Supreme Court Lowers the Bar for Plaintiffs to Establish Waiver of Right to Arbitrate Due to Employer’s Delayed Motion to Compel Arbitration 
Supreme Court Lowers the Bar for Plaintiffs to Establish Waiver of Right to Arbitrate Due to Employer’s Delayed Motion to Compel Arbitration 

On May 23, 2022, the U.S. Supreme Court issued a unanimous decision in the case of Morgan v. Sundance, Inc., which held a party’s waiver of the right to arbitrate a dispute by virtue of a delay in seeking enforcement of the arbitration agreement, no longer requires a showing of prejudice to the party opposing enforcement of the arbitration agreement. Prior to this, the circuit courts followed the rule of determining whether prejudice existed prior to finding waiver. After the Morgan decisionthe analysis reverts to the standard contract waiver analysis “focus[ing] on the actions of the person who held the right; ... [rather than] the effects of those actions on the opposing party.” This new rule applies whenever a party seeks to stay litigation and enforce an arbitration agreement under the Federal Arbitration Act (“FAA”).

The underlying Plaintiff/Petitioner, Robyn Morgan (“Morgan”), was employed as an hourly employee at a Taco Bell franchise owned by Defendant/Respondent Sundance, Inc. (“Sundance.) When Morgan applied for her position with Sundance, she signed an arbitration agreement.  Despite the arbitration agreement, Morgan eventually filed a nationwide class action in federal district court, alleging Sundance violated federal law regarding overtime. Instead of immediately filing a motion to compel arbitration, Sundance litigated the case in court for approximately eight months.  Sundance’s litigation actions included moving to dismiss the action and participating in mediation.  Sundance’s motion to dismiss was denied and the mediation was not successful.  After these litigation activities, Sundance filed a motion to compel arbitration that relied on the provisions of the FAA.  Morgan opposed the motion by arguing Sundance waived the right to arbitrate by litigating the case in federal district court for over eight months. 

The federal district court denied Sundance’s motion to compel arbitration by applying settled Eighth Circuit precedent set forth in Erdman v. Phoenix Land and Acquisition, LLC, 650 F.3d 1115, 1117 (8th Cir. 2011), under which a party waives its right to arbitrate if it was aware of the right to arbitrate, “acted inconsistently with that right,” and “prejudiced the other party by its inconsistent actions.” Sundance appealed the district court’s opinion.  On appeal, the Eight Circuit held the Erdman rule applied, but disagreed with the district court’s finding that Sundance’s actions prejudiced Morgan. Morgan appealed the issue and the Supreme Court granted her petition for review.

The Court held the Eighth Circuit “was wrong to condition a waiver of the right to arbitrate on a showing of prejudice.” In reaching its decision, the Court observed that outside the arbitration context, the federal rule of waiver does not include a prejudice requirement. The Court reviewed the text of the FAA and concluded there is no authorization for “federal courts to invent special, arbitration-preferring procedural rules.” Thus, the FAA’s policy favoring arbitration does not authorize federal courts to invent special, arbitration-preferring, procedural rules. Following Morgan, the test of waiver is now focused on whether a litigant knowingly relinquished their right to arbitrate, with no consideration of whether the waiver prejudiced the party opposing enforcement of the arbitration agreement. 

What it Means for Employers

This case serves as an important reminder for employers to promptly pursue enforcement of their right to arbitrate when facing a claim by an employee.  Delaying action may cause a court to find the employer waived the right to arbitrate and the employer may find itself in court in front of a jury defending its claims.

Please contact the author or your usual employment law counsel with AALRR with any questions regarding this case or arbitration agreements.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

© 2022 Atkinson, Andelson, Loya, Ruud & Romo

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