U.S. Supreme Court Eliminates Prejudice Requirement for Waiver of Arbitration Agreements
With the increasing use of arbitration clauses and agreements, courts have been required to address challenges to the enforceability of such contracts. One such situation is where one party to an arbitration agreement delays in moving to compel arbitration, and the other party raises an argument that the right to arbitrate was waived. As detailed in our previous alert on this issue,1 U.S. Circuit Courts of Appeals had diverged over the standard for finding a party to an arbitration agreement waived the right to arbitrate. Specifically, the Seventh and D.C. Circuits did not require prejudice to find waiver, the Tenth Circuit listed prejudice as relevant but not necessary, and the remaining Circuits all required prejudice to find waiver of an arbitration agreement.2 The U.S. Supreme Court’s decision this week in Morgan v. Sundance Inc. resolved that split, with the Court unanimously holding that prejudice is not required to find waiver of an arbitration agreement.3
THE U.S. SUPREME COURT’S DECISION
The Supreme Court’s decision answered the narrow question of whether prejudice is required to find waiver of an arbitration agreement, and avoided the question of whether, in this case, Sundance had in fact waived its right to arbitrate.4 The Supreme Court began by recognizing that, outside of the arbitration context, federal courts generally do not require prejudice to find waiver. Instead, the analysis focuses on “the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party.”5 The Supreme Court recognized that the prejudice requirement applied by the Eighth Circuit in Morgan, and by the majority of Circuits in similar cases, was “a rule found nowhere else,” and necessarily treats arbitration agreements differently than other contracts.6
The Supreme Court then traced the federal “policy favoring arbitration,” which Sundance and the majority of the Circuit Courts of Appeals relied upon in support of the requirement of prejudice. The Court noted that the policy originated “to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.”7 However, the Court emphasized that the policy could not make arbitration agreements more enforceable, and that courts could not “devise novel rules to favor arbitration over litigation.”8 The Supreme Court defined the proper aim of the Federal Arbitration Act as “a bar on using custom-made rules, to tilt the playing field in favor of (or against) arbitration.”9
Applying that aim, the Supreme Court concluded that prejudice could not be required to find waiver of an arbitration agreement where it is not required in the case of other contracts. The Court then remanded the case to the Eighth Circuit to consider whether Sundance “knowingly relinquish[ed] the right to arbitrate by acting inconsistently with that right.”10
IMPLICATIONS OF THE DECISION
Post-Morgan, parties seeking to compel arbitration pursuant to an arbitration agreement will have to be more diligent to preserve their right, and assert it as soon as possible. Moving forward, although parties seeking to compel arbitration can continue to argue that they did not intend to waive their right to arbitrate, they can no longer rely on the argument that their actions caused no prejudice to the other party. As such, a delay in asserting the right to arbitrate may lead to waiver, regardless of the impact of that delay. Furthermore, depending on how the Eighth Circuit handles the case on remand, Morgan has likely eliminated the litigation strategy of attempting to defeat claims on a motion to dismiss, and then moving to compel arbitration if the motion to dismiss is unsuccessful.
3 Morgan v. Sundance, 596 U.S. ___, 4 (2022).
4 Id. at 4 5 (“We decide today a single issue . . . [whether the Courts of Appeals] may create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration.’ . . . They cannot.”)
5 Id. at 5.
6 See id.
7 Id. at 6 (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2010)).
9 Id. at 7.