The Wal-Mart class action is no aberration

By Roger Parloff, Fortune senior editor

The Wal-Mart class action is no aberration; it's an epitome. It shares a common skeletal structure with almost every employment discrimination class action today and thus opens a telling window on a looming litigation threat to corporate America.

The rulings in the Wal-Mart case "virtually guarantee that employers will be subjected to large-scale employment discrimination class actions with billions of dollars in potential damages, even ... where only a few individuals complain of discrete instances of disparate treatment," the U.S. Chamber of Commerce asserted in an amicus brief.

The Wal-Mart rulings could end up representing a high-water mark, however. The underlying legal battles seem destined for the Supreme Court. The urgent question is whether the current Court - with its staunchly conservative five-justice majority, sharp aversion to race-conscious remedies, and weak respect for prior precedent - will allow this situation to persist. The Wal-Mart suit may be the case that gives us the answer.

Two types of cases

The federal employment discrimination laws, first enacted in 1964, prohibit two types of discrimination. The most easily understood variety is called disparate treatment: The plaintiff alleges that the employer treated him worse than some other employee because of race, color, religion, sex, or national origin.

Then there is "disparate impact." Here the plaintiff need not allege discriminatory intent. Instead he charges only that the defendant company is using some employment practice that, while possibly well intentioned, isn't essential to the job and acts in a way that systematically disadvantages a protected group.

Employees have successfully challenged practices like requiring a high school diploma for certain blue-collar jobs (which put African Americans at a disadvantage in particular times and places); written tests (which put minorities at a disadvantage because of poor schools, language barriers, or cultural bias); and height requirements (which put Asian women seeking to become flight attendants at a disadvantage).

Though disparate treatment and disparate impact cases are both aimed at eradicating the same thing, there is potential tension between them.

The goal of disparate treatment cases is to guarantee every worker equal opportunity, but not equal outcomes. The focus of disparate impact cases is on equal outcomes. If one pursues equal outcomes too single-mindedly, one can compromise the principle of equal opportunity by inducing the use of quotas.

In 1988 the Supreme Court faced what it recognized to be a momentous crossroads. A black bank teller who had been turned down for a promotion four times in favor of white applicants asked the Court to let her sue on a disparate impact theory, even though the only "employment practice" she challenged was the bank's policy of giving unbridled discretion to managers about whom to promote.

It had long been recognized that unfettered discretion was vulnerable to intentional discrimination, and this bank employee was now arguing that it was also vulnerable to subconscious discrimination.

On the one hand, the Court's failure to allow such a suit might have permitted employment procedures that resulted in the functional equivalent of intentional discrimination. On the other, to permit it would come close to allowing plaintiffs to sue on the basis of statistical disparities alone. That in turn might force employers to adopt surreptitious quotas, even though courts have said they are illegal.

In the end, the Court let the case, known as Watson v. Fort Worth Bank & Trust, go forward, even while asserting that "an employer's policy of leaving promotion decisions to the unchecked discretion of lower-level supervisors should itself raise no inference of discriminatory conduct."

Four of the eight justices participating, led by Justice Sandra Day O'Connor, stressed that statistical disparities alone were not suspect.

She wrote, "It is completely unrealistic ... to suppose that employers can eliminate, or discover and explain, the myriad of innocent causes that may lead to statistical imbalances in the composition of their workforces."

One of the first class actions to make use of the Watson precedent was Stender v. Lucky Stores. That case, brought in the late 1980s against a supermarket chain in Northern California, was handled by two men who would play key roles in employment discrimination litigation, including the Wal-Mart case.

The first was a young but already accomplished employment lawyer, Brad Seligman. And the second was an organizational sociologist, William Bielby, who was an expert witness in the case. Bielby (pronounced BILL-by) had been studying gender segregation in the workplace since the 1960s and was then testifying in his first litigation. (Now 60, he is a professor at the University of Illinois in Chicago.)

Lucky Stores was a family-owned business, where store managers chose whom to place in which jobs without any job postings, written guidelines, or oversight.

At Lucky Stores there was near total gender segregation: Almost all the cashiers were women, for instance, while almost all the managerial-track jobs were held by men.

"So the issue there became, How do you get this extreme outcome when everything seems so fluid?" recalls Bielby.

The innocent possibility was that women sought out different jobs because of the responsibilities of raising children: They wanted lighter, more regular hours; no night shifts or weekends; and no geographic relocations.

The illegal possibility was that male managers were, at least to some degree, assuming that these would be women's preferences, inadvertently blocking those who did want more responsibility from ever getting it. (Intentional discrimination was also possible, of course, but if that could be proved, one would not need a disparate impact theory.)

In the Lucky Stores case Bielby testified both about the psychological literature concerning unconscious stereotypes and about the way the unfettered discretion given to managers at Lucky Stores allowed such stereotypes to run unchecked.

"There are studies that show," Bielby says today, "that the strongest predictor of whether an opening is filled by a man or woman is whether the previous incumbent was a man or woman.... It's built into our understandings of what the work is about and who does the work, and it becomes the air you breathe."

In 1992, U.S. District Judge Marilyn Hall Patel ruled for the plaintiffs at trial, emphasizing Bielby's testimony in her opinion. (The case was settled for $107 million.) Judge Patel's ruling alerted other plaintiffs employment lawyers to the power of such testimony. Soon they were calling Bielby or a handful of other psychologists and sociologists to provide similar testimony in their cases.

Trying to change a company

In December 1999, Brad Seligman got a call from a New Mexico lawyer who had won several sex discrimination suits against Wal-Mart on behalf of individual women employees. The lawyer said he thought there was a much bigger problem and wanted Seligman's advice about bringing a class action.

Seligman, now 56, heads a nonprofit group called the Impact Fund. It operates from modest offices in the Berkeley marina. He founded the group in 1992 - endowing it with $1.25 million of his own money - to mount, as its name suggests, high-impact employment discrimination cases.

From his earlier days in private practice Seligman knew that while it was rewarding to win a nice recovery for an individual, a class action victory could "change a company." Given his political views, he says, that was much more gratifying.

Seligman, who dresses casually in a sweater, khakis, and sandals with white socks, is a child of the '60s. He started college at the University of California at Santa Cruz in 1969, became active in left-wing politics, dropped out, moved to Berkeley, and then moved again to a secluded cabin in Sonoma County. In late 1974, when he found himself unable to meet his $10-a-month rent, he applied to law school.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.