In a unanimous decision, the U.S. Supreme Court vacated and remanded a U.S. Eighth Circuit Court of Appeal decision – and expressly overruled other similar previous cases – requiring a showing of prejudice in order for waiver to apply.
In so doing, the Court made it clear that there is no “strong federal policy favoring arbitration”; rather, the Federal Arbitration Act was simply intended to place arbitration agreements on equal footing with other contracts.
In this particular case, the plaintiff Robyn Morgan worked as an hourly employee at a Taco Bell franchise owned by defendant Sundance. When applying for the job, Morgan signed an agreement to use confidential binding arbitration, instead of going to court, to resolve any employment dispute. Years later, she nevertheless instituted a nationwide collective action against Sundance in Federal Court for violations of the Fair Labor Standards Act. Sundance initially defended itself against Morgan’s suit as if no arbitration agreement existed. Sundance moved to dismiss the suit, answered the complaint, and engaged in mediation. When the case did not settle, Sundance – nearly eight months after the suit was initially filed – changed course, and moved to compel arbitration.
The lower courts applied Eighth Circuit precedent, which dictates that a party waives its contractual right to arbitration if it knew of the right; acted inconsistently with that right; and prejudiced the other party in so doing. Although the District Court found the prejudice requirement satisfied, the Court of Appeals disagreed and sent Morgan’s case to arbitration. However, the U.S. Supreme Court, in a unanimous decision, reversed:
“Outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice.” Rather, the court focuses on the actions of the person who held the right, and “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.”
Significantly, the Court then explained that the Federal Arbitration Act’s so-called ‘policy favoring arbitration’ does not “authorize federal courts to invent special, arbitration-preferring procedural rules. Our frequent use of that phrase connotes … 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. Or in another formulation: The policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so’ …. If an ordinary procedural rule – whether of waiver or forfeiture or what-have-you – would counsel against enforcement of an arbitration contract, then so be it. The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”
Morgan v. Sundance, Inc., No.21-328, 2022 WL 1611788 (May 23, 2022).
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