On May 23, 2022, the United States Supreme Court issued a unanimous decision in Morgan v. Sundance, Inc., and rejected a court-created rule that benefitted defendants (typically employers), that sought to invoke an arbitration provision after actively litigating a dispute.
The High Court announced that “federal courts may not create arbitration-specific variants of federal procedural rules” based on the Federal Arbitration Act’s “policy favoring arbitration.” Instead, the High Court held that “a court must hold a party to its arbitration contract just as the court would do any other kind.” That is, arbitration contracts must be treated like any other contract, as the courts are not in the business of “favor[ing] arbitration over litigation.”
In Morgan, the Plaintiff former-employee, Robyn Morgan, filed suit against her former employer, a Taco Bell franchise owned by Defendant Sundance, Inc., alleging that the company failed to pay overtime. At the outset, Sundance litigated the lawsuit, seeking to dismiss the case, filing an answer to the complaint, and participating in mediation. Subsequently, Sundance moved to compel arbitration based on an arbitration provision signed by Morgan as part of her application. In response, Morgan argued that Sundance’s active participation in litigation constituted a waiver of its right to insist on arbitration.
Typically, and significant to the High Court’s ruling, a party does not need to prove prejudice when arguing that an opponent has waived a contractual right. The lower court, however, consistent with federal appellate court precedent, resolved this issue by applying a rule specifically developed for the arbitration context. Under this rule, a party waives its contractual right to arbitration only if it knew of the right, acted inconsistently with that right, and prejudiced the other party by its inconsistent actions. The district court held that Morgan had been prejudiced by Sundance’s delay. The Court of Appeals disagreed, sending the case to arbitration. The Supreme Court granted certiorari to determine whether the FAA’s policy favoring arbitration supports an arbitration-specific waiver rule demanding a showing of prejudice.
In ruling that the FAA’s policy favoring arbitration does not authorize federal courts to create arbitration-specific procedural rules, the Supreme Court observed that the policy “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 on the same footing as other contracts.” The policy, according to the High Court, is geared toward making “arbitration agreements as enforceable as other contacts, but not moreso.” As such, it held that, since the federal rule concerning waiver does not include a prejudice requirement in other contexts, then prejudice “is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.” By removing the prejudice requirement, the High Court greatly simplified the test to establish that a party’s opponent waived its right to compel arbitration.
Although the Supreme Court’s decision left open several questions, such as how and to what extent state law is applicable to contract-based doctrines impacting a party’s attempt to compel arbitration, it is evident that federal jurisprudence moving forward should treat arbitration provisions as being on “equal footing” as other contractual provisions.
If you are struggling to determine whether to arbitrate or litigate a case involving an arbitration agreement, contact the attorneys at Metz Lewis. Our proven guidance will help you decide the course of action best for you or your company.
This post was written John Paul Regan