McReynolds v. Merrill Lynch & Co.

• Decision Date: 11 September 2012
• Docket Number: No. 11–1957.,11–1957.
• Citation: 694 F.3d 873
• Court: U.S. Court of Appeals — Seventh Circuit
• Parties: George McREYNOLDS, et al., Plaintiffs–Appellants, v. MERRILL LYNCH & CO., INC., et al., Defendants–Appellees.

694 F.3d 873

George McREYNOLDS, et al., Plaintiffs–Appellants,

v.MERRILL LYNCH & CO., INC., et al., Defendants–Appellees.

No. 11–1957.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 24, 2011.

Decided Sept. 11, 2012.

Linda Debra Friedman (argued), Senior Attorney, Stowell & Friedman, Chicago, IL, for Plaintiffs–Appellants.

Allan D. Dinkoff (argued), Jeffrey S. Klein, Attorneys, Weil, Gotshal & Manges LLP, New York, NY, Stephen M. Shapiro, Attorney, Mayer Brown LLP, Chicago, IL, for Defendants–Appellees.

Julie Loraine Grantz, Attorney, Equal Employment Opportunity Commission, Washington, DC, for Amicus Curiae Equal Employment Opportunity Commission.

Samuel S. Shaulson, Attorney, Morgan, Lewis & Bockius, New York, NY, for Amici Curiae Securities Industry and Financial Markets Association, American Bankers Association, and Chamber of Commerce of the United States of America.

Rae T. Vann, Attorney, Norris Tysse Lampley & Lakis, Washington, DC, for Amicus Curiae Equal Employment Advisory Council.

Before SYKES and TINDER, Circuit Judges, and DeGUILIO, District Judge.^*

SYKES, Circuit Judge.

In 2005 a group of brokers at Merrill Lynch sued the firm under 42 U.S.C. § 1981 and Title VII raising various claims of racial discrimination and seeking to litigate the claims as a class. Among other things, they alleged that the firm's “teaming” and account-distribution policies had the effect of steering black brokers away from the most lucrative assignments and thus prevented them from earning compensation comparable to white brokers. That litigation is ongoing. See McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 672 F.3d 482 (7th Cir.2012) (reversing the denial of class certification).

Three years after that suit was filed, Bank of America acquired Merrill Lynch, and the companies introduced a retention-incentive program that would pay bonuses to Merrill Lynch brokers corresponding to their previous levels of production. In response a similar group of brokers filed a second class-action suit, this time against both Merrill Lynch and Bank of America. The new suit again invoked § 1981 and Title VII, but focused specifically on the retention program. The plaintiffs alleged that the bonuses incorporated previous production levels that were the product of Merrill Lynch's underlying discriminatory policies. The defendants moved to dismiss for failure to state a claim, arguing that the retention program was a race-neutral compensation system keyed to quality of production and was therefore exempt from challenge under § 703(h) of Title VII (codified at 42 U.S.C. § 2000e–2(h)).

The district court granted the motion. The court first held that the retention program qualified as a production-based compensation system within the meaning of the § 703(h) exemption. As such, the program was protected from challenge unless it was adopted with “the intention to discriminate because of race.” 42 U.S.C. § 2000e–2(h). The court then held that the complaint's allegations of discriminatory intent were conclusory, akin to those rejected by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Finally, to the extent that the allegations pertained to the underlying employment practices at Merrill Lynch—the “inputs” that produced the bonuses—the court held that they duplicated the claims in the earlier, ongoing suit. These holdings resolved the § 1981 claim as well, so the court dismissed the entire case with prejudice.

We affirm. As described in the complaint, the retention program awarded bonuses based on a race-neutral assessment of a broker's prior level of production, which suffices to protect the program under § 703(h) unless it was adopted with intent to discriminate. It is not enough to allege, as the complaint does, that the bonuses incorporated the past discriminatory effects of Merrill Lynch's underlying employment practices. See Am. Tobacco Co. v. Patterson, 456 U.S. 63, 102 S.Ct. 1534, 71 L.Ed.2d 748 (1982); Int'l Bhd. of Teamsters v. United States, 431 U.S. 324, 97 S.Ct. 1843, 52 L.Ed.2d 396 (1977). The disparate impact of those employment practices is the subject of the first lawsuit, and if proven, will be remedied there. With respect to the retention program itself, the complaint alleges discriminatory intent in a wholly conclusory fashion, so dismissal was proper under the pleading standards announced in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and amplified in Iqbal.

I. Background

Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith, Inc. (jointly, “Merrill Lynch”), are financial-services firms engaged in the retail and institutional sale of various financial products. At the time the present case was filed, Merrill Lynch was the largest retail brokerage firm in the country, employing over 15,000 financial advisors nationwide.¹ These brokers sell the company's financial products and services, and they are paid according to a firm-wide grid formula that applies different commission rates based on the broker's level of production. While the formula is intricate, the basic principle is that a broker's compensation is based on “production credits”—in essence, commissions earned on client assets managed by the broker. The compensation formula is neutral with respect to race.

In 2005 George McReynolds, a black broker, filed a class-action discrimination lawsuit against Merrill Lynch in federal court in the Northern District of Illinois. McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 05–cv–6583 (N.D. Ill. filed Nov. 18, 2005) (“ McReynolds I ”). The suit was originally brought by McReynolds as the lone named plaintiff and alleged claims of racial discrimination under 42 U.S.C. § 1981, but it was amended in November 2006 to add 16 additional named plaintiffs and a discrimination claim under Title VII, 42 U.S.C. § 2000e–2. The plaintiffs challenged a wide array of Merrill Lynch's employment policies and practices, alleging racial discrimination in hiring, compensation, account distribution, and “teaming” (the grouping of brokers that handle particular accounts).

A major theme of the McReynolds I litigation is the allegation that black brokerswere systematically steered away from the most lucrative assignments and thus prevented from earning compensation comparable to their white counterparts. The case was assigned to Judge Robert Gettleman, and in 2010 he denied class certification. A panel of this court recently reversed that determination, see McReynolds, 672 F.3d at 492, and the litigation is ongoing.

Meanwhile, on September 15, 2008, Bank of America announced that it would acquire Merrill Lynch in a $50 billion all-stock merger. The transaction closed on January 1, 2009, and Merrill Lynch now operates as a wholly owned subsidiary of Bank of America. As part of the acquisition, the companies decided to pay retention-incentive bonuses to Merrill Lynch brokers based on each broker's production credits. Thus, brokers who had already been earning higher compensation for producing more business would be offered larger bonuses to remain with the firm through the acquisition.

In response to the retention plan, McReynolds and a group of black brokers filed the present suit, making this case “ McReynolds II.” The named plaintiffs in the two cases are substantially similar, though not identical; all the plaintiffs in this case are also plaintiffs in McReynolds I, and the same law firm represents them. Merrill Lynch is a defendant in both cases, and Bank of America is also a defendant in this case.²

The McReynolds II complaint once again alleges two claims of racial discrimination—one under 42 U.S.C. § 1981 and one under Title VII—but the substantive focus is far more limited in that this suit challenges only the retention program.³ In essence the plaintiffs allege that the pervasive past discrimination at Merrill Lynch resulted in production credits that reflected the effects of past discriminatory policies and practices. In turn, the use of production credits to determine retention bonuses amounted to an act of employment discrimination because it had the purpose and effect of depressing the size of bonuses earned by black brokers, or eliminating them altogether. The plaintiffs once again sought class certification.

The new suit was initially assigned to Judge Matthew Kennelly, and while class discovery was still underway, Merrill Lynch moved to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Judge Kennelly denied the motion, holding that the plaintiffs had adequately alleged that the retention plan was adopted with intent to discriminate. Merrill Lynch then filed an unopposed motion to transfer the case to Judge Gettleman, the presiding judge in McReynolds I. After the case was transferred, the Supreme Court decided Iqbal, which made it clear that the new pleading standards the Court had announced two years earlier in Twombly applied outside the antitrust context of Twombly itself. Based on Iqbal, Merrill Lynch renewed its motion to dismiss.

Judge Gettleman granted the motion. As a threshold matter, the judge opted to resolve the motion to dismiss before ruling on class certification, noting that a Rule 12(b)(6) motion “tests the sufficiency of the complaint, not the merits of the case.” The judge then held that the retention program was a race-neutral production-based compensation system protected by § 703(h) and could be challenged only if it was adopted with intent to discriminate, not mere awareness that the program would disfavor black brokers based on the residual effects of past discrimination. The judge held that the complaint's allegations of intent to discriminate were nothing more than a “[t]hreadbare recital[ ] of the elements of the cause of action, supported by mere conclusory statements”—the kind of pleading the Supreme Court rejected in Iqbal.556 U.S. at...