Supreme Court Rules That Prejudice Is Not a Required Element To Establish Waiver of an Agreement To Arbitrate

Robyn Morgan worked as an hourly employee at a Taco Bell franchise owned by Sundance. When applying for the job, Morgan signed an agreement to arbitrate any employment dispute. Despite that agreement, Morgan filed a nationwide collective action asserting that Sundance had violated federal law regarding overtime payment.

Sundance initially defended against the lawsuit as if no arbitration agreement existed, filing a motion to dismiss (which the district court denied) and engaging in mediation (which was unsuccessful). Then — nearly eight months after Morgan filed the lawsuit —  Sundance moved to stay the litigation and compel arbitration under the Federal Arbitration Act (FAA).

Morgan opposed the motion, arguing that Sundance had waived its right to arbitrate by litigating for so long. The district court and the court of appeals applied Eighth Circuit precedent, under which 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 ruled that Morgan was prejudiced by Sundance’s actions. The Eighth Circuit disagreed and ordered the parties to arbitrate the dispute.

The prejudice requirement is not a feature of federal waiver law generally. The Eighth Circuit adopted that requirement because of the “federal policy favoring arbitration.” Other courts have rejected such a requirement. The Supreme Court granted certiorari to resolve the split over whether federal courts may adopt an arbitration-specific waiver rule demanding a showing of prejudice.

The Supreme Court held that the Eighth Circuit erred in conditioning a waiver of the right to arbitrate on a showing of prejudice. According to the Court, federal courts have generally resolved cases like this one as a matter of federal law, using the terminology of waiver. The parties disputed whether that framework is correct. The Court reasoned that “federal courts may not create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration.’” That 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 upon the same footing as other contracts.”

Outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice. The Supreme Court observed that waiver “is the intentional relinquishment or abandonment of a known right.” To decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party. “That analysis applies to the waiver of a contractual right, as of any other.”

The Court reasoned that “a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation. The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”

The Court observed that the text of the FAA “makes clear that courts are not to create arbitration-specific procedural rules like the one here.” Section 6 of the FAA provides that any application under the statute—including an application to stay litigation or compel arbitration—“shall be made and heard in the manner provided by law for the making and hearing of motions” (unless the statute says otherwise). A directive to treat arbitration applications “in the manner provided by law” for all other motions is simply a command to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness. Because the usual federal rule of waiver does not include a prejudice requirement, Section 6 instructs that prejudice is not a condition of finding that a party waived its right to stay litigation or compel arbitration under the FAA.

Stripped of its prejudice requirement, the Court concluded that “the Eighth Circuit’s current waiver inquiry would focus on Sundance’s conduct. Did Sundance knowingly relinquish the right to arbitrate by acting inconsistently with that right?” According to the Court, on remand, the Court of Appeals may resolve that question, or determine that a different procedural framework (such as forfeiture) is appropriate. The Court made it clear that “its sole holding today is that it may not make up a new procedural rule based on the FAA’s ‘policy favoring arbitration.’”

The Morgan decision demonstrates that employers who have arbitration agreements risk waiving their right to arbitrate covered disputes if they take actions that are inconsistent with the agreement.

If you have any questions about this case, please contact Michael L. Stevens or any other member of the Firm’s Labor & Employment Group.