U.S. Supreme Court Eliminates the Requirement of Prejudice In Determining Whether Arbitration Rights Have Been Waived
For more than 50 years, federal courts have held that a litigant in a pending lawsuit must show prejudice in order defeat an opposing party’s invocation of its contractual right to arbitration. Recently, in Morgan v. Sundance, Inc., the U.S. Supreme Court rejected the requirement that prejudice be demonstrated by a party resisting arbitration, and in doing so fundamentally altered the test for when a right to arbitration has been waived. The case is an important warning to all litigants that they not sleep on their contractual right to arbitration, lest they risk losing it altogether.
The Facts of the Case
Petitioner Robyn Morgan, an hourly employee at a Taco Bell owned by respondent Sundance, signed an employment agreement containing an arbitration clause. She accused Sundance of manipulating payroll records to avoid paying overtime, commencing an action asserting wage theft under the Fair Labor Standards Act. Before filing a motion to compel arbitration, Sundance defended the action in federal court for eight months, filing a motion to dismiss that was denied and then engaging in unsuccessful mediation. Applying precedent, the lower court denied Sundance’s motion, finding that the company knew of its right to arbitration, but acted in a manner that was inconsistent with that right and prejudiced Morgan through its inconsistent actions. On appeal, the Eighth Circuit reversed, thus permitting arbitration to proceed, concluding that Morgan did not demonstrate prejudice.
The Supreme Court’s Decision
The Supreme Court noted that the Eighth Circuit relied upon a 1968 Second Circuit decision (Carcich v. Rederi A/B Nordie) that interpreted the Federal Arbitration Act (FAA) as “an overriding federal policy favoring arbitration” and held that “mere delay” without prejudice to an opposing party is insufficient to waive an arbitration clause. In the years since Carcich was decided, multiple other federal Circuit Courts have adopted the prejudice requirement and applied the Second Circuit’s reasoning.
In Morgan, the Supreme Court explicitly rejected the Second Circuit’s reasoning in Carcich and held that the FAA does not authorize courts to create procedural rules that favor arbitration. Referring to Section 6 of the FAA, which provides that any application to compel arbitration “shall be made and heard in the manner provided by law for the making and hearing of motions,” the Court concluded that the FAA prohibited the courts from formulating special rules intended to operate in “favor of (or against) arbitration.” The Court found that requiring a showing prejudice by the party opposing arbitration was such a rule and therefore was prohibited.
Having eliminated the prejudice requirement, the Supreme Court remanded the case to the Eighth Circuit with a direction to consider whether Sundance knowingly waived its right to arbitrate by acting in a manner that was inconsistent with that right.
The Supreme Court’s decision in Morgan instructs that federal courts may not give special treatment to arbitration provisions, with waiver of arbitration no longer being conditioned on a showing of prejudice to the party opposing it. Accordingly, litigants who wish to invoke their contractual right to arbitration in the context of an existing lawsuit should do so promptly, or else risk waiving their rights through continued litigation in court.
Richard F. Markert is a Bleakley Platt partner and a member of the Firm’s Litigation Practice Group, specializing in commercial litigation and arbitrations. To read Mr. Markert’s attorney profile, please click here.