George McReynolds v. Merrill Lynch

In the

United States Court of Appeals

For the Seventh Circuit

No. 11-1957

G EORGE M C R EYNOLDS, et al.,

Plaintiffs-Appellants,

v.

M ERRILL L YNCH & C O ., INC., et al.,

Defendants-Appellees.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 08 C 6105—Robert W. Gettleman, Judge.

A RGUED O CTOBER 24, 2011—D ECIDED S EPTEMBER 11, 2012

Before SYKES and T INDER, Circuit Judges, and D EG UILIO ,

District Judge.Œ

S YKES, 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

Œ

The Honorable Jon E. DeGuilio, United States District Court

for the Northern District of Indiana, sitting by designation.

2 No. 11-1957

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 plain-

tiffs alleged that the bonuses incorporated previous

production levels that were the product of Merrill

Lynch’s underlying discriminatory policies. The defen-

dants 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 pro-

tected from challenge unless it was adopted with “the

No. 11-1957 3

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 (2009). Finally, to the extent that

the allegations pertained to the underlying employ-

ment practices at Merrill Lynch—the “inputs” that pro-

duced 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 assess-

ment 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 incorpo-

rated the past discriminatory effects of Merrill Lynch’s

underlying employment practices. See Am. Tobacco Co. v.

Patterson, 456 U.S. 63 (1982); Int’l Bhd. of Teamsters v.

United States, 431 U.S. 324 (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 (2007), and amplified in Iqbal.

4 No. 11-1957

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 broker-

age 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 ac-

cording to a firm-wide grid formula that applies dif-

ferent 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 compensa-

tion 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,

1

The parties refer to Merrill Lynch’s financial advisors as

“FAs,” but we find that acronym awkward, so we’ll call

them “brokers” instead.

No. 11-1957 5

42 U.S.C. § 2000e-2. The plaintiffs challenged a wide

array of Merrill Lynch’s employment policies and prac-

tices, alleging racial discrimination in hiring, compensa-

tion, 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 brokers were 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

6 No. 11-1957

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 discrimina-

tion because it had the purpose and effect of depressing

the size of bonuses earned by black brokers, or elim-

inating 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 ade-

quately 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,

2

We will refer to the defendants collectively as “Merrill Lynch,”

unless the context requires otherwise.

3

The version of the complaint at issue here is the plaintiffs’

“First Amended Complaint,” but we refer to it as simply

“the complaint.”

No. 11-1957 7

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 com-

plaint, 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 pro-

gram 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 678. To the

extent that the production-credit “inputs” were them-

selves the product of discriminatory policies, the judge

held that the new suit simply duplicated the litigation

already underway in McReynolds I.

Finally, Judge Gettleman took note of a case in the

Southern District of New York raising a nearly identical

challenge to this same retention program, except that

it alleged a claim of sex discrimination. See Goodman v.

8 No. 11-1957

Merrill Lynch & Co., 716 F. Supp. 2d 253 (S.D.N.Y. 2010).

The judge in Goodman had dismissed the plaintiffs’ com-

plaint, holding that Merrill Lynch’s retention program

was a production-based compensation system pro-

tected under § 703(h) and that the complaint failed to

adequately allege intentional discrimination. Id. at 261-62.

II. Discussion

We review a Rule 12(b)(6) dismissal de novo, construing

the complaint in the light most favorable to the plain-

tiffs, accepting as true all well-pleaded facts, and drawing

reasonable inferences in the plaintiffs’ favor. Tamayo v.

Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008). The plain-

tiffs’ primary argument is that the district court erred

in concluding at the pleading stage that the retention-

bonus program was a valid production-based compensa-

tion system shielded from challenge by § 703(h). They

also maintain that dismissal was inconsistent with the

Lilly Ledbetter Fair Pay Act of 2009, Pub. L. No. 111-2, § 3,

123 Stat. 5 (codified at 42 U.S.C. § 2000e-5(e)(3)). Finally,

they argue that the district court erroneously concluded

that to the extent the allegations in the present com-

plaint focus on Merrill Lynch’s underlying discriminatory

practices, they merely duplicate the claims in the

McReynolds I litigation.4

4

At the end of their opening brief, the plaintiffs also lodge a

procedural objection to the district court’s decision to address

the dismissal motion ahead of class certification. Rule 23(c) of

(continued...)

No. 11-1957 9

4

(...continued)

the Federal Rules of Civil Procedure provides that the

district court must address class certification “early” in the

litigation and generally before addressing a motion directed at

the merits. See Bertrand v. Maram, 495 F.3d 452, 455 (7th Cir.

2007). But there is no fixed requirement that the court must

always defer a decision on a Rule 12(b)(6) motion until after

the court addresses class certification. As the district court

noted, a motion to dismiss for failure to state a claim tests the

sufficiency of the complaint, and although a Rule 12(b)(6)

dismissal operates as a final decision on the merits if leave

to replead is not granted, it is sometimes appropriate to decide

a Rule 12(b)(6) motion ahead of class certification. See, e.g.,

Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 550 (2007) (affirming

dismissal of antitrust claims prior to ruling on class certifica-

tion); Greenberger v. GEICO Gen. Ins. Co., 631 F.3d 392, 394-96

(7th Cir. 2011) (same); Shlahtichman v. 1-800 Contacts, Inc., 615

F.3d 794, 797 (7th Cir. 2010) (same).

It was especially appropriate to do so here. As we will explain,

this suit essentially piggybacks on McReynolds I, in which

the same plaintiffs are challenging the various employment

practices at Merrill Lynch that contribute to the determination

of a broker’s production credits. Those production credits, in

turn, form the basis for the retention bonuses at issue here.

Whether the retention-bonus program is insulated from chal-

lenge under § 703(h) is a threshold question that can be resolved

on the pleadings. To the extent that the plaintiffs are really

challenging the disparate impact of the underlying policies

that provide the “inputs” for the bonuses, their claim here is

subsumed within McReynolds I, and if successful, will be

remedied there.

10 No. 11-1957

A. Section 703(h)

The plaintiffs assert claims of racial discrimination

under § 1981 and Title VII based on what the complaint

describes as a long history of discriminatory employ-

ment policies and practices at Merrill Lynch that have

the effect of denying black brokers the same business

opportunities as white brokers. The complaint alleges

that Merrill Lynch uses “production credits” to deter-

mine compensation, that these production credits reflect

the effects of the underlying discrimination, and thus

that the retention program, which paid bonuses based

on production credits, was adopted with intent to dis-

criminate against black brokers.

Section 703(h) of Title VII provides that certain com-

pensation systems are exempt from challenge as an unlaw-

ful employment practice absent intent to discriminate:

Notwithstanding any other provision of this sub-

chapter, it 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 produc-

tion . . . , provided that such differences are not the

result of an intention to discriminate because of race,

color, religion, sex, or national origin . . . .

42 U.S.C. § 2000e-2(h). The import of § 703(h) is that

disparate racial impact is insufficient under Title VII to

invalidate a “bona fide seniority or merit system,” or a

“system which measures earnings by quantity or quality

No. 11-1957 11

of production.” Plaintiffs challenging an employment

practice or compensation system of this type must

establish intent to discriminate. Patterson, 456 U.S. at 65.

Section 703(h) thus creates an exception to the general

rule that “a prima facie Title VII violation may be estab-

lished by policies or practices that are neutral on their

face and in intent but that nonetheless discriminate in

effect against a particular group.” Teamsters, 431 U.S. at

349. An employment practice that passes muster under

Title VII does not violate § 1981, Waters v. Wis. Steel Works

of Int’l Harvester Co., 502 F.2d 1309, 1320 n.4 (7th Cir. 1974),

so if the Merrill Lynch retention program is protected

under § 703(h), then dismissal of both claims was proper.

1. Production-Based Compensation System

Our first question is whether the retention program

qualifies as “a system which measures earnings by quan-

tity or quality of production” within the meaning of

§ 703(h). The Supreme Court has more often inter-

preted and applied § 703(h) as it pertains to challenges

to seniority and merit systems, but what the Court has

said in those contexts guides the analysis here. The

most relevant cases for our purposes are Teamsters and

Patterson.

In Teamsters the Supreme Court held that a seniority

system cannot be challenged under Title VII merely

because it incorporates the effects of past acts of inten-

tional discrimination. 431 U.S. at 353-54. The Court ex-

plained that employees who are the victims of intentional

12 No. 11-1957

discrimination after Title VII was enacted are entitled to

retroactive seniority as a remedy for the violation, id. at

347-48 (citing Franks v. Bowman Transp. Co., 424 U.S. 747,

778-79 (1976)), but § 703(h) insulates the seniority

system itself from challenge notwithstanding that the

system locks in the effects of past discrimination, id.

The Court acknowledged that § 703(h) immunized only

“bona fide” seniority systems in which differences in

treatment were not “the result of an intention to discrimi-

nate because of race,” but it declined to hold that any

system that perpetuates the effects of past discrimina-

tion was not “bona fide” as a result. Id. at 353. Rather, the

Court explained that the seniority system in Teamsters

applied neutrally to all races and “did not have its

genesis in racial discrimination,” and was therefore a

bona fide seniority system insulated from challenge

under § 703(h). Id. at 355-56. Patterson reaffirmed the

holding of Teamsters and clarified that § 703(h) applies

equally to seniority systems adopted both before and

after the passage of Title VII. 456 U.S. at 77.

Merrill Lynch argues, and we agree, that Teamsters

and Patterson control the outcome here. The complaint

alleges that retention bonuses are determined by pro-

duction credits—“in essence, commissions earned on

client assets managed by the [broker]”—and that the

credits are “generated for the [brokers’] assets under

management on the purchase or sale of certain invest-

ment products.” The complaint further alleges that

“[a]ssets under management reflect the total amount of

clients’ assets that a broker is responsible for managing

No. 11-1957 13

on the clients’ behalf.” As described in the complaint, the

production-credit system is about as direct a measure

of production as one could imagine in the financial-

services industry, and the plaintiffs do not suggest other-

wise.

The complaint likewise alleges that “compensation is

largely determined by a ‘grid’ formula that applies dif-

ferent commission rates based on a[] [broker’s] level

of production” and that this formula is “neutral on [its]

face.” Nowhere does the complaint allege that the

formula is actually applied in a discriminatory man-

ner—only that the “inputs” determining a broker’s pro-

duction levels were themselves the products of past

discrimination.

Taking these allegations as true, we have little trouble

concluding that the retention-bonus program com-

pensates brokers on the basis of production and that it

does so in a race-neutral manner. To the extent that the

program incorporated the effects of past discrimination,

the same was true of the seniority system in Teamsters.

Just as the Teamsters plaintiffs could obtain retroactive

seniority as a remedy in a claim addressing the under-

lying discrimination, so too may the plaintiffs here

obtain a remedy for any underlying discriminatory

policies if they succeed in their challenge in McReynolds I.

Stated differently, to whatever extent the plaintiffs can

prove they would have received larger bonuses but for

the past discrimination affecting their production levels,

that loss may be incorporated into the remedy

in McReynolds I. But the retention program itself is

14 No. 11-1957

shielded from challenge as a production-based compensa-

tion system under § 703(h).

The plaintiffs have several arguments as to why Team-

sters should not control, but none are ultimately persua-

sive. First, they rely on a line of cases holding that

a compensation scheme is not protected under § 703(h)

if it does not actually measure what it purports to mea-

sure. See, e.g., Griggs v. Duke Power Co., 401 U.S. 424, 434-36

(1971) (holding that § 703(h) does not protect use

of testing requirements with a disparate impact on

racial minorities where the tests were not shown to be

related to job performance); Ass’n Against Discrimination

in Emp’t v. City of Bridgeport, 647 F.2d 256, 272-74 (2d

Cir. 1981) (racially discriminatory test that did not

actually measure fitness for the job could not be charac-

terized as a “bona fide merit system” under § 703(h)).

The plaintiffs contend that just as the tests in Griggs

and Association Against Discrimination were not really

measuring merit, neither is the retention-bonus program

really measuring the quality of production.

This comparison does not hold up under scrutiny.

The material point in Griggs and Association Against

Discrimination was that the testing devices at issue in those

cases were not validly measuring employees’ merit to

begin with and were only serving to create racial dis-

parities. See Griggs, 401 U.S. at 431 (“[N]either the

high school completion requirement nor the general

intelligence test is shown to bear a demonstrable rela-

tionship to successful performance of the jobs for which

it was used.”); Ass’n Against Discrimination, 647 F.2d at

No. 11-1957 15

273 (“[I]t would defy reason to characterize as a ‘bona

fide merit system’ a test that does not measure the

fitness of those who take it for the positions to be filled

according to its results.”). This case is quite different. The

complaint itself acknowledges that a broker’s produc-

tion credits do, in fact, reflect “commissions earned on

client assets managed by the [broker],” and there is no

suggestion that this metric of production is improper. It

is also undisputed that brokers who more successfully

invest their assets under management earn more pro-

duction credits and that this calculation is made on an

objective and racially neutral basis. In short, a broker’s

production credits—on which the retention bonuses

were based—do in fact measure the “quality of produc-

tion” as required for the § 703(h) exemption.

This might be a different case if a broker’s compensa-

tion depended on a subjective analysis of how effectively

the broker was representing the firm. If, for example,

black brokers were receiving systematically poorer

reviews than their white counterparts who performed

substantially similar work, and the reviews determined

compensation, then Merrill Lynch could not shield the

system simply by calling it a merit- or production-based

system—or at least, the § 703(h) issue could not be

resolved at the pleading stage. In that situation, the

challenger might have an arguable factual basis for a

claim under Griggs that the evaluations were not

actually measuring production. But here, the complaint

alleges that the retention-bonus program applies equally

to all brokers and uses an objective, mechanical

measure of productivity, avoiding any subjective evalua-

tions.

16 No. 11-1957

The plaintiffs also argue that § 703(h) should

apply only to “piecework” production systems, like the

manufacture of physical products on an assembly line, and

not the sort of financial-asset production-credit system

at issue here. This reading of the statute has no basis in

the text and is not compelled by relevant precedent.

Section 703(h) states that “it shall not be an unlawful

employment practice for an employer to apply different

standards of compensation . . . pursuant to . . . a system

which measures earnings by quantity or quality of pro-

duction.” This language is not limited to piecework

systems; indeed, the specific use of the phrase “quantity

or quality” plainly expands the reach of § 703(h) beyond

quantity-based piecework compensation systems. The

plaintiffs point out that where production-based

systems are discussed in the legislative history of § 703(h),

only piecework systems are mentioned as an example.

Consulting legislative history may be an acceptable

means of decoding an ambiguous statute, see DIRECTV,

Inc. v. Barczewski, 604 F.3d 1004, 1008 (7th Cir. 2010), but

the text of § 703(h) is not ambiguous in any relevant

respect. It broadly exempts compensation systems

based on quantity or quality of production.

Next, the plaintiffs contend that even if the retention

program qualifies as a production-based system, it is not

“bona fide” as that term is used in § 703(h). See 42 U.S.C.

§ 2000e-2(h) (“[I]t shall not be an unlawful employment

practice for an employer to apply different standards

of compensation . . . pursuant to a bona fide seniority or

merit system, or a system which measures earnings by

quantity or quality of production . . . .” (emphasis added)).

No. 11-1957 17

The statute itself does not explain what is meant by

“bona fide,” but in Teamsters the Supreme Court

elaborated on the term in the context of a seniority system:

The seniority system in this litigation is entirely bona

fide. It applies equally to all races and ethnic groups.

To the extent that it “locks” employees into

non-line-driver jobs, it does so for all. The [injured

employees] . . . are not all Negroes or Span-

ish-surnamed Americans; to the contrary, the over-

whelming majority are white. The placing of line

drivers in a separate bargaining unit from other em-

ployees is rational in accord with the industry

practice . . . . It is conceded that the seniority system

did not have its genesis in racial discrimination, and

that it was negotiated and has been maintained

free from any illegal purpose.

431 U.S. at 355-56. The plaintiffs maintain that although

the retention program is racially neutral on its face,

it cannot be considered “bona fide” because the

production-credit system on which it is based had

its genesis in Merrill Lynch’s discriminatory policies

and practices and was neither negotiated nor main-

tained free from illegal purpose.

We do not need to grapple with the question whether

the term “bona fide” has some specialized meaning in

this context.5 On the most straightforward reading of the

statute, the “bona fide” modifier applies to seniority

5

A standard definition of “bona fide” is: “1. Made in good faith;

without fraud or deceit. 2. Sincere; genuine.” B LACK ’S L AW

D ICTIONARY 199 (9th ed. 2004).

18 No. 11-1957

and merit systems, not to production-based compensa-

tion systems. To repeat, the statute provides that “it

shall not be an unlawful employment practice for an

employer to apply different standards of compensation . . .

pursuant to a bona fide seniority or merit system, or a

system which measures earnings by quantity or quality

of production.” If the “bona fide” modifier were meant

to apply to production-based systems as well as seniority

and merit systems, the more natural phrasing would

authorize employers to use different standards of com-

pensation “pursuant to a bona fide seniority system,

merit system, or system which measures earnings by

quantity or quality of production.” 6

The interpretive question is largely irrelevant, however,

because even if the “bona fide” modifier applies, the

concept is inherently built into what it means for a

system to measure quantity or quality of production.

6

We have not been able to find any case that has squarely

addressed this interpretive question. The plaintiffs cite Beasley

v. Kroehler Manufacturing Co., 406 F. Supp. 926, 928-29 (N.D. Tex.

1976), for the proposition that “a production system must be

shown to measure the actual quantity or quality of the em-

ployee’s production—without employer manipulation—before

it qualifies as bona fide.” But Beasley says nothing of the

sort—indeed, the court went so far as to quote § 703(h) as

excluding the bona fide language as applied to production-based

compensation systems. See id. (“Title VII specifically provides

that ‘it shall not be an unlawful employment practice for an

employer to apply different standards of compensation . . .

pursuant to a . . . quantity or quality of production[.]’ 42 U.S.C.

§ 2000e-2(h).” (alterations in original)).

No. 11-1957 19

Indeed, the “bona fide” question is essentially identical

to the question whether the retention-bonus program is,

in fact, a production-based system. If there were truly

a dispute as to whether the retention program mea-

sured production—as would be the case in the “subjec-

tive analysis” hypothetical discussed above—then

perhaps it could be said that the retention program

was not “bona fide.” But as we have explained, the reten-

tion program qualifies as a production-based system,

so any extra “bona fide” analysis is beside the point.

Finally, when the Supreme Court explained why the

seniority system in Teamsters was “entirely bona fide,”

431 U.S. at 355, it did so in language that distinguished

a bona fide seniority system from one adopted as a

“result of an intention to discriminate.” The Court ob-

served that the seniority system qualified as “bona fide”

in part because it “did not have its genesis in racial dis-

crimination” and was “negotiated and . . . maintained

free from any illegal purpose.” Id. at 356. This anticipates

the next step in the § 703(h) analysis, which concerns

the issue of discriminatory intent.

2. Intent to Discriminate

Because it qualifies as a production-based compensa-

tion system, the retention program is exempt from chal-

lenge under § 703(h) provided it was “not the result of an

intention to discriminate because of race.” As an initial

matter, the plaintiffs argue that even if the retention

program itself was not adopted with a discriminatory

purpose, it was based on production levels that re-

20 No. 11-1957

flected the effects of past intentional discrimination, so

the actual differences in bonus pay resulted from an

intention to discriminate, if only indirectly. This argu-

ment relies on a misreading of the statutory language.

Appropriately excerpted, § 703(h) provides that “it

shall not be an unlawful employment practice . . . to

apply different standards of compensation . . . provided

that such differences are not the result of an intention

to discriminate.” The phrase “such differences” in the

proviso refers back to “standards of compensation,”

not the actual amount of compensation.

Teamsters confirms this understanding of the statute.

There, it was conceded that the differences in seniority

(and thus the differences in employment privileges)

were the product of intentional discrimination, but the

seniority system itself was nevertheless immune from

challenge under § 703(h). The plaintiffs suggest that

production-based systems should be treated differently

from seniority systems, but nothing in the text of

the statute or the Court’s analysis in Teamsters supports

limiting that case to its facts. The proviso applies across

the board. By its terms, § 703(h) authorizes employers to

apply different standards of compensation pursuant to

a seniority, merit, or production-based system provided

that the system was not adopted with a discriminatory

purpose. Although Teamsters addressed a seniority

system, the Court’s interpretation of § 703(h) applies with

No. 11-1957 21

equal force here.7 A production-based compensation

system, like a seniority or merit system, forfeits the pro-

tection of § 703(h) only if the system itself was

adopted with the intent to discriminate.

The complaint alleges this intent, but it does so only

generally, raising the question whether the allegations

pass muster under the heightened pleading standards

set forth in Twombly and Iqbal. To survive a motion to

dismiss under Rule 12(b)(6), a complaint must “state a

claim to relief that is plausible on its face.” Twombly,

550 U.S. at 570. “A claim has facial plausibility when

the plaintiff pleads factual content that allows the court

to draw the reasonable inference that the defendant is

liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.

“Where a complaint pleads facts that are ‘merely con-

sistent with’ a defendant’s liability, it ‘stops short of the

line between possibility and plausibility of entitlement

7

The EEOC, as an amicus for the plaintiffs, suggests an odd

distinction between Teamsters and the present case. The agency

argues that Teamsters involved “discrete acts of discrimination

that had immediate and tangible adverse effects on the plaintiffs

but were not challenged at the time,” but in this case, “the

disparity in compensation under the [retention program] was

the first tangible consequence of the discriminatory allocation

of accounts and other benefits.” Setting aside whether this

distinction is valid in theory, the argument cannot be squared

with the complaint, which asserts that Merrill Lynch’s underly-

ing discriminatory policies had a disparate impact on brokers’

wages well before the acquisition by Bank of America, and

that those policies are the subject of litigation in McReynolds I.

22 No. 11-1957

to relief.’ ” Id. (quoting Twombly, 550 U.S. at 557) (internal

quotation marks omitted).

Iqbal clarified two working principles underlying the

Twombly decision. First, although the complaint’s

factual allegations are accepted as true at the pleading

stage, allegations in the form of legal conclusions are

insufficient to survive a Rule 12(b)(6) motion. Id. Accord-

ingly, “[t]hreadbare recitals of the elements of the cause

of action, supported by mere conclusory statements,

do not suffice.” Id. Second, the plausibility standard

calls for a “context-specific” inquiry that requires the

court “to draw on its judicial experience and common

sense.” Id. at 679. This is “not akin to a ‘probability re-

quirement,’ ” but the plaintiff must allege “more than

a sheer possibility that a defendant has acted unlawfully.”

Id. at 678.

Applying these principles here, the allegations that

Merrill Lynch knew that the production-credit system

had a disparate impact on black brokers are legally insuf-

ficient. 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. See Iqbal, 556 U.S. at 676-77; Pers. Adm’r

of Mass. v. Feeney, 442 U.S. 256, 279 (1979).

The plaintiffs suggest that reliance on Iqbal and Feeney

is misplaced because those cases concerned constitu-

tional claims, not statutory claims. The distinction

makes no difference. It is well-established that an

intentional-discrimination claim under Title VII is evalu-

No. 11-1957 23

ated the same way as an intentional-discrimination

claim arising under the Equal Protection Clause:

Neither [Washington v.] Davis nor [Personnel Administra-

tor v.] Feeney were Title VII cases, a point emphasized

in Davis. But when intentional discrimination is

charged under Title VII[,] the inquiry is the same

as in an equal protection case. The difference be-

tween the statutory and constitutional prohibitions

becomes important only when a practice is

challenged . . . based on a theory of “disparate impact,”

as distinct from “disparate treatment” . . . .

Am. Nurses’ Ass’n v. Illinois, 783 F.2d 716, 722 (7th Cir. 1986)

(citation omitted); see also EEOC v. Joe’s Stone Crab, Inc.,

220 F.3d 1263, 1273 (11th Cir. 2000) (“[T]o show discrim-

inatory intent [under Title VII], a plaintiff must demon-

strate ‘that the decisionmaker . . . selected or reaffirmed

a particular course of action at least in part because of,

not merely in spite of, its adverse effects on an

identifiable group.’ ” (alteration in original) (quoting

Feeney, 442 U.S. at 279) (internal quotation marks omit-

ted)). By operation of § 703(h), both the Title VII and § 1981

claims require a showing of intentional discrimination,

so Iqbal and Feeney provide the proper decisional frame-

work.

The complaint alleges in some detail that black

brokers at Merrill Lynch have been the victims of dis-

criminatory employment policies and practices and

that they receive fewer production credits as a result.

But much less is said about the retention program it-

self. The complaint alleges that the retention awards

24 No. 11-1957

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 under-

lying discriminatory practices that allegedly caused it.

As to whether the retention program itself was

adopted with discriminatory purpose, however, the

complaint asserts only the following:

Defendants intentionally designed and implemented

retention bonuses based largely on production

credits that had a disparate impact on and intention-

ally discriminated against African Americans and

women. Defendants identified and selected for

higher compensation the FAs they would try hardest

to retain via the retention bonuses, and they knew

that they were offering more generous retention

packages to white men than to African Americans

and women. Simply put, Defendants intended to

retain and more generously compensate white men

rather than African Americans and women. Defen-

dants did not want to retain African American FAs,

and have engaged in policies and practices designed

to further their higher rates of attrition.

We agree with the district court that these allegations

of intent are the sort of conclusory allegations that are

insufficient under Iqbal. All four sentences say basically

the same thing and at roughly the same level of general-

ity—that Merrill Lynch intentionally designed the re-

tention program based on production levels that incorpo-

No. 11-1957 25

rated the effects of past discrimination, and that the

firm did so with the intent to discriminate against black

brokers. Stated as such, the assertion is merely a con-

clusion, unsupported by the necessary factual allegations

to support a reasonable inference of discriminatory

intent. Iqbal, 556 U.S. at 679 (“While legal conclusions

can provide the framework of a complaint, they must

be supported by factual allegations.”). Indeed, it is

helpful to compare this language to the rejected com-

plaint in Iqbal itself, which alleged that the defendants

“knew of, condoned, and willfully and maliciously

agreed to subject [the plaintiff] to harsh conditions of

confinement as a matter of policy, solely on account of

[his] religion, race, and/or national origin and for no

legitimate penological interest.” Id. at 680 (internal quota-

tion marks omitted).

The plaintiffs argue that the complaint adequately

alleges intentional discrimination but the district court

erroneously rejected the allegations as “implausible” by

drawing two improper inferences: first, that the true

motive of the retention program was to retain the

most productive brokers; and second, that Bank of

America would have wanted to avoid discrimination

to prevent a lawsuit. Had the complaint adequately

alleged intentional discrimination in the first place, this

might be a valid point. The “plausibility” standard

under Iqbal “does not imply that the district court

should decide whose version to believe, or which version

is more likely than not.” Swanson v. Citibank, N.A., 614

F.3d 400, 404 (7th Cir. 2010). But the complaint did not

adequately allege intentional discrimination in the

26 No. 11-1957

first place. The district court recognized as much,

holding that the plaintiffs offered nothing more than

conclusory allegations of discriminatory intent.

In any event, our standard of review is de novo, and

based on our own review of the complaint, we conclude

that it contains insufficient factual content to support

an inference that the retention program itself was intention-

ally discriminatory. The plaintiffs have alleged that

Merrill Lynch’s past employment practices had discrim-

inatory effects on black brokers and the firm knew it

when it designed the retention program. But however

ample the complaint’s allegations might be to support

a disparate-impact claim vis-à-vis the underlying em-

ployment practices, they are insufficient to support a

claim of intentional discrimination with respect to the

retention program. Under Teamsters the past discriminatory

“inputs” are legally irrelevant to the lawfulness of the

retention program. The complaint needs to allege some

facts tending to support a plausible inference that the

retention program itself was adopted for a discriminatory

purpose.

The complaint contains no factual allegations of this

nature. It alleges only that Merrill Lynch was aware of

the disparate impact of its policies on black brokers and

then asserts in wholly conclusory terms that this impact

was the purpose of the retention program. Under a com-

bined reading of Teamsters and Iqbal, these allegations

are legally insufficient to state a claim. This is a complex

discrimination claim, and we have observed that under

Iqbal and Twombly, “[t]he required level of factual specific-

No. 11-1957 27

ity rises with the complexity of the claim.” McCauley v.

City of Chicago, 671 F.3d 611, 616-17 (7th Cir. 2011)

(citing Swanson, 614 F.3d at 405). Because the complaint

contains only conclusory allegations that the retention

program was adopted with intent to discriminate, it

fails to state a claim upon which relief may be granted.

B. Lilly Ledbetter Fair Pay Act

The plaintiffs also argue that dismissal was improper

under the Lilly Ledbetter Fair Pay Act of 2009, which

they claim creates a new cause of action for discriminatory

practices whenever compensation is paid pursuant to

past discriminatory employment decisions. They argue,

in essence, that a new cause of action was created when

Merrill Lynch paid the retention bonuses, taking this

case outside the ambit of § 703(h). This argument com-

pletely misunderstands the Fair Pay Act.

The Act was passed following the Supreme Court’s

decision in Ledbetter v. Goodyear Tire & Rubber Co., Inc., 550

U.S. 618 (2009), which held that Title VII’s 180-day

statute of limitations begins to run when a discriminatory

pay decision is made, not each time compensation is

paid, id. at 632. Lilly Ledbetter filed suit within 180 days

of receiving a paycheck reflecting an allegedly discrim-

inatory wage, but the employment decisions that

caused the claimed disparity in pay occurred much

earlier. The Court held that the limitations period began

to run at the time the discriminatory employment

decisions were made, not each time a paycheck was

issued. Id. at 627-28.

28 No. 11-1957

In response to this decision, Congress passed the Fair

Pay Act, which provides as follows:

For purposes of this section, an unlawful employment

practice occurs, with respect to discrimination in

compensation in violation of this title, when a dis-

criminatory 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 applica-

tion 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). The statute thus reverses the

decision in Ledbetter and clarifies that an unlawful em-

ployment practice occurs for purposes of the statute

of limitations “each time . . . compensation is paid, re-

sulting in whole or in part from [an unlawful employ-

ment] decision or other practice.”

The Act therefore concerns the question of timing—it

affects when discriminatory practices may be challenged

by extending the statute of limitations every time a pay-

check is issued. It is an accrual rule; it does not affect

the substance of the claim. Indeed, in AT & T Corp. v.

Hulteen, 556 U.S. 701, 715-16 (2009), the Supreme Court

specifically held that § 703(h), as interpreted in Teamsters,

survived the Fair Pay Act. Hulteen held that a bona fide

seniority system was protected by § 703(h) even though

it did not retroactively equalize pregnancy leaves taken

before the passage of the Pregnancy Discrimination

Act (“PDA”). Id. at 704-06. The Court thus applied Team-

No. 11-1957 29

sters in the context of pregnancy discrimination. In

holding that the Fair Pay Act did not affect its decision,

the Court noted that “AT & T’s pre-PDA decision not

to award Hulteen service credit for pregnancy leave

was not discriminatory, with the consequence that

Hulteen has not been ‘affected by application of a dis-

criminatory compensation decision or other practice.’ ” Id.

at 716 (quoting 42 U.S.C. § 2000e-5(e)(3)(A)). In other

words, by virtue of § 703(h), the employer had not, in

fact, committed an unlawful employment practice, so

there was no way that future payments could have

“continued” this nonexistent discrimination.

The same is true here. The plaintiffs have challenged

only the retention program, but the program is immune

from challenge as a race-neutral production-based com-

pensation system under § 703(h). As such, there is no

Title VII violation in the first place, so it makes no sense

to say that the payment of bonus awards extended the

statute of limitations. What the Fair Pay Act would do,

if applicable here, is allow the plaintiffs another chance

to challenge Merrill Lynch’s underlying discriminatory

practices if the statute of limitations had run on those

claims. But the plaintiffs are already challenging those

practices in McReynolds I, so the Fair Pay Act simply has

no role to play in this litigation.

C. Construing the Complaint as a Challenge to Underly-

ing Discriminatory Practices

Finally, the plaintiffs argue that even if the retention

program itself is protected, the complaint should be

30 No. 11-1957

construed as a challenge to the underlying discrim-

inatory practices at Merrill Lynch—about which there are

many detailed allegations in the complaint—and the

district court therefore should not have dismissed the

suit as duplicative of the claims made in McReynolds I.8

This argument would be difficult to win under any cir-

cumstances, and it is especially weak here. The district

court has broad discretion to dismiss a complaint “ ‘for

reasons of wise judicial administration . . . whenever it

is duplicative of a parallel action already pending

in another federal court.’ ” Serlin v. Arthur Andersen &

Co., 3 F.3d 221, 223 (7th Cir. 1993) (quoting Ridge Gold

Standard Liquors, Inc. v. Joseph E. Seagram & Sons, Inc., 572

F. Supp. 1210, 1213 (N.D. Ill. 1983)). A suit is duplicative

if the “claims, parties, and available relief do not signifi-

cantly differ between the two actions.” Ridge Gold, 572

F. Supp. at 1213. The district court has significant latitude

on this question, and we will reverse only for abuse

of discretion. Serlin, 3 F.3d at 223.

Application of that standard here is quite straightfor-

ward. 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’ produc-

tion credits, and by extension in the retention awards.

8

Merrill Lynch maintains that the plaintiffs waived this

argument by failing to make it in the district court. To the

contrary, the plaintiffs specifically raised this argument in

their brief in response to the motion to dismiss.

No. 11-1957 31

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.

The plaintiffs insist that because the class and the

claims are broader in McReynolds I, and Bank of America

is named as a defendant here but not in the earlier case,

the two actions are sufficiently different to proceed as

independent actions. We disagree. The larger class size

and broader scope of the claims in McReynolds I actually

support the district court’s holding that any challenge

to Merrill Lynch’s underlying employment practices

here is subsumed in the earlier case. And to the extent

that Bank of America may be liable as a corporate

parent, the plaintiffs can try to amend their complaint in

McReynolds I to add Bank of America as a defendant. See

EEOC v. Vucitech, 842 F.2d 936, 944 (7th Cir. 1988);

see also Worth v. Tyer, 276 F.3d 249, 259-60 (7th Cir.

2001) (“ ‘When the successor company knows about its

predecessor’s liability, knows the precise extent of that

liability, and knows that the predecessor itself would not

be able to pay a judgment obtained against it, the presump-

tion should be in favor of successor liability . . . .’ ” (quoting

Vucitech, 842 F.2d at 945)). But allowing a separate

suit seeking the same remedy would be redundant.

Finally, the plaintiffs make the curious assertion that

dismissal would “eliminate[] the role of the [EEOC] in

investigating employment discrimination claims against

employers that repeatedly commit ‘similar or related’

32 No. 11-1957

discriminatory acts.” The argument seems to be that

the district court’s refusal to entertain this duplicative

lawsuit will somehow discourage potential plaintiffs

from filing charges with the EEOC and thus prevent the

agency from adequately investigating long-standing

discriminatory practices. We see no such disincentive.

Plaintiffs may always file new claims with the EEOC.

Dismissal here simply reflects the district court’s con-

clusion 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.9

A FFIRMED.

9

In their reply brief, the plaintiffs also argue that the case

should have been stayed rather than dismissed. See Gleash v.

Yuswak, 308 F.3d 758, 760 (7th Cir. 2002) (“Even when prudence

calls for putting a redundant suit on hold, it must be stayed

rather than dismissed unless there is no possibility of prejudice

to the plaintiff.”). Arguments raised for the first time in a reply

brief are waived. See Mendez v. Perla Dental, 646 F.3d 420, 423-24

(7th Cir. 2011). Moreover, we doubt that the decision to dismiss

rather than stay this case could have possibly prejudiced the

plaintiffs. As we have noted, to the extent that they prevail on

their claims in McReynolds I, the plaintiffs will have a complete

remedy.

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