Alleged Merrill Bias Does Not Pass to Parent Bank

(CN) - Bank of America does not yet have to face the race-discrimination claims that currently plague its Merrill Lynch subsidiary, the 7th Circuit ruled.

Financial advisor George McReynolds and others first sued Merrill Lynch in 2005, purporting to represent a class of 700 black brokers who allegedly earned less than their white counterparts because the firm had steered them away from more lucrative accounts. Three years into litigation, however, Bank of America acquired Merrill Lynch and the companies introduced a retention incentive program that would pay bonuses to Merrill Lynch brokers based on their previous levels of production.

McReynolds and the same group of original plaintiffs then sued both Merrill Lynch and Bank of America, claiming that the retention program discriminated against black brokers by virtue of Merrill Lynch's old discriminatory policies.

The banks defended their retention program as a race-neutral compensation system tied to production quality and therefore exempt from challenge under Title VII.

A federal judge dismissed for failure to state a claim and further held that the 2008 suit duplicated the ongoing 2005 case by challenging Merrill Lynch's old policies.

Fresh from affirming certification of the 2005 class action earlier this year, the 7th Circuit again sided with the trial court.

"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," Judge Diane Sykes wrote for a three-judge panel. "The disparate impact of those employment practices is the subject of the first lawsuit, and if proven, will be remedied there."

Compensation discrimination complaints have heightened pleading requirements, and plaintiffs must allege more than a "sheer possibility" that a defendant broke the law.

"Applying these principles here, the allegations that Merrill Lynch knew that the production-credit system had a disparate impact on black brokers are legally insufficient," Sykes wrote. "Instead, the complaint must allege enough factual content to support an inference that the retention program itself was adopted because of its adverse effects on black brokers." (Emphasis in original.)

"The complaint alleges in some detail that black brokers at Merrill Lynch have been the victims of discriminatory employment policies and practices and that they receive fewer production credits as a result," she added. "But much less is said about the retention program itself. The complaint alleges that the retention awards were 'based on annualized production credits through September 2008,' that the awards for black brokers 'were lower than they would have been absent unlawful discrimination,' and that both Merrill Lynch and Bank of America were aware of this differential and the underlying discriminatory practices that allegedly caused it."

There is simply no evidence showing that the retention program discriminated intentionally, the court found.

"The plaintiffs have alleged that Merrill Lynch's past employment practices had discriminatory effects on black brokers and the firm knew it when it designed the retention program," Sykes wrote. "But however ample the complaint's allegations might be to support a disparate-impact claim vis-à-vis the underlying employment practices, they are insufficient to support a claim of intentional discrimination with respect to the retention program." (Emphasis in original.)

More profoundly, the complaint is a duplicative action of the 2005 suit.

"All of the named plaintiffs in this case are also plaintiffs in McReynolds I, and the McReynolds I litigation challenges the underlying employment practices that are alleged to have caused differences in brokers' production credits, and by extension in the retention awards," Sykes wrote. "The plaintiffs will be able to obtain complete relief in McReynolds I because any loss relating to reduced retention awards based on lower production credits can simply be treated as part of the damages in that case should the plaintiffs prevail on the merits."

McReynolds also failed to show that dismissal would "eliminate" the role of the Equal Employment Opportunity Commission by discouraging potential plaintiffs from filing charges for the agency to investigate.

"We see no such disincentive," Sykes concluded. "Plaintiffs may always file new claims with the EEOC. Dismissal here simply reflects the district court's conclusion that if the complaint in this case is construed as a challenge to Merrill Lynch's underlying discriminatory practices, there are not, in fact, any new claims being made - only the potential for greater damages in the earlier suit. This conclusion was not an abuse of discretion."

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