United States: SCOTUS Rejects Prejudice Requirement For Wavier Of Right To Arbitrate

Los Angeles, Calif. (June 2, 2022) - Generally, under federal waiver law, a party waives a contractual right when it is aware of the existence of that right and acts inconsistently with it. There is no requirement that the party asserting waiver be prejudiced by the other party's conduct. But when the right concerns arbitration, most federal courts have held that a finding of harm is essential – a party can waive its right to arbitrate by litigating only when its conduct has prejudiced the other side. Courts justify this arbitration-specific standard by the Federal Arbitration Act's policy favoring arbitration. However, some federal courts have not required a showing of harm when deciding waiver in the arbitration context.

In Morgan v. Sundance, Inc., No. 21-328 (May 23, 2022), the United States Supreme Court granted review to resolve the split in authority between federal courts regarding whether there is an arbitration-specific waiver rule requiring a showing of prejudice. The Supreme Court held that federal courts may not create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the “policy favoring arbitration” under the Federal Arbitration Act (FAA). Below is a more detailed analysis of Morgan v. Sundance and what it means for employers.

Facts and Analysis

The plaintiff, Robyn Morgan, was an hourly employee at a Taco Bell franchise owned by his employer, Sundance, Inc. (Sundance). When applying for the job, the employee signed an agreement to arbitrate any employment dispute. Despite that agreement, Morgan filed a nationwide collective action in the Southern District of Iowa, asserting that Sundance had violated federal law regarding overtime payment. Sundance initially filed a motion to dismiss, which the district court denied. Sundance then filed an answer, asserting 14 affirmative defenses, none of which mentioned the arbitration agreement. After the parties engaged in an unsuccessful mediation, Sundance sought to enforce the arbitration agreement under the FAA approximately eight months after Morgan filed the lawsuit. Morgan opposed, arguing that Sundance had waived its right to arbitrate by litigating for so long. The district court denied Sundance's motion, finding that Sundance had waived the right to compel arbitration by waiting too long enforce the agreement, and that Morgan had been prejudiced by the delay.

After Sundance appealed, the U.S. Court of Appeals for the Eighth Circuit reversed, finding that Morgan was not prejudiced by the delay because the nature of the motion to dismiss was jurisdictional, not merits based, and the mediation was in an effort to avoid litigation, which was consistent with arbitration.

The Supreme Court granted review to resolve the split over whether federal courts may adopt an arbitration-specific waiver rule demanding a showing of prejudice. The Court found that the text of the FAA makes clear that courts are not to create arbitration-specific procedural rules, like the one requiring prejudice to find waiver. The FAA's policy favoring arbitration “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.” In other words, arbitration contracts should be treated like all other contracts. As with other contracts, the waiver inquiry is limited to the party's conduct, and whether the party knowingly relinquished the right by acting inconsistently with that right, without consideration of whether the other party suffered any prejudice. The Supreme Court held that this inquiry applies to arbitration agreements.

Conclusion

As a practical matter, the Court's finding that a showing of prejudice is unnecessary when evaluating waiver of the right to arbitrate means that it is increasingly important for employers to promptly assert their right to arbitrate under the terms of an arbitration agreement in the event of litigation. A delay in doing so – even if the delay does not prejudice the employee – can be viewed as a waiver of the right to arbitrate.

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