While the federal bill (Fairness in Arbitration Act of 2007) banning mandatory arbitration clauses might not make it past a presidential veto, the recent California Supreme Court decision in Gentry v. Superior Court holds that most arbitration clauses with class action waivers do not prevent employees from joining class-action lawsuits.

Corporate defense attorneys see arbitration as a critical process for maintaining a healthy business and regard opposition to mandatory arbitration as an obvious stance for plaintiff attorneys looking after their own interests.

"They usually say it's a due process issue, that people have the right to a jury trial, and so forth. But I think they really are hopeful about getting in front of a jury that doesn't know much about a law," says corporate defense attorney Mark Howitson, a Menlo Park based partner with Orrick, Herrington & Sutcliffe LLP.

New Setback for California Employers
The court's Aug. 31 decision in Gentry removes the protection from potentially disastrous class action lawsuits once afforded by class action waivers, which often are included in mandatory arbitration contract clauses.

"In Gentry, the California Supreme Court not only invalidated the class action waiver, it left open the possibility that the employer's arbitration clause was entirely unenforceable," says employment attorney Bernice Conn, a partner with Los Angeles based law firm Robins, Kaplan, Miller & Ciresi LLP.

Business executives worry that jury members will hold them in an unfavorable light from the outset of a trial, resulting in tacit prejudice, Howitson suggests. And if the hundreds of billions of dollars sought in damages against tobacco companies is any indication, class action lawsuits have the potential to derail entire industries.

In the Gentry case, an employee of Circuit City Stores Inc. was barred from joining a class action suit, leaving the employee with the option of individual arbitration. The dispute centered on statutory violations of overtime pay rules.

The court issued the following statement in the opening paragraph of its published opinion: "We conclude that at least in some cases, the prohibition of class-wide relief would undermine the vindication of the employees' unwaivable statutory rights and would pose a serious obstacle to the enforcement of the state's overtime laws."

In the opinion, the court acknowledged that the plaintiff was given ample information about arbitration, and offered a 30 day period in which to withdraw from the agreement, but the court still found the arbitration agreement "unconscionable."

The silver lining for employers is that the decision was split 4:3, which offers hope for employer friendly decisions down the road.

The Federal Threat
Meanwhile, on Capitol Hill, federal lawmakers hope to eliminate pre dispute mandatory arbitration agreements altogether. Commonly known as the Fairness in Arbitration Act of 2007, H.R~ 3010 was introduced on July 12 of this year, along with its identical Senate bill, & 1782.

The Congressional Research Service offers the following summary of the Act:

"Arbitration Fairness Act of 2007 declares that no pre dispute arbitration agreement shall be valid or enforceable if it requires arbitration of: (11 ) an employment, consumer, or franchise dispute, or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power."

Passage of the bill will only help trial lawyers make more money but will not advance the interests of either party, says defense attorney Jon Meer, who chairs the labor and employment practice of DLA Piper US LLP in Los Angeles.

"All the Act will do is create more business for lawyers. The law is already very clear that any contract signed under duress is unenforceable," says Meer, who believes the Act will be vetoed if it passes Congress.

Meer says it may carry some political clout, though, in the court of public opinion, Presenting the Act as a way to protect the ability of the "little guy" to file suit, as opposed to putting that plaintiff at the mercy of a private arbitrator in the pocket of corporate America, could be effective, if inaccurate.

"An unfair arbitration is unfair for everyone, just as with an unfair court decision," Meer says.

And if the Act Does Pass?
For employers, outlawing mandatory arbitration agreements would lead to significantly higher litigation costs, increase exposure to large "runaway" verdicts and they would lose the leverage of having a say in the selection of arbitrators, says Santa Monica based employment attorney David Rosen, whose firm represents both plaintiffs and defendants.

"The [arbitrator selection] process allows the employer to filter out the employee friendly arbitrators. Furthermore, the fact the arbitrator knows he or she may be 'stricken' by the employer in future arbitrations may impact the arbitrator's decision making process," writes Rosen, a partner with Murphy Rosen, based in Santa Monica.

If the Act were to be signed into law, the net result would be a more equal footing between employees and employers, Conn says. She does not believe arbitrators are necessarily in the pocket of the companies that choose them, and she believes arbitration often is more efficient, Conn's problem with mandatory arbitration agreements is her assertion that most employees will sign the paperwork just to get the job, without understanding it.

"if you're an employee, you need the job. This clause doesn't often weigh into the decision process. A lot of consumers and employees don't understand how the law works," Conn says.

As stated earlier, Meer believes the Act will create significantly more business for trial attorneys.

The Act is in the very early stages of the lawmaking process, so it may be some time before it moves. Meanwhile, employers may want to revisit their own arbitration agreements and keep track of new case law and legislation.