Since the United States Supreme Court upheld the validity of class action waivers in commercial consumer arbitration agreements several years ago, many employers have found arbitration agreements with class action waivers a valuable tool to protect against the tide of class action litigation. In addition to avoiding the risk of a runaway jury award, these agreements force aggrieved individuals to arbitrate their claims one by one, instead of permitting a costly, drawn out class action. Many courts have upheld such arrangements against legal challenge, but it appears this tide could be turning.

The United States Court of Appeals for the Ninth Circuit (covering Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) recently dealt a major blow to employers when it struck down an arbitration agreement that forced employees to pursue work-related claims individually. The appellate court found that pursuing work-related claims together (or as a class) is protected concerted activity under the National Labor Relations Act (NLRA). The court thus concluded that agreements requiring employees to resolve their claims in “separate proceedings” are unenforceable because they interfere with this substantive right. The Ninth Circuit also found that its ruling was consistent with the Federal Arbitration Act because it did prohibit arbitration altogether, but rather only barred arbitration agreements requiring individual actions – indicating that arbitration agreements permitting class actions would be enforceable.

This decision is important because it gives merit to dozens of National Labor Relations Board decisions invalidating class action waivers that, until now, had largely been rejected by the federal courts upon review. Prior to the Ninth Circuit decision, only the Seventh Circuit (covering Illinois, Indiana and Wisconsin) had deemed class waivers invalid. On the other side of the equation, the Fifth Circuit has recently enforced class waivers on two separate occasions and rejected all arguments based on the NLRA. This split amongst the federal appellate courts sets the stage for a Supreme Court showdown.

It is true the Supreme Court has had a long history of treating arbitration agreements favorably, and has kept to that position in recent years. It has consistently upheld arbitration provisions under which parties waive their right to participate in class or collective actions. However, many of those recent decisions came out on 5-4 basis with the justices split down ideological lines. Because of the recent uncertainties about the potential makeup of the Supreme Court and a possible shift in the ideological makeup of the Supreme Court, a future decision on this issue could have a different outcome.

In the meantime, unless and until the Supreme Court decides this issue, employers – especially those within the Seventh and Ninth Circuits – should be careful when adopting, using or trying to enforce arbitration agreement with a class waiver. A cautious approach should also be taken by employers located within a circuit that has enforced such agreements, because it is unclear whether any potential negative ruling in the future could have retroactive impact on matters that have previously been arbitrated on an individual basis.