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Supreme Court Holds Waiver of Arbitration Rights Does Not Require Showing of Prejudice

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The U.S. Supreme Court held today that a party need not make a showing of prejudice in order to establish that another party waived its contractual right to arbitration.  In doing so, the Court stressed that the Federal Arbitration Act does not authorize a court to “devise novel rules to favor arbitration over litigation.”  Because there is typically no need to show prejudice to establish waiver in litigation, it held, there is no need to do so in arbitration either.

The case, Morgan v. Sundance Inc., involved an employment dispute between Robyn Morgan, a Taco Bell employee, and the franchise owner, Sundance.  Morgan had signed an agreement to arbitrate any employment dispute, but nevertheless filed a nationwide collective action in court asserting that Sundance had violated federal overtime law.  Sundance initially filed a motion to dismiss and engaged in mediation, only to later change course and move to compel arbitration.  Morgan opposed, arguing that Sundance had waived its right to arbitrate by litigating the case in court for eight months.  The Eighth Circuit held that Morgan must prove not only that Sundance acted inconsistently with the right to arbitrate, but also that it prejudiced Morgan through its inconsistent actions.  It held that Morgan had failed to show such prejudice because the parties had not yet begun formal discovery or contested any matters “going to the merits.”  That requirement of prejudice is not a standard requirement of federal waiver law.  Instead, the Eighth Circuit adopted that requirement in light of the “federal policy favoring arbitration.”

The Supreme Court reversed, holding that the Eighth Circuit had erred in conditioning a waiver of the right to arbitrate on a showing of prejudice.  The Court clarified that the FAA’s “policy favoring arbitration” is “merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s historical refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.”  It went on, “a court must hold a party to its arbitration contract just as the court would to any other kind [of contract].  But a court may not devise novel rules to favor arbitration over litigation.  If an ordinary procedural rule—whether of waiver or forfeiture or what-have-you—would counsel against enforcement of an arbitration contract, then so be it.  The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”  Indeed, the Court reasoned, Section 6 of the FAA provides that applications under the FAA “shall be made and heard in the manner provided by law for the making and hearing of motions,” indicating that courts should apply the usual federal procedural rules to motions to compel arbitration, including standard rules relating to the timeliness of motions.

In an interesting aside, the Court noted that the Courts of Appeal had to date typically considered such questions as matters of federal waiver law.  The Court explicitly declined to rule on any role state law might play in resolving whether a party’s litigation conduct results in the loss of a contractual right to arbitrate.  Nor did it resolve whether such questions should be considered under a waiver framework, or whether they were instead properly considered as matters of forfeiture, estoppel, laches, or procedural timeliness.  The Court noted that, on remand, the Eighth Circuit may consider whether the correct test is whether a party waived the right to arbitrate (by acting inconsistently with that right), or whether a different procedural framework, such as forfeiture, is appropriate.  We expect that future cases will explore these alternative frameworks, which appear to remain open for lower court consideration after this decision.

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