No. 11-1957 _________________________________________________________ IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT _________________________________________________________ GEORGE MCREYNOLDS, MAROC HOWARD, FRANKIE ROSS, ET AL., Plaintiffs/Appellants, v. MERRILL LYNCH & CO., INC.; MERRILL LYNCH, PIERCE, FENNER & SMITH; BANK OF AMERICA CORPORATION, Defendants/Appellees. _________________________________________________________ On Appeal from the United States District Court for the Northern District of Illinois The Honorable Robert W. Gettleman _________________________________________________________ BRIEF OF THE EQUAL EMPLOYMENT OPPORTUNITY COMMISSION AS AMICUS CURIAE IN SUPPORT OF APPELLANTS AND REVERSAL _________________________________________________________ P. DAVID LOPEZ General Counsel LORRAINE C. DAVIS Acting Associate General Counsel VINCENT J. BLACKWOOD Assistant General Counsel JULIE L. GANTZ Attorney EQUAL EMPLOYMENT OPPORTUNITY COMMISSION Office of General Counsel 131 M St. N.E., 5th Floor Washington, D.C. 20507 (202) 663-4718 julie.gantz@eeoc.gov TABLE OF CONTENTS TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . i STATEMENT OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 STATEMENT OF THE ISSUE. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARGUMENT THE COMPLAINT STATES A TITLE VII CLAIM NOTWITH- STANDING § 703(H) BECAUSE THE COMPLAINT ALLEGES THAT THE DISPARITIES IN COMPENSATION BETWEEN BLACK AND WHITE FINANCIAL ADVISORS CAUSED BY THE DEFENDANTS' COMPENSATION SYSTEM WERE THE RESULT OF INTENTIONAL DISCRIMINATION. . . . . . . . . . . . . . . . . . . . . 6 CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 CERTIFICATE OF COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . 16 CERTIFICATE OF SERVICE TABLE OF AUTHORITIES CASES Brownlee v. Gay & Taylor, Inc., 642 F. Supp. 347 (D. Kan. 1985). . . . . . . . . 9 Goodman v. Merrill Lynch & Co., 716 F. Supp. 2d 253 (S.D.N.Y. 2010). . . . . . 4 Ledbetter v. Goodyear Tire, 550 U.S. 618 (2007). . . . . . . . . . . . . . . . 12 McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, No. 05-6583, 2010 WL 3184179 (N.D. Ill. Aug. 9, 2010). . . . . . . . . . . . . . . . . . . . 5 Ryduchowski v. Port Authority of New York, 203 F.3d 135 (2d Cir.2000). . . . . . 9 Teamsters v. United States, 431 U.S. 324 (1977). . . . . . . . . . . . 4, 9, 10-11 United Air Lines v. Evans, 431 U.S. 553 (1977). . . . . . . . . . . . . . . 10-11 FEDERAL RULES AND STATUTES Title VII of the Civil Rights Act of 1964 42 U.S.C. § 2000e et seq. . . . . . . . . . . . . . . . . . . . . . . . 1 42 U.S.C. § 2000e-2(h). . . . . . . . . . . . . . . . . . . . . . . passim 42 U.S.C. § 2000e-5(e)(3)(A). . . . . . . . . . . . . . . . . . . . . . . . 13 Equal Pay Act 29 U.S.C. § 206(d)(1). . . . . . . . . . . . . . . . . . . . . . . . 7 42 U.S.C. § 1981. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Fed. R. App. P. 29(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Fed. R. App. P. 32(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Fed. R. App. P. 32(a)(6). . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Fed. R. App. P. 32(a)(7)(B). . . . . . . . . . . . . . . . . . . . . . . . . . 16 STATEMENT OF INTEREST The Equal Employment Opportunity Commission is the agency charged by Congress with the interpretation, administration, and enforcement of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., and other federal laws prohibiting discrimination. This appeal raises important questions regarding the scope of § 703(h) of Title VII, which provides that an employer does not violate Title VII by providing different levels of compensation pursuant to "a bona fide seniority or merit system, or a system which measures earnings by quantity or quality of production . . . provided such differences are not the result of an intention to discriminate . . . ." Plaintiffs allege in this case that the defendants' compensation system provides lower compensation, specifically lower retention bonuses, to black financial advisors based on their race. The district court held that the complaint fails to state a claim under Title VII because it fails to allege that the compensation system was established or maintained for the purpose of discriminating on the basis of race which, according to the court, is necessary to satisfy § 703(h). We believe the district court overlooked the proviso in § 703(h) for disparities that are "the result of an intention to discriminate." Because the complaint alleges that the challenged differences in compensation were caused by intentional race discrimination in the assignment of accounts and other disparate treatment of black financial advisors, it states a claim under Title VII notwithstanding § 703(h). The district court's failure to consider the allegations of intentionally discriminatory input into the compensation system in deciding whether it is immunized by § 703(h) would severely limit challenges to discriminatory compensation programs if applied generally. Given our enforcement interests in this issue, we offer our views to the Court pursuant to Fed. R. App. P. 29(a). STATEMENT OF THE ISSUE Whether the defendants' compensation system, which allegedly pays black financial advisors less than white financial advisors, is protected by § 703(h) of Title VII unless it was designed to discriminate against black employees, notwithstanding plaintiffs' allegation that the disparities in compensation between black and white employees were the result of defendants' intentional race discrimination in the assignment of accounts. BACKGROUND George McReynolds and the eight other plaintiffs are current or former black Financial Advisors ("FAs") for Merrill Lynch & Co., Inc., a nationwide financial services holding company that provides financial and investment services. Appendix ("A.") 14 (First Amended Complaint ("FAC") ¶ 3). FAs are ranked in five "quintiles" based on the "production credits" their accounts generate. A.15 (FAC ¶ 8). The complaint alleges that black FAs are assigned less valuable accounts to manage than white FAs because of their race. A.19 (FAC ¶ 16). According to the complaint, Merrill Lynch "steers accounts, productive assets, and other income-generating opportunities to white brokers, and away from black brokers." Id. An FA's quintile ranking affects his or her annual compensation and was used to calculate the retention bonuses offered to FAs after Bank of America ("BOA") acquired Merrill Lynch in January 2009,<1> through a program known as the Advisor Transition Program ("ATP"). A.15-16 (FAC ¶¶ 7- 9); A.3 (Memorandum Opinion and Order ("Mem.") at 2). The plaintiffs allege that because black FAs were underrepresented in the top quintiles of production credits, they were disproportionately excluded from receiving retention awards or received lower awards than they would have absent discrimination. A.21 (FAC ¶ 20). The plaintiffs brought suit under 42 U.S.C. § 1981 and Title VII. A.24-25 (FAC ¶¶ 34-41). The defendants moved to dismiss the complaint under Rule 12(b)(6). The district court granted the defendants' motion to dismiss, holding that "the complaint merely alleges discriminatory conduct but has not 'shown' that plaintiffs are entitled to relief." A.6 (Mem. at 5). According to the court, § 703(h) of Title VII, 42 U.S.C. § 2000e-2(h), insulates from challenge "an employer's bona fide merit, seniority or production-based compensation system, even where the system has a discriminatory impact." Id. In the court's view, "[s]o long as the system itself was adopted without a discriminatory intent it is bona fide and immunized under § 703(h), even if it perpetuates the effects of other acts of discrimination that clearly violate Title VII." A.6-7 (Mem. at 5-6) (citing Teamsters v. United States, 431 U.S. 324, 348 (1977)). The court held that the company's method for computing retention awards qualifies as a "production-based compensation system" within the meaning of § 703(h) because "it used a gender- and race-neutral formula that was measured solely based on each individual FA's annualized production credit through September 2008." A.7 (Mem. at 6). The court agreed with the district court in Goodman v. Merrill Lynch & Co., 716 F. Supp. 2d 253, 261 (S.D.N.Y. 2010), which held the same ATP system was protected from challenge by a class of women under § 703(h), and reasoned that "'account distributions and partnership formations may have affected the plaintiffs' overall production credits, thereby skewing the input into the ATP,'" but that "'the ATP itself remains a protectable production based compensation system under section 703(h).'" Id. (quoting Goodman). The court held that the plaintiffs' complaint challenging the ATP retention awards would state a claim if it contained "sufficient factual allegations to make it plausible that the system was adopted with the intent to discriminate against African-American FAs in favor of white FAs," but that it failed to do so. Id. In the court's view, the plaintiffs' remedy lies in challenging the discriminatory inputs into a bona fide merit, seniority, or production-based compensation system directly, as was undertaken in an earlier suit filed by the same plaintiffs. A.8 (Mem. at 7) (citing McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, No. 05-cv-06583, 2010 WL 3184179 (N.D. Ill. 2010) ("McReynolds I")).<2> The court concluded that, "even if plaintiffs' factual allegations with respect to the inputs (which are the subject of McReynolds I) were sufficient to allow the court to infer more than the mere possibility that Merrill Lynch designed the ATP with discriminatory intent (and they clearly are not), those same allegations in no way suggest that BOA acted with any discriminatory intent." A.9 (Mem. at 8). "There are simply no facts in the complaint to suggest even the possibility that BOA ever discriminated against African-Americans." Id. ARGUMENT THE COMPLAINT STATES A TITLE VII CLAIM NOTWITH- STANDING § 703(H) BECAUSE THE COMPLAINT ALLEGES THAT THE DISPARITIES IN COMPENSATION BETWEEN BLACK AND WHITE FINANCIAL ADVISORS CAUSED BY THE DEFENDANTS' COMPENSATION SYSTEM WERE THE RESULT OF INTENTIONAL DISCRIMINATION. The complaint alleges that the defendants violated Title VII by providing lower retention bonuses to black FAs than white FAs pursuant to its ATP system. The district court held that this allegation fails to state a claim under Title VII because the ATP was protected from challenge under § 703(h). Section 703(h) of Title VII provides: [I]t shall not be an unlawful employment practice for an employer to apply different standards of compensation, or different terms, conditions, or privileges of employment pursuant to a bona fide seniority or merit system, or a system which measures earnings by quantity or quality of production . . . provided that such differences are not the result of an intention to discriminate because of race . . . . 42 U.S.C. § 2000e-2(h). To fall within this provision, the racial disparities in the retention bonuses based on the ATP (1) must be "pursuant to a bona fide merit system or system that measures earnings by quantity or quality of production;" and (2) cannot be "the result of an intention to discriminate because of race." Accordingly, even if the ATP is a bona fide system that measures earnings by the quantity of production, the racial disparities it produces are still illegal if they are the result of intentional discrimination.<3>In dismissing the complaint, the district court erred by overlooking this proviso in holding that § 703(h) protects the racial disparities in bonuses simply because it believed the ATP itself is a bona fide compensation system. The complaint alleges that the defendants discriminated on the basis of race in assigning accounts, and giving out leads, referrals, and other forms of assistance. A.19 (FAC ¶ 16). Because black FAs were assigned less lucrative accounts than white FAs, the complaint alleges, their accounts generated less income and they were significantly more likely to wind up in lower quintiles than white employees. A.21 (FAC ¶ 20). Under the ATP, the placement of black FAs in lower quintiles allegedly caused the defendants to pay them less and, as relevant to this suit, to offer them lower retention bonuses. Thus the complaint alleges that the racial disparity in compensation under the ATP is a direct result of the earlier discriminatory allocations of accounts, leads, and other benefits. This is sufficient to state a claim under Title VII notwithstanding § 703(h) because it amounts to an allegation that the disparities in retention bonuses between black and white FAs under the ATP are "the result of an intention to discriminate because of race." The district court's ruling that the complaint fails to state a claim because it does not allege that the ATP was created for the purpose of race discrimination, i.e., that it was not "bona fide," reads the proviso out of § 703(h). Under this analysis, discrimination in compensation would be immune from challenge under Title VII whenever it was accomplished by means of a facially neutral compensation system that bases compensation on merit or production even if the plaintiffs prove that the defendant intentionally caused the discriminatory result by giving biased performance evaluations or, as alleged in this case, by giving black employees less productive accounts. This would severely undermine Title VII's protection against compensation discrimination in a way that Congress clearly did not intend and which courts have rejected. Congress could not have more clearly expressed its view that intentional discrimination of the sort alleged in this case could not be shielded by § 703(h) merely by taking the form of input into a neutral compensation system. The proviso to § 703(h) expressly forecloses the defendants' argument that the racially discriminatory retention bonuses generated by the ATP system are beyond the reach of Title VII even if, as plaintiffs allege, they were caused by the defendants' intentional discrimination in assigning accounts. While there are very few cases analyzing the scope of § 703(h) in the context of compensation discrimination, courts have in other contexts rejected the notion that compensation discrimination is immune from challenge where it is perpetrated in the context of a neutral system. Cf. Ryduchowski v. Port Auth. of New York, 203 F.3d 135, 144 (2d Cir. 2000) (reinstating jury verdict on plaintiff's Equal Pay Act claim because "the jury could have reasonably concluded that Ryduchowski's lower performance evaluation in 1995, which led to her lower merit increase, was not the result of differences in performance, but rather differences in gender between her and [her male colleague]"); Brownlee v. Gay & Taylor, Inc., 642 F. Supp. 347, 353 (D. Kan. 1985) ("[T]he mere presentation of a formal salary administration program will not foreclose an Equal Pay Act or Title VII case when there is evidence that the salary program may have been administered differently on the basis of sex."). In ruling to the contrary, the district court relied on the statement in Teamsters v. United States, 431 U.S. 324, 353-54 (1977), that a seniority system is not unlawful under Title VII merely because it perpetuates the effects of past discrimination. This case is distinguishable from Teamsters. In Teamsters, the plaintiff alleged that a neutral seniority system that credited time worked by white and black employees on the same basis was not protected by § 703(h) because, as a result of the employer's pre-Act refusal to hire blacks as road drivers, black road drivers as a group presently were lower on the road driver seniority list than they would have been absent the past discrimination. 431 U.S. at 330-31. In other words, the plaintiff was attempting to litigate the lawfulness of the employer's past hiring practices by challenging an ancillary effect of that discrimination. See also United Air Lines v. Evans, 431 U.S. 553, 560 (1977) (female flight attendant fired pursuant to the airline's discriminatory policy who did not challenge the original firing but later sued when she was not credited with past seniority upon being rehired was precluded from challenging the seniority system; the Supreme Court stated that a discriminatory act not made the basis of a timely charge is the legal equivalent of a discriminatory act occurring before Title VII was passed and "is merely an unfortunate event in history which has no present legal consequence"). In Teamsters and Evans there were discrete acts of discrimination that had immediate and tangible adverse effects on the plaintiffs but were not challenged at the time: the refusal to hire in Teamsters and the termination in Evans. When, years later, the plaintiffs sought to resurrect those earlier potential claims by challenging a subsequent ancillary harm in the loss of seniority rights, the Supreme Court held that they could not. In Teamsters, the past discriminatory hiring decisions challenged had the immediate effect of leaving the victims either unemployed or stuck in a less desirable job than white drivers; the later loss of seniority accompanying a transfer to the line driver position was a secondary consequence. And in Evans, the flight attendant forced to resign because of her sex suffered an immediate loss of employment and salary; the failure to credit her with seniority for her earlier tenure when she was rehired four years later was a secondary effect of the earlier unchallenged discrimination. In those cases, the Supreme Court foreclosed the resurrection of old claims. The plaintiffs' claim in this case is fundamentally different. Here, the disparity in compensation under the ATP was the first tangible consequence of the discriminatory allocation of accounts and other benefits. The reduced compensation paid to the black FAs through the ATP was delayed in time but a direct consequence of defendants' unequal distribution of accounts at the outset of the plaintiffs' employment. Furthermore, there does not appear to have been any tangible effect of the discriminatory assignment of accounts until it affected the plaintiffs' compensation by means of the ATP. Thus, unlike a seniority system that perpetuates past discrimination and cannot be challenged under Teamsters, the retention bonus plan here is directly caused by the original intentional discrimination in distributing client accounts and other benefits. Furthermore, if the district court were correct in ruling that § 703(h) immunizes all merit or production systems unless the plaintiffs establish that the defendant intentionally designed the system to award lower compensation to black FAs, it would insulate from challenge the type of discrimination the Lilly Ledbetter Fair Pay Act was enacted to combat. The Ledbetter Act was enacted to salvage compensation claims that would otherwise be time-barred, and the timeliness of the plaintiffs' claims is not at issue here. But under the district court's ruling, in most cases where a plaintiff had a claim resurrected by the Ledbetter Act, § 703(h) would foreclose the claim. The Ledbetter facts illustrate this. At the tire plant where Lilly Ledbetter worked as a manager, raises were based on the employee's performance evaluations. Ledbetter v. Goodyear Tire, 550 U.S. 618, 621 (2007). Ledbetter offered evidence that several supervisors had given her poor evaluations because of her sex. Id. at 622. As a result, her pay was not increased as much as it would have had she been evaluated fairly. Id. She contended that the past pay decisions continued to affect her pay throughout her employment with Goodyear. Id. By the end of her tenure there, she was making significantly less than all of her male colleagues. Id. The jury awarded her backpay and damages. Id. The Eleventh Circuit reversed, and the Supreme Court affirmed, holding that her claim was time- barred and that she could not "take the intent associated with the prior pay decisions and shift it to the 1998 pay decision." Id. at 629. In response, Congress enacted The Lilly Ledbetter Fair Pay Act, which amends Title VII to extend the time permitted for an employee to bring a compensation claim by allowing each new paycheck to trigger the running of the limitations period under Title VII. The Ledbetter Act provides that, with respect to compensation discrimination, "an unlawful employment practice occurs . . . when a discriminatory compensation decision or other practice is adopted, when an individual becomes subject to a discriminatory compensation decision or other practice, or when an individual is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice." 42 U.S.C. § 2000e-5(e)(3)(A). Under the district court's decision in this case, a defendant facing a claim like Ledbetter's would be able to shield its compensation plan under § 703(h), thereby effectively nullifying the Ledbetter Act. The allegation in this case that the defendant calculated the FAs' retention bonuses using the quintile rankings based on earnings from client accounts that were unequally distributed based on race is analogous to the allegation in Ledbetter. In Ledbetter, the employer used a facially neutral compensation system that based raises on performance evaluations. Ledbetter proved that her compensation was lower than that of comparable male employees because her supervisors gave her lower performance evaluations because she was a woman. Congress made clear in enacting the Ledbetter Act that such a claim should be permitted under Title VII. However, if the district court's decision in this case were correct, her claim would presumably founder on § 703(h) as well. Ledbetter's salary was based on a facially neutral merit system that was not enacted for the purpose of sex discrimination. Her showing that the disparity was caused by intentional discrimination in the evaluations entered into the system would, under the district court's analysis here, be merely a perpetuation of past discrimination. Neither in Ledbetter nor in this case is that a fair characterization. Because in each case the lower compensation challenged by the plaintiffs was the first tangible consequence of the discriminatory evaluations or account assignments, the plaintiffs can show that the challenged disparities were the result of the defendants' intentional discrimination. CONCLUSION For the foregoing reasons, the judgment of the district court should be reversed and the case remanded for further proceedings. Respectfully submitted, P. DAVID LOPEZ General Counsel LORRAINE C. DAVIS Acting Associate General Counsel VINCENT J. BLACKWOOD Assistant General Counsel /s/ Julie L. Gantz ______________________________ JULIE L. GANTZ Attorney EQUAL EMPLOYMENT OPPORTUNITY COMMISSION Office of General Counsel 131 M St. N.E., 5th Floor Washington, D.C. 20507 (202) 663-4718 julie.gantz@eeoc.gov CERTIFICATE OF COMPLIANCE This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because it contains 3,261 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii). This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because it has been prepared in a proportionally spaced typeface using Microsoft Word 2003 in Times New Roman 14 point. /s/ Julie L. Gantz _________________________________ JULIE L. GANTZ Attorney EQUAL EMPLOYMENT OPPORTUNITY COMMISSION Office of General Counsel 131 M St. N.E., 5th Floor Washington, D.C. 20507 (202) 663-4718 julie.gantz@eeoc.gov Dated: July 26, 2011 CERTIFICATE OF SERVICE I, Julie L. Gantz, hereby certify that on July 26, 2011, I electronically filed the foregoing with the Clerk of the Court for the United States Court of Appeals for the Seventh Circuit by using the CM/EFC system. I certify that all participants in the case are registered CM/ECF users and that service will be accomplished by the CM/ECF system. /s/ Julie L. Gantz ____________________________ Julie L. Gantz Attorney EQUAL EMPLOYMENT OPPORTUNITY COMMISSION Office of General Counsel 131 M St. N.E., 5th Floor Washington, D.C. 20507 (202) 663-4718 julie.gantz@eeoc.gov ********************************************************************************** <> <1> Merrill Lynch now operates as a wholly-owned subsidiary of BOA. A.14 (FAC ¶5). <2> The district court denied class certification in that case on August 9, 2010. No. 05-6582, 2010 WL 3184179, at *6 (N.D. Ill. Aug. 9, 2010). The individual claims of the named plaintiffs in McReynolds I remain pending in the district court. <3> The plaintiffs argue on appeal that the term "merit system, or a system which measures earnings by quantity or quality of production," which was borrowed by Congress from the Equal Pay Act, 29 U.S.C. § 206(d)(1), encompasses only piece work systems such as those used to compensate some employees in an assembly line manufacturing process, relying on the legislative history of the EPA. It is not necessary for the Court to decide whether the ATP is the type of system that may be excepted by § 703(h) because, even if the ATP is such a system, § 703(h) does not shield the disparities in the retention bonuses offered to black and white FAs pursuant to the ATP because the complaint adequately alleges that those disparities are the result of intentional race discrimination.