The Massachusetts Supreme Judicial Court’s recent decision, Salvas v. Wal-Mart Store, Inc., 452 Mass. 337 (2008), has provided a clarification of class action procedure that may disappoint business defendants and plaintiffs alike.

On the one hand, the decision precludes business defendants from raising, at the class certification stage, the reliability or probative value of business records that the plaintiffs may be using to allege class-wide injury. Thus, under Salvas, a class could be certified — and the well-recognized pressure on the business defendant to settle created — on the basis of evidence that may, at best, be of doubtful probity.

On the other hand, by recognizing that a business defendant has the right to inquire into whether any individual member of the class has been injured, and indicating that this should be done at the damages stage of the proceeding, the SJC may have in effect required the bifurcation into separate liability and damages phases of large and complex class actions where factual inquiry is necessary to determine whether any class member has been damaged.

This development cannot be good news for class-action plaintiffs, who, even if they prevail on liability, may still face the task of proving whether each member of the class has actually been injured.

Time records of the essence

Salvas was a class action brought on behalf of all Wal-Mart hourly employees in Mass-achusetts during the period between August 1995 and Dec. 31, 2005, a class consisting of approximately 67,500 former and present Wal-Mart employees.

The plaintiffs alleged that Wal-Mart “wrongfully withheld compensation for time worked and denied or cut short rest and meal breaks to which they were entitled.” 452 Mass. at 338. Before the SJC was the plaintiffs’ appeal from, inter alia, the trial court’s decertification of the class and its entry of partial summary judgment for Wal-Mart.

An important aspect of the appeal boiled down to an evidentiary question, i.e., the treatment of Wal-Mart’s time records. In support of its motion for decertification, Wal-Mart had submitted evidence showing that the Wal-Mart time records on which the plaintiffs relied could not be taken as an accurate description of what any given employee was actually
doing or why he or she was doing it.

The Superior Court was persuaded by Wal-Mart’s evidence that the time records, by themselves, were insufficient to establish an entitlement to compensation by any member of
the class.

Drawing what it termed a “critical distinction,” at the class certification stage, between “the existence of any harm and the measurement of that harm,” the Superior Court allowed Wal-Mart’s motion to decertify the class on the ground, among others, that Wal-Mart’s records could not establish the alleged wrongdoing on a class-wide basis.

In reversing the trial court’s decertification, the SJC found that the lower court had erred, first, in its understanding of the requirements for certification under Mass. R. Civ. P. 23, which governs many class actions in Massachusetts.

As the court put it: “[I]n the liability phase of this putative class action, it is not the representative plaintiffs’ burden to identify every ‘specific’ instance in which a member of the plaintiff class has been ‘injured or harmed by Wal-Mart’s actions or policies.’ Rather, the plaintiffs’ burden is to prove by a preponderance of the evidence that Wal-Mart engaged in an over-all, class-wide practice of time shaving, denying or discouraging rest breaks or meal breaks, and requiring off-the-clock work by its hourly employees.” 452 Mass. at 357.

Elsewhere, the court described the “essential factual questions of liability” in the case as: “Did a contract or agreement exist? On what terms? Did Wal-Mart breach the contract or agreement?” Those questions, the court said, “rest on a ‘sufficient constellation of common issues [to] bind [ ] class members together for purposes of certification.” Id. at 367.

Secondly, the court found that the trial court had erred in its treatment of the Wal-Mart time records because “[t]he question is not whether Wal-Mart’s records are dispositive evidence, conclusively establishing liability and damages ‘of themselves.’ Rather, the test is whether the business records are admissible evidence, probative of Wal-Mart’s liability.” Id. at 357.

Noting that, by statute, business records “have a special place in our law of evidence,” the SJC found that the records were admissible although it also noted that the “presumption of reliability is not irrebuttable” and that Wal-Mart could challenge, through admissible evidence, the time records’ veracity at trial. Id. at 359.

Nevertheless, the time records (and the plaintiffs’ expert report based on them) were admissible, and, as a result, their arguable unreliability could not support, at the pre-trial stage, decertification of the class.

A class action bifurcated

As noted above, the court’s decision, by precluding a challenge to the validity of business records at the pre-trial stage, raises the specter of a class certification where, as in this case, serious questions exist as to whether any member of the class was actually damaged.

This possibility should be a cause of concern given the empirical evidence that, even when the merits of the underlying claim are doubtful, most class actions settle after certification because of the high cost of defense and the risk of exposure to a large and potentially crippling aggregated damages award. The risk of facing an all-or-nothing verdict presents too high a risk, even when the probability of an adverse judgment is low.

However, as also indicated above, there is another aspect of the SJC’s decision in Salvas that counterbalances the relatively lenient evidentiary standard for class certification and may have an impact on business defendants’ willingness to settle after certification and prior to trial. This is the SJC’s apparent bifurcation of the Salvas class action into two separate phases — one to determine class-wide liability, the other to determine damages based, if appropriate, on an individualized inquiry of class members.

As the court put it: “Many of the judge’s conclusions concerning the insufficiency of the additional material to demonstrate predominance, and the arguments advanced by Wal-Mart on this point, are more properly directed to questions of damages than to questions liability. . . . [C]lasses may be certified for the purpose of determining liability even where individual inquiries may be necessary on the issue of damages. . . . Where damages issues are likely to require more individualized treatment, a judge has available a number of creative methods of managing questions of remedy in a manner that protects the defendant’s rights while redressing harms to individual plaintiffs.” Id., at 368.

The court’s instruction that — where individualized examination is required to determine damages, the trial court should “protect the defendant’s rights while redressing harms to individual plaintiffs” — is salutary and, to some extent, alleviates the sting of the court’s earlier ruling on decertification. It is an indication that the SJC has not ignored the concerns raised by Wal-Mart and others concerning the plaintiffs’ evidence in this case, nor has it ignored the wider concerns voiced by amici concerning the burdens imposed by class actions on business. It has sought a way to address those concerns within the framework of Mass. R. Civ. P. 23 while also protecting the rights of class action plaintiffs, who may now, however, face the added burden, after establishing class-wide liability, of having to prove the extent to which individual class members were injured.

What emerges from Salvas is a balanced approach to the dilemmas faced by plaintiffs and business defendants in large class actions, one that will make neither side entirely happy.

But business defendants should take advantage of the procedural benefit offered to them by the SJC and should seek bifurcation along the lines suggested by the court wherever the case can be made that an individualized inquiry is essential on the question of damage.

Martin J. Newhouse is president of the New England Legal Foundation, which filed an amicus curiae brief in support of Wal-Mart in the Salvas case.