Companies should act promptly to move to compel arbitration when an employee who is party to an arbitration agreement files a lawsuit — or risk waiving that right even if the employee suffers no prejudice from the delay. As a unanimous Supreme Court held in Morgan v. Sundance, Inc., No. 21-328 (May 23, 2022), courts must follow their ordinary waiver rules in deciding whether a party waives the right to arbitrate a dispute. The decision is important because it explicitly rejects an arbitration-specific waiver standard requiring a showing of prejudice, overruling nine circuits that had used such a rule.
Federal “Policy Favoring Arbitration” Does Not Authorize Bespoke Waiver Rules
The Morgan decision comes after an employee of a fast-food franchise owned by Sundance filed a collective action lawsuit alleging overtime-pay violations under the Fair Labor Standards Act. No. 21-328 at 2. Although the employee was party to an arbitration agreement covering employment disputes, Sundance initially proceeded as if she was not; it moved to dismiss the claim, then answered the complaint, then attended an unsuccessful mediation. Id.
After that (and nearly eight months after the case started), Sundance moved to compel arbitration under the Federal Arbitration Act (FAA). Id. The employee opposed the motion, contending that Sundance had waived its right to arbitrate by waiting so long to assert it. Id. at 3. Following applicable appellate precedent, the lower courts held that Sundance had not waived its right to arbitrate because although it knew of its right to arbitrate and acted inconsistently with that right, it had not “prejudiced the other party by its inconsistent actions.” Id. (citation omitted).
The prejudice prong of that arbitration-waiver test is a requirement not found in federal waiver law generally. Id. at 5. Waiver, the Court noted, is typically determined based on “the actions of the person who held the right,” without considering the effect on the other party. Id. Prior to Morgan, though, nine circuits had held that more was required to waive arbitration rights in particular: Invoking “the strong federal policy favoring arbitration” as embodied by the FAA, those circuits created an arbitration-specific rule requiring not only actions inconsistent with the enforcement of a right, but also prejudice to the opposing party, to hold that a party waived its right to arbitrate. Id. at 4 (citation omitted).
But the FAA doesn’t allow courts to create such special rules just for arbitration. Id. at 6. Instead, it merely places arbitration agreements “upon the same footing as other contracts.” Id. (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2010)). As a result, the Court unanimously held, lower courts cannot require a showing of prejudice to the opposing party when deciding whether a party, like Sundance, litigated too long and thus waived its right to compel arbitration. Id. at 7.
A Win for Employees With Questions Remaining
The Morgan decision is a good one for employees and other parties seeking to litigate what they previously agreed to arbitrate, as Morgan makes it easier to successfully argue that a defendant has waived its right to arbitration (at least in the nine circuits that previously required a showing of prejudice). Questions remain after Morgan, however, as the Court expressly did not address other arguments that the parties raised in their briefs. No. 21-328 at 4, 7. Those arguments included that state, not federal, law might control in resolving when a party’s “litigation conduct results in the loss of a contractual right to arbitrate” as well as whether and how doctrines of forfeiture, estoppel, laches, or procedural timeliness may play into the inquiry. Id. at 4. The Court assumed without deciding that the federal law of waiver was the correct framework for the issue, but in remanding the case, it acknowledged that the lower court might “determine that a different procedural framework (such as forfeiture) is appropriate.” Id. at 7. It remains to be seen how courts address such issues.At least one takeaway from Morgan is clear, though: Employers faced with a lawsuit should quickly decide whether they want to arbitrate the dispute and, if so, move to compel arbitration promptly. The failure to do so might result in a loss of the right to arbitrate.
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