On June 20, 2011, the United States Supreme Court, in a 5-4 decision, sided with Wal-Mart in the gender discrimination class action lawsuit brought by an estimated 1.6 million female employees. In the case, Dukes v. Wal-Mart, plaintiffs alleged that Wal-Mart engaged in a pattern and practice of discrimination in terms of pay and promotion practices.

The Supreme Court essentially held that employees seeking to maintain a class-action discrimination claim against their employers must show that a common question ties together the claims of each and every plaintiff in the purported class. In other words, there must be cohesiveness in the facts presented by the plaintiffs.

The plaintiffs attempted to demonstrate “the glue” by arguing that Wal-Mart gave too much discretion to individual store managers and supervisors as respects pay and promotion practices, thus allowing a corporate pattern and practice of discrimination to exist. The court rejected the plaintiffs’ arguments, reasoning that “in a company of Wal-Mart’s size and geographical scope, it is unlikely that all managers would exercise their discretion in a common way ‘without some uniform policy directing them to do so.’” The Court’s decision reverses that of the U.S. Court of Appeals for the Ninth Circuit, which had affirmed the class certification granted in June 2004 by the U.S. District Court for the Northern District of California.

Since the Supreme Court issued its decision, employment law experts have weighed in on the implications. Rather than reiterate those opinions here, this FINPRO Focus will discuss the critical questions on the minds of buyers of employment practices liability insurance policies (EPLI) in light of the court’s decision:

1. How does Dukes v. Wal-Mart impact a company’s decision to purchase EPLI?
2. How, if at all, will the EPLI market change or respond in light of Dukes v. Wal-Mart Stores?

How Does Dukes v. Wal-Mart Impact a Company’s Decision To Purchase or Maintain EPLI?

The Supreme Court’s decision in Dukes is no doubt a victory for large, multinational employers in that plaintiffs must meet a higher burden of proof in establishing commonality in class-action lawsuits, particularly those seeking monetary damages, as distinguished from those seeking structural remedies. However, the court’s decision is likely to have little impact—if any—on a company’s decision to purchase or maintain EPLI.

First, according to the 2011 edition of the Annual Workplace Class Action Litigation Report published by Seyfarth Shaw, employment related class-action complaints rose to an all-time high of 14,559 in 2010, up from 13,720 in 2009. In addition, the value of the 10 most expensive employment discrimination class-action settlements in 2010 was approximately $346.6 million, a four-fold increase over 2009. These statistics indicate that, regardless of the Supreme Court decision in Dukes, the exorbitant settlements in class-action lawsuits still pose a significant threat to companies.  

Second, the plaintiffs’ bar will continue to test the rules of class certification, specifically the dimension of class sizes, as well as the scope of recoverable damages.

As respects Dukes specifically, the Supreme Court’s decision will not put an end to the litigation over alleged discriminatory practices at Wal-Mart, according to press releases issued and interviews conducted by some of the lead plaintiffs in Dukes and their attorneys. In general, the decision is likely to increase the frequency of multi-plaintiff claims and, correspondingly, the overall costs of defending employment discrimination cases.

Based on several studies, the average costs of defending a class-action lawsuit can range from $5 million to $100 million, depending on the size of the potential class, venue of the litigation, the size of the employer, the lawyers involved, and, more importantly, the length of the litigation. Accordingly, even if a putative class-action lawsuit is not certified or the class is later decertified, the cost of reaching that determination is a sufficient justification for a company to purchase or maintain its EPLI coverage.

Third, although the financial impact of class-action claims is significant, the operational impact (e.g., impact on employee morale, disruption of normal business operation for purpose of discovery, etc.) and reputational risks cannot be overstated. EPLI, coupled with expertly designed litigation strategy, generally provides companies with additional assurance that their EPL claims can be managed and settled expeditiously (and, often, quietly) so as to minimize any operational disruptions.

Fourth, the Supreme Court’s decision could be the impetus for legislative action by the U.S. Congress to further clarify the circumstances under which a large employer can be sued in an abnormally large class action. Rep. Nancy Pelosi (D-CA) has already restated her party’s commitment to passing the Paycheck Fairness Act,  which has been stalled in Congress since last year.

Similarly, with additional funding currently provided by the Obama Administration, the Equal Employment Opportunity Commission (EEOC)—which is not subject to the same class-action procedures as a private employer—may now be even more compelled to bring additional class-action lawsuits on behalf of employees. In response to the Supreme Court's decision, the Office of Federal Contract Compliance Programs (OFFCP) recently announced it will make seeking class relief for equal pay and other violations a priority. OFFCP, the agency charged with enforcement of affirmative action and equal employment opportunity required of federal government contractors, like the EEOC, does not have to abide by class certification rules required of private plaintiffs.

Finally, the Dukes decision should not cause companies that have historically purchased EPLI for catastrophic losses to reduce the amounts of limits purchased. The costs of defending class actions remains a real exposure: A study of several recent EPLI class action settlements indicated that the amount of a class-action settlement may have little to do with the class size.

For example, the recent $175 million settlement (following a total jury verdict of $253 million) in Velez v. Novartis was on behalf of 5,600 female employees who, like the plaintiffs in Dukes, alleged a pattern and practice of gender discrimination. (To read more about the Novartis case please read our white paper, “Novartis $250 Million Punitive Damages Award: Why Employment Practices Liability Insurance Matters”).

Given the above considerations, it is clear that Dukes does not eliminate the overall exposure presented by class actions, and companies should not be lulled into a false sense of security as a result of the decision. EPLI should, therefore, remain an integral part of a company’s overall risk management strategy, in addition to vigorous enforcement and consistent implementation of fair employment policies and procedures.

How, If at all, Will the EPLI Market Change or Respond in Light of Dukes v. Wal-Mart?

Notwithstanding the Supreme Court’s decision, EPLI insurers remain concerned about the potential exposures in class-action lawsuits, whether small or large. As noted above, defense costs and settlement costs in class actions can be exorbitant. Therefore, EPLI insures likely will continue to focus on the overall risk profile of each company while placing additional scrutiny on those companies in which human resources policies, procedures, and decisions are decentralized. In particular, insurers may scrutinize the level of discretion given to local managers and supervisors within multinational organizations; in the past, underwriters placed greater value on centralized human resources and legal functions.

The court’s decision may also cause insurers to focus on several terms and conditions of EPLI policies, such as the prior and pending litigation exclusion, the definition of claim, and interrelated claims provisions. As always, a careful review of all coverage terms is essential, but in light of these concerns it is critical that purchasers of EPLI carefully review these provisions in their policies to ensure that they appropriately address coverage issues that may arise as a result of EPL class-actions claims.

For more information on the above and the potential EPLI coverage implications in light of the Supreme Court decision in Dukes v. Wal-Mart, please contact your Marsh representative or Adeola Adele at 212-345-1724, or adeola.i.adele@marsh.com.

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