Supreme Court Discards the Prejudice Requirement for Waiving Delayed Arbitration
Earlier this week, the Supreme Court unanimously held in Morgan v. Sundance that litigants are no longer required to show prejudice when opposing a party’s delayed attempt to compel arbitration. Previously, an Eighth Circuit decision refused to find that the right to arbitrate a dispute was waived after months of ongoing litigation unless the party opposing arbitration could show their litigation position was prejudiced by the delay. Since the two parties had not yet litigated on the merits, the Eighth Circuit majority ruled that the plaintiff was not prejudiced by the delayed arbitration demand.
The Supreme Court vacated the Eighth Circuit decision, reasoning that the Federal Arbitration Act does not authorize “special, arbitration-preferring procedural rules.” The Court explained that the analysis of whether a party has waived a contractual right typically does not examine whether the other party is prejudiced as a prerequisite to finding waiver. The Court held that by requiring “that kind of proof before finding the waiver of an arbitration right, the Eighth Circuit applies a rule found nowhere else….”
This is an important decision for employers because many employers use mandatory arbitration programs as a way to manage and mitigate the risk of employee claims, as arbitration facilitates class and collective action waivers, and in some cases can be less expensive than court litigation. As a result of the decision, employers should know that employees no longer have the burden of showing prejudice when challenging an arbitration agreement after litigation has already ensued. Delays in seeking to compel arbitration can alone doom an employer’s ability to arbitrate a dispute. This puts the onus on employers to promptly review their onboarding files and other agreements with employee-plaintiffs to identify applicable arbitration clauses, and act to compel arbitration of the dispute if arbitration is the desired forum. If employers delay in seeking to compel arbitration, individual and class action plaintiffs may be able to keep their claims in court.
The decision settles inconsistencies among circuit court decisions on how to handle disputes when a defendant has delayed arbitration. It reminds the courts that it cannot impose arbitration-friendly legal requirements that are not backed by existing law.
Eyasu Yirdaw also contributed to this article.