Troy Wolverton

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Wal-Mart Waits for a High-Stakes Ruling

Troy Wolverton

A federal judge in San Francisco heard arguments from the company and plaintiffs' lawyers on whether the suit should receive class-action status. The attorneys for seven plaintiffs, all women, are hoping the judge will certify a class of some 1.6 million current and former female employees of Wal-Mart. That would make it the largest sex discrimination class action ever, according to the attorney for the plaintiffs.

The battle over whether to certify the class could prove crucial for Wal-Mart. Without class certification, the company is facing merely seven plaintiffs, with no pressure to settle the suit. With certification of such a mammoth class, the retail giant would be under enormous pressure to settle, with a potential payout in the billions of dollars. Companies typically settle class-action suits out of court, legal experts say. Any such settlement could have a significant effect on Wal-Mart's finances, the company said in its quarterly report filed in July.

Representatives of both sides in the case do not expect the judge to rule immediately. While Wal-Mart argues that the plaintiffs will face a tough time convincing the judge to grant the case class-action status, at least one plaintiffs' attorney disagrees.

Cases like this one are regularly granted class-action status, said David Borgen, a partner with Oakland, Calif.-based Goldstein Demchak Baller Borgen & Dardarian. In 1997, Borgen's firm secured an $87.5 million settlement against Home Depot in a similar sex discrimination case.

Assuming the judge certifies the class, "Wal-Mart is likely to enter into some kind of settlement," Borgen said.

And some in the investment community are starting to focus on the potential ramifications.

"I think it's a big risk factor going forward," said Heather Brilliant, who covers Wal-Mart for Morningstar.

Filed in June 2001, the case against Wal-Mart focuses on the experiences of seven named plaintiffs, each of whom say they were denied promotions or pay raises while working at Wal-Mart. Despite making known their desire to move up in Wal-Mart's ranks, they were consistently passed over in favor of male colleagues, according to the suit.

Some, who had access to pay records at Wal-Mart, say that they and fellow women colleagues were paid less than men working comparable jobs. Additionally, several say they had to contend with sexually inappropriate comments from colleagues and harassment from superiors when they complained.

The case alleges that the experiences of these women are representative of those of female workers at Wal-Mart. The plaintiffs back up this charge with statistics that show that women account for 67% of the hourly workforce at Wal-Mart but only 35% of assistant managers, the lowest level of salaried workers at the company. At higher-level positions, women compose an even smaller minority, according to the plaintiffs' data. Those statistics and the experiences of the seven women show that Wal-Mart systematically discriminates against female employees in terms of compensation and promotions, the plaintiffs charge.

The disparities are caused by Wal-Mart's culture, according to the plaintiffs. Although the company tends to promote from within, those who get promoted are most often men. Until recently, the company used a subjective system for promotions, instead of spelling out objective criteria, the plaintiffs say. And rather than posting job openings for management positions so that anyone could apply for them, the company often kept information about new openings quiet, simply tapping the shoulders of those it wanted to promote, they say.

Although the case focuses on the experiences of seven named women, Joseph Sellers, who represents the plaintiffs, said he and his colleagues have heard from "thousands" of women with similar experiences.

"We have a large database of women who have contracted us," said Sellers, who heads the civil rights practice at Washington, D.C.-based Cohen Milstein Hausfeld & Toll. "The interest level [in this case] is very strong among current and former women at the company."

Wal-Mart currently has 1.4 million employees, according to company spokeswoman Sarah Clark. Clark said she did not know what percentage of Wal-Mart's employees are women.

Wal-Mart argues that a class of potentially 1.6 million women would be too unwieldy to manage. Even if it could be managed, the company argues that the experiences of seven women cannot be representative of a class that large. Wal-Mart Supercenters and the company's Neighborhood Market stores represent nearly one-third of the company's stores and employ about half of its workers. But none of the plaintiffs ever worked in either a Supercenter or a Neighborhood Market, the company notes.

Meanwhile, the company charges that decisions about pay and promotions are largely made at the store level.

"Wal-Mart does not tolerate discrimination against women or anyone else," said Clark. "We believe that Wal-Mart is a great place to work. Isolated complaints do not change that fact."

Wal-Mart's arguments are typical of companies facing potential class actions, said Borgen. But while the company is arguing that it would be impossible to certify a class that large, Borgen said it has been done in other types of class-action suits. Looking at the plaintiffs' theories in this case, there's not that much difference between it and the case his firm settled against Home Depot, Borgen said.

"The main difference is just that it's a bigger case and national in scope," he said.

Should it lose the class certification and choose to settle the case, Wal-Mart could face two problems, said Morningstar's Brilliant. The first, of course, would be the financial impact of any sum it was forced to pay.

In the Home Depot case, the $87.5 million settlement was split among about 6,500 women, according to Borgen's firm. The average check was about $10,000, according to the firm. Applying similar numbers in the Wal-Mart case could take a potential settlement into the billions of dollars.

But beyond the financial impact is the black eye Wal-Mart would receive to its reputation if the suit ends badly for the company, Brilliant said. Socially responsible investors could shun the company, she said. And so might customers.

"This does call into question whether Wal-Mart is a good corporate citizen anymore," she said.

But other analysts are less concerned about the suit. Class-action suits about securities fraud used to draw a lot of headlines but turned out to be a nonevent for most companies and their stocks, noted Rob Wilson, who covers Wal-Mart for Tiburon Research Group. This suit is likely to have similar consequences, he said.

"I don't think it really impacts them," Wilson said. "Maybe it will drop the stock down a little bit, but I doubt it."