Supreme Court Holds Waiving Arbitration Does Not Require Proof of Prejudice
In Morgan v. Sundance, Inc., the U.S. Supreme Court resolved a circuit split regarding whether a party has waived its right to arbitrate. Under the test reviewed by the Court, a party waived its right to arbitration if it knew of the right to arbitrate, acted inconsistently with that right, and prejudiced the other party by its inconsistent actions. The Supreme Court, however, removed the prejudice requirement and held that a showing of prejudice is not required when considering whether or not a party has waived its right to arbitrate under the Federal Arbitration Act (FAA).
Morgan involved a plaintiff who sued her former employer for alleged violations of the Fair Labor Standards Act (FLSA). Despite the existence of an agreement to arbitrate employment-related disputes, the plaintiff sought to proceed as a nationwide collective action, claiming the defendant had altered time records to avoid paying overtime as the FLSA required. The defendant moved to dismiss on grounds that plaintiff should either join an earlier-filed collective action that alleged identical claims or proceed on an individual basis. Plaintiff refused, and the district court denied the motion. The defendant then filed an answer, asserting 14 affirmative defenses, none of which were based on the arbitration agreement. Soon thereafter, the defendant mediated with the plaintiffs in both cases. The other suit settled, but Morgan did not.
Then, nearly eight months after Morgan was filed, the defendant moved to stay the litigation and compel arbitration, pursuant to FAA sections 3 and 4. The plaintiff opposed the motion, arguing that the defendant had waived its right to arbitrate. The defendant responded that it had asserted its right to arbitrate as soon as the Supreme Court had clarified in Lamps Plus, Inc. v. Varela, 587 U.S. ___ (2019) that the arbitration would proceed on a bilateral, rather than a collective basis.
In ruling on the defendant’s motion, the district court applied the Eighth Circuit’s test, which—along with the First, Second, Third, Fourth, Fifth, Sixth, Ninth and Eleventh Circuits —required a showing of prejudice (or “harm”) to the party opposing arbitration, in addition to showing that the party compelling arbitration knew of its right and acted inconsistently despite it. While the district court found the plaintiff had established prejudice, the Eighth Circuit Court of Appeals found otherwise and compelled the action to arbitration. The U.S. Supreme Court then granted certiorari.
In a unanimous opinion written by Justice Kagan, the Supreme Court reversed. Characterizing the requirement of prejudice as an “arbitration-specific variant of federal procedural rules,” the Court held that the Eighth Circuit was wrong to condition waiver of the right to arbitrate on a showing of prejudice. Initially, the Supreme Court pointed out that in the non-arbitration context, prejudice is not a factor when deciding whether a party has waived a contractual right. According to Justice Kagan, the “bespoke rule of waiver” in the arbitration context is “found nowhere else.” Additionally, while the justification for the prejudice requirement is purportedly rooted in the FAA’s public policy favoring arbitration, the Court observed that the purpose of that policy is to ensure that arbitration contracts are treated like other contracts. Specifically, Section 6 of the FAA provides that motions to compel arbitration are to be made “in the manner provided by law,” so prejudice cannot be a condition for waiver of the right to arbitrate under the FAA, according to the Court.
The Supreme Court then remanded the case to the Eighth Circuit, with instruction to determine waiver without regard to whether the plaintiff could show prejudice.