U.S. Supreme Court Resolves Circuit Split Regarding Waiver Analysis for Arbitration Provisions

By John S. Delikanakis

On May 23, the U.S. Supreme Court resolved in Morgan v. Sundance¹ whether a litigant seeking to establish waiver had to show prejudice resulting from an opposing party’s failure to timely enforce an arbitration provision under the Federal Arbitration Act (FAA). The Court found that a litigant does not.

Facts

Morgan was an hourly employee at a franchise restaurant owned by Sundance. When hired, she signed an agreement to arbitrate any claims against Sundance. Ignoring that agreement, Morgan filed a class action lawsuit in U.S. District Court against Sundance alleging violations of the Fair Labor Standards Act (FLSA). Morgan claimed that Sundance failed to pay overtime wages to its employees who worked more than 40 hours a week as required by the FLSA.

Sundance proceeded to defend Morgan’s lawsuit. It filed an unsuccessful motion to dismiss and afterwards, an answer and affirmative defenses. Neither Sundance’s motion to dismiss or its affirmative defenses raised Morgan’s agreement to arbitrate.

Eight months into the litigation Sundance moved to stay and compel arbitration under Sections 3 and 4 of the FAA, citing its rights under the arbitration agreement Morgan signed.

The District Court and Eighth Circuit Proceedings

The District Court applied Eighth Circuit precedent in considering whether Morgan could raise waiver to defeat Sundance’s motion to stay and compel arbitration. Citing the strong federal policy favoring arbitration, Eighth Circuit precedent instructs a court to not only assess whether a party’s actions were inconsistent with its right to arbitrate (akin to an intentional relinquishment or abandonment of a known right), but must also find that those inconsistent actions prejudiced the other party.

The District Court found that Morgan had been prejudiced by Sundance’s actions and denied Sundance’s motion to compel arbitration. The Eighth Circuit found Morgan had not been prejudiced and reversed.

The “prejudice requirement” in the analysis of a party’s waiver of a right to arbitrate was applied by nine federal circuit courts of appeal and rejected by two. The U.S. Supreme Court granted certiorari to resolve the split.

The Court’s Analysis

Justice Kagan’s analysis on behalf of the Court reinforces the basic and universally accepted principle that arbitration is a creature of contract. Arbitration provisions are often rightly referred to as contracts within a contract. Sometimes heavily negotiated, sometimes not.

The Court’s analysis begins with a simple observation. The “prejudice requirement” adopted by the majority of federal circuits, in deference to the FAA’s policy and the Court’s pronouncements favoring arbitration, is contrary to the usual federal law regarding a waiver of contractual rights. That law, as well as the common law, usually focuses only on the conduct of the party alleged to have waived a known right.

Moreover, Justice Kagan found that the FAA and the Court’s cases interpreting the FAA uniformly acknowledge “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” (emphasis supplied), but “does not authorize federal courts to invent special, arbitration-preferring procedural rules . . . Accordingly, 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.” Thus the “contract within the contract” must be construed as any other contract, including when a waiver is alleged.

In other words, and with a nod to George Orwell, one might now say that arbitration contracts are not “more equal” than other contracts in the United States.

Take Away Points (Fairly Obvious)

• Make an early decision whether to enforce a contractual right to arbitrate or bear a greater of risk losing it. Delay may support a finding of waiver of that right.
• Consider express anti-waiver provisions in an agreement to arbitrate.