Waiving Arbitration Does not Require Prejudice to the Other Party, Says USSC

June 9, 2022

On May 23, 2022, in a case called Morgan v. Sundance, the United States Supreme Court unanimously decided that a party can waive its right to arbitration even when its conduct has not prejudiced the other side.  In so holding, the USSC changed 1st circuit precedent which had for years required a showing of prejudice.  All that is needed to prove waiver is a showing that the party knowingly relinquished the arbitration by acting inconsistently with that right.  Here is what happened:

Robyn Morgan worked as an hourly employee at a Taco Bell franchise that was owned by Sundance, Inc.  As many companies require of new hires, Morgan signed an arbitration agreement when he started with the company.  In essence, he agreed to use binding arbitration instead of going to court if he had a dispute with the Company about matters concerning his employment.

Despite the agreement, Morgan brought a nationwide collective action alleging that Sundance violated the overtime rules of the Fair Labor Standards Act (“FLSA”).  Morgan alleged that Sundance avoided paying its hourly employees premium overtime pay for hours worked over 40 in a week, in particular by recording hours in a different week than they were actually worked, to prevent any weeks’ total from exceeding 40.

Although it could have enforced the arbitration agreement at the outset of suit, Sundance initially defended itself.  It filed a motion to dismiss, and then an answer and affirmative defenses when it lost that motion.  Notably, none of the affirmative defenses mentioned the arbitration agreement.  Sundance also jointly mediated Morgan’s case with another collective action filed by a different plaintiff.  It settled that other case, but not Morgan’s.

At that point, nearly 8 months after Morgan filed suit, Sundance moved to stay (i.e., stop) the litigation and force Morgan to arbitrate his claims pursuant to the arbitration agreement.  Morgan opposed the motion arguing that Sundance had waived its right to arbitrating by actually litigating the case for months.  While Morgan initially won his motion, the 8th Circuit Court of Appeals overturned that decision, sending Morgan’s case to arbitration.  But both appeals courts applied a prejudice prong to their waiver analysis.  That is, they said that a party will be found to have waived arbitration if 1) t knew of the right, 2) acted inconsistently with that right AND 3) prejudice the other party by its inconsistent actions.

The USSC said this analysis was wrong, and that no prejudice prong should be applied to waiver analysis in the arbitration context.  The Court reasoned that prejudice is not a feature of federal waiver law generally.  That is, in no other context must a party prejudice the other in order to be found to have waived their right.  Yet, 9 of the 11 federal circuits, including the 1st circuit, have applied an arbitration-specific wavier rule demanding a showing of prejudice.  The USSC has now said that these 9 circuits were wrong, and that no such showing must be made in the context of the waiver of arbitration.

As far as the Federal Arbitration Act’s (“FAA”) policy favoring arbitration, the USSC said its point is that arbitration agreements must be treated just like other contracts, not that arbitration should be fostered by the courts.   That policy “favoring arbitration,” therefore, does NOT authorize federal courts to invoke special “arbitration-preferring” rules.  It simply requires that arbitration agreements must be “put on the same footing” and treated like any other contract.  In other words, the point of “the policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so.’” As the federal rule of waiver does not include a prejudice requirement in other contexts, and it should not for arbitration agreements either, according to the USSC.

Going forward, the waiver of the right to arbitration under federal law, as with any other right, will be found when there is “intentional relinquishment or abandonment of a known right.”  Courts must focus on the actions of the person who held the right, but not the effects of those actions on the opposing party.  In other words, there need be no harm, reliance or prejudice to the other side.  As for Morgan’s case, it was sent back to the 8th Circuit for a new decision, using a waiver analysis based on whether Sundance knowingly gave up the right to arbitration by acting inconsistently with that right, irrelevant with how it affected Morgan.

So, what does all of this mean for employers who use arbitration agreements?  First, it makes it easier for employees to argue that an employer has waived the right to arbitrate because they do not have to show that they have suffered any prejudice or harm by the delay.  Employers who try to negotiate a settlement or participate in any part of litigation will need to, at a minimum express the reservations of their right to arbitrate, if they have any inclination to compel arbitration at some point.  It also means that employers who wish to enforce their rights under arbitration agreements will have to seriously consider compelling arbitration early on in litigation or risk that they may well be found to have waived the right.