On May 23, 2022, the U.S. Supreme Court issued a decision that significantly impacts a litigant’s right to compel arbitration and the circumstances that may result in a decision that a litigant has waived its right to compel arbitration.
The Case
In Morgan v. Sundance, Inc., an hourly employee at a fast food franchise signed an agreement that required her to arbitrate any employment disputes. The employee later filed a nationwide collective action, alleging that the Defendant employer had violated the overtime provisions of the FLSA. Instead of immediately moving to compel arbitration, the Defendant initially defended the lawsuit by filing a motion to dismiss. The Plaintiff and Defendant also engaged in mediation after the motion to dismiss was denied. After the mediation was unsuccessful, nearly eight months after the lawsuit had been filed, the Defendant moved to stay the litigation and compel arbitration of the dispute. The Plaintiff argued that the Defendant had waived its right to compel arbitration by waiting so long to make the argument and by litigating the dispute in court for nearly eight months.
The Lower Courts’ Decisions
The lower courts applied then existing Eighth Circuit precedent for finding waiver of the right to arbitration, which required a showing that the party seeking to arbitrate knew of its right to arbitration, acted inconsistently with that right, and “prejudiced the other party by its inconsistent actions.” The District Court found that the elements were satisfied and the Employer had waived its right to arbitration by waiting too long. The Eighth Circuit Court of Appeals reversed, ordered arbitration, and held that the Plaintiff had not been prejudiced by the Defendant’s delay in seeking arbitration. The Eight Circuit reasoned that much of the delay was a result of waiting for disposition on the Motion to Dismiss, that no discovery had been conducted and the litigation in the District Court to that point had focused on quasi-jurisdictional issues instead of the merits of the case. One judge dissented from the majority opinion and raised doubts about the prejudice requirement itself. The U.S. Supreme Court granted certiorari to resolve the circuit split regarding the appropriateness of an arbitration-specific waiver rule requiring a showing of prejudice.
The Supreme Court Decision
The Supreme Court noted that the prejudice requirement is not a feature of federal waiver law generally, outside of the arbitration context. Rather, the courts focus on the actions of the party holding the right and seldom consider the effects of those actions on the opposing party. Those circuits that have adopted the prejudice requirement for finding a waiver of the right to arbitration have done so because of the “federal policy favoring arbitration.” The Supreme Court also clarified this often cited federal policy. The Court explained that the policy favoring arbitration in the Federal Arbitration Act, “is merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” The policy is to make “arbitration agreements as enforceable as other contracts, but not more so.” Accordingly, a court must hold a party to its arbitration contract just as the court would to any other kind. Importantly, “a court may not devise novel rules to favor arbitration over litigation.” Since the usual federal rule of waiver does not include a prejudice requirement, prejudice is also not a condition of finding that a party waived its right to compel arbitration under the FAA. The Court remanded the case back to the Eighth Circuit to decide whether the Defendant knowingly relinquished the right to arbitrate by acting inconsistently with that right, without regard for any prejudice inquiry. The Court proclaimed that its sole holding in this case is that courts “may not make up a new procedural rule based on the FAA’s ‘policy favoring arbitration.’”
Lessons for Employers
The lesson for employers to be drawn from this case is to very quickly decide whether to invoke an arbitration clause in response to a lawsuit. Employers and other defendants should avoid any delay in asserting their arbitration rights, or they may face a finding that such right has been waived.
If you have any questions, please contact Brad Taormina at btaormina@wp.hallrender.com or your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer an individual’s questions that may constitute legal advice.
