The Seventh Circuit’s decision in McReynolds v. Merrill Lynch, No. 11-3639 (7th Cir. Feb. 24, 2012), exemplifies how courts are dealing with the Supreme Court’s recent decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), at least in Title VII class certification settings.  In Wal-Mart, the Court denied certification of a purported class where the employment decisions alleged to be discriminatory had been delegated to local managers.  In McReynolds, a decision written by Judge Richard Posner, the Seventh Circuit reversed the district court’s denial of class certification under Fed. R. Civ. P. 23(b)(2) and (c)(4).  The Seventh Circuit held that certain issues could be resolved on a class-wide basis. The Court’s allowance of issue certification to permit an otherwise uncertifiable class to be certified may prove to be a problematic new trend for defendants, and one that undercuts the requirements of Fed. R. Civ. P. 23.

In McReynolds, approximately 700 African American brokers, both current and former employees, filed a class action against Merrill Lynch claiming racial discrimination in its employment practices in violation of Title VII of the Civil Rights Act of 1964.  Plaintiffs claimed that the company’s “teaming” and “account distribution” policies – which allowed brokers to form their own sales teams and which allowed allegedly biased criteria to determine the distribution of accounts of departing brokers — had a disparate impact on African American brokers.

Plaintiffs originally moved for class certification in 2010, which was denied by the district court. Plaintiffs renewed that motion based on the Supreme Court’s Wal-Mart decision, and class certification was again denied by the district court. However, the district court explicitly urged a Fed. R. Civ. P. 23(f) interlocutory appeal to determine whether and how Wal-Mart should affect the certification issue.

The Seventh Circuit reasoned that, as opposed to Wal-Mart, where “there was no company-wide policy to challenge,” Merrill Lynch’s teaming and account distribution policies were alleged to be implemented company-wide and were well suited to a class-action challenge.  Although the brokers’ compensation was determined at the local level by managers with company-delegated discretion, that did not preclude a class action challenge to the two policies.  The court rejected defendants’ argument that any discrimination would result from the “local, highly-individualized implementation of policies rather than the policies themselves.”  Even if there would have been racial discrimination on the local level in the absence of the corporate policies, “[t]he incremental causal effect . . . of those company-wide policies—which is the alleged disparate impact—could be most efficiently determined on a class-wide basis.”

Assuming the Plaintiffs were to succeed in their challenge, each of the class members would have to prove their compensation was adversely affected by the corporate policies in separate, individual actions.  The Seventh Circuit reasoned that judicial efficiency favored permitting certification of an injunctive relief class and a class concerning the determination of issues susceptible to class-wide treatment, with damages to be determined separately:  “Obviously a single proceeding, while it might result in an injunction, could not resolve class members’ claims…. So should the claim of disparate impact prevail in the class-wide proceeding, hundreds of separate trials may be necessary…. But at least it wouldn’t be necessary in each of those trials to determine whether the challenged practices were unlawful.”

However, relying on In re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1020 (7th Cir. 2002) and In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1299-1300 (7th Cir. 1995), the Court indicated that the outcome of the issue certification analysis may be impacted by the size of the dispute in relation to the size of the defendant: “If resisting a class action requires betting one’s company on a single jury verdict, a defendant may be forced to settle; and this is an argument against definitively resolving an issue in a single case if enormous consequences ride on that resolution.”

The Seventh Circuit’s decision may be problematic for defendants in discrimination class action suits and in other contexts in which a court determines that judicial efficiency weighs in favor of permitting class certification on particular issues.