively demonstrate" that the proposed class definition was appropriate."34 In its conclusion, the court again emphasized the impact of the Dukes case on the court's decision to deny class certification:
This is not to say that class certification is not possible in this case. Rather, at this time, given the Supreme Court's emphasis in Dukes on thoroughly vetting class definitions prior to certification and the Seventh Circuit's cautionary language in Spano regarding certifying classes in cases such as this, the Court concludes that Plaintiffs have not yet established that the proposed class definitions are appropriate to certify.35
The court went on to note that it had not conducted a full Rule 23 analysis and that certain issues appeared suitable for class certification, such as the liability issues of whether defendants were fiduciaries and whether they breached their fiduciary duties, but that plaintiffs faced "significant hurdles" in convincing this court that class certification was appropriate for the loss and causation issues.36Groussman v. Motorola37 Less than a month after the Kraft Foods decision, the Northern District of Illinois again denied certification in an ERISA class action lawsuit, this time relying more "substantially"38 on the Dukes decision. Plaintiffs consisted of a putative class of 45,000 plan participants in the Motorola 401(k) Plan that alleged Motorola had breached its fiduciary duties under ERISA § 502(a)(2) and (a)(3)39 by improperly managing the plan by continuing to offer Motorola stock as an option after it was imprudent to do so, resulting in substantial losses to the Plan. Plaintiffs sought to certify a class under Rule 23(b)(1) and (3) consisting of "all persons who were participants in, or beneficiaries of, the [p]lan at any time between July 1, 2007 and December 31, 2008 and whose account included investments in Motorola stock."40 The court ruled that the plaintiffs failed to satisfy the requirements of Rule 23(a). Specifically, the court rejected plaintiffs' argument that, in order to meet the commonality requirement, it need only show a common nucleus of operative facts among the claims of the proposed class members, holding that plaintiffs failed to recognize the Dukes decision, which specifically stated that this showing was insufficient.41 The Court explained that the Dukes court "made clear that class certification should only be granted after a 'rigorous analysis' by the court."42 The court relied on Dukes in support of its position that, for the commonality requirement, a plaintiff must show that the class members suffered the same injury and that showing that they all suffered a violation of the same provision of the law would not suffice. Plaintiffs argued that the alleged ERISA violations arose from a common set of facts, and that the proposed class members shared common issues of law, specifically that defendants owed a fiduciary duty to plaintiffs and the proposed class members. The court rejected this argument, holding that plaintiffs did not show that the proposed class members suffered the same injury or that key common issues of fact or law were capable of resolution in a class action. According to the court: Plaintiffs' argument that the commonality requirement is met simply because all proposed class members were participants in the Plan and had invested in Motorola stock is the type of loose factual connections among class members that does not suffice under Dukes. Nor can Plaintiffs satisfy the commonality requirement by general allegations that all proposed class member will argue that Defendants violated ERISA and that Defendants breached their fiduciary duties.43 The court concluded that, although there might be some general overlapping common issues of fact and law, the assessment of damages for each plaintiff and proposed class member would require an individualized analysis for each class member. Specifically, the court held that that the relevant facts and circumstances for each class member varied widely because: (1) the proposed class did not consist of individuals who uniformly invested in Motorola stock at a set time and suffered in a similar manner; and (2) depending on individualized investment strategies, each class member would have suffered damages in a different manner. The court also held that, based on Dukes, plaintiffs failed to meet the requirements of the adequate representation prong of Rule 23(a). The court noted that the Supreme Court recognized in Dukes that a "rigorous analysis" in assessing a motion for class certification "will entail some overlap with the merits of the plaintiff's underlying claim."44 In this case, the court referenced defendants' reliance on evidence from plaintiffs' depositions that indicated that it was likely that plaintiffs would not be able to show that they took any actions in reliance on any misrepresentations or misleading statements by defendants. The court held that defendants successfully proved that neither of the proposed plaintiffs made any changes to their plan investments during the class period and therefore, since plaintiffs would be unable to establish defendants' liability on their own claims, they would not be appropriate representatives for the class.


So far, the Southern District of Florida, the Northern District of Illinois and the Sixth Circuit have all denied or reversed the grant of certification of class actions under the standard set forth by Dukes. Upon reconsideration, the Southern District of Illinois declined to de-certify a class in light of Dukes. As we continue through 2012, it will be interesting to see how other courts and other district and circuit courts apply Dukes to cases in all stages of the class action proceedings. DisclaimerThis 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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