At the end of 2015, Governor Jerry Brown vetoed AB 465, which would have banned mandatory arbitration agreements in the employment setting, including arbitration agreements with class action waivers. As many employers know, including a class action waiver in an arbitration agreement or clause has been a great deterrent to class action lawsuits over the past several years since the California courts have blessed their viability. What Jerry Brown and the California state courts have given, the Ninth Circuit and the federal courts are trying to take away.

On August, 22, 2016, a three-judge panel of the Ninth CircuitCourt of Appeals found that class actionwaivers in mandatory employee arbitration agreements are unlawful, holding thata class action waiver contained in an arbitration agreement signed as acondition of employment violated employees’ rights under the National LaborRelations Act (NLRA). (Morris v. Ernst & Young LLP (9th Cir. August 22, 2016).) The Morrisdecision came on the heels of a May 2016 Seventh Circuit opinion, which ruled the sameway. Incontrast, both the Fifth and the Eighth Circuitshave found in favor of employers, holding that such class action waivers arelawful and do not violate the NLRA. (Note that the victorious employer in the EighthCircuit case was represented by Lathrop & Gage’s Kansas City office.) This creates a “split in the circuits,” or a divideamongst the federal courts interpreting the NLRA. Unfortunately, for California employers,thestate residessquarely in the Ninth Circuit, and any federal cases brought here would be governed by the Morrisdecision.

In Morris, the plaintiff and otheraccounting employees were required to sign an arbitration agreement. The agreement mandated theemployees: 1) could only pursue legal claims against Ernst & Young througharbitration; and (2) could arbitrate only as individuals and in “separateproceedings” — effectively, a class actionwaiver. Despite signing theseagreements, the employees brought a class action against Ernst & Young infederal court,alleging they were misclassified and denied overtime wages. After Ernst & Youngmoved to compel arbitration pursuant to the signed agreements, the trial courtordered the employees to individual arbitration and dismissed the case. Theemployees appealed.

In a majority opinion authored byChief Judge Sidney R. Thomas, the Ninth Circuit panel concluded that the classaction waiver was unlawful and vacated the trial court’s decision to compelindividual arbitration. According to the court,the NLRA provides employees with the “essential” right to pursue work-relatedlegal claims together. BecauseErnst & Young’s mandatory class action waiver prevented employees frombringing a concerted legal action (by making them resolve all theirwork-related legal claims in “separate proceedings”), the waiver was unlawfuland unenforceable.

Tremendous uncertainty over the futureof class action waivers remains, since as recently as September 8, 2016, Ernst& Young asked the United States Supreme Court (SCOTUS) to take on the question of whether classaction waivers clash with the NLRA. However, it is not clear if SCOTUS will agree to hear this case or, if so, when. This ambiguity is furthercompounded by uncertainty over the potential makeup of the Supreme Courtif/when it decides theissue, after the death of Justice Antonin Scalia.

For now, however, employers doingbusiness in the Ninth Circuit, and California in particular, should be preparedfor employees to challenge class action waivers in mandatory arbitrationagreements in federal court and to deal with this unfavorable precedent.

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