Unanimous U.S. Supreme Court Rejects Prejudice Requirement for Arbitration Waiver

On May 23, 2022, the U.S. Supreme Court considered the question of waiver in a case governed by the Federal Arbitration Act (“FAA”) and held that a party can waive its right to arbitration irrespective of whether the other party suffered prejudice. Morgan v. Sundance, Inc., No. 21-328

Robyn Morgan worked as an hourly employee for Sundance, Inc., a Taco Bell franchisee that operated more than 150 Taco Bell restaurants. Morgan worked for Sundance’s Taco Bell restaurant in Osceola, Iowa. When she applied for that job, she signed an arbitration agreement in which she agreed to “use confidential binding arbitration, instead of going to court, for any claims that arise” between her and Sundance.

Despite this agreement, Morgan filed a putative nationwide class action in federal court alleging that Sundance violated the Fair Labor Standards Act. Morgan alleged that Sundance had a policy of “shifting” hours that its employees worked in one week to record those hours for the following week, preventing any week’s total from exceeding 40 hours. Morgan sought to represent herself and all other hourly employees who worked for Sundance over the previous three years.

Two years before Morgan brought her action, a similar action had been filed against Sundance in the Eastern District of Michigan, alleging the same “shifting” practices to avoid payment of overtime. Wood v. Sundance, Inc. While Wood was also initially filed as a nationwide class action, it was later conditionally certified to include only Sundance’s Taco Bell restaurants in Michigan. Sundance moved to dismiss or stay Morgan’s suit pursuant to the “first-to-file” rule, arguing that her action was duplicative of Wood. The district court denied Sundance’s motion.

Sundance then answered Morgan’s complaint but did not assert an affirmative defense based on the arbitration agreement. A joint mediation was held for both actions. While the Wood case settled, Morgan’s did not.

Eight months after Morgan’s lawsuit was filed, Sundance moved for a stay of the litigation and to compel arbitration under Sections 3 and 4 of the FAA. Morgan opposed the motion, arguing that Sundance waived it right to arbitrate by engaging in litigation. Under Eighth Circuit precedent, a party waives its right to arbitration if it knew of the right, acted inconsistently with that right, and prejudiced the other party by its inconsistent actions. The District Court found that Morgan was prejudiced by the delay of having to defend against Sundance’s motion to dismiss or stay and spending time and resources preparing for a classwide mediation instead of an individual arbitration.

A divided U.S. Court of Appeals for the Eighth Circuit reversed, sending the action to arbitration. The panel found that Sundance had not waived its right to contractual arbitration. The Court questioned the lower court’s determination that Sundance had acted inconsistently with its right to arbitrate and also found that Morgan had failed to show prejudice: four months of the delay were attributable to the parties waiting for a disposition of the first-to-file motion, no discovery was conducted, and there was no evidence that Morgan would have to duplicate any of her efforts in an arbitration.

Writing for a unanimous court, Justice Elena Kagan held that the Eighth Circuit (and Seventh and D.C. Circuit) precedent incorrectly conditioned a waiver of the right to arbitrate on a showing of prejudice. The federal courts could not create “arbitration-specific variants of federal procedural rules, like those concerning waiver based on the FAA’s policy favoring arbitration.” The FAA’s policy favoring arbitration does not allow for a court to invent arbitration-preferring procedural rules. The policy, rather, is to make arbitration agreements as enforceable as other contracts, not more so. Section 6 of the FAA bars the use of custom-made rules to tilt the playing field in favor of arbitration. Arbitration agreements must be on equal footing with other contracts and a court must hold a party to its arbitration contracts just as it would to any other kind of contract. Outside of the arbitration context, a federal court assessing waiver does not generally ask about prejudice and the usual federal rule of waiver does not include a prejudice requirement. Stripped of this prejudice requirement, the only question on remand is whether Sundance knowingly relinquished the right to arbitrate by acting inconsistently with that right.


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