Supreme Court Makes It Easier to Establish a Waiver of Arbitration through a Pursuit of Litigation

On May 23, the Supreme Court resolved a circuit split in holding that the Federal Arbitration Act’s (FAA) “policy favoring arbitration” does not allow federal courts to create arbitration-specific federal procedural rules.¹ Specifically, the Court took issue with the rule adopted by most federal circuits, under which waiver of an arbitration right required a showing of prejudice. Writing for a unanimous court, Justice Kagan provided important guidance on the enforceability of arbitration agreements in federal courts.

Origins of the Sundance Dispute

The facts of the underlying dispute in Sundance are straightforward. Petitioner Robyn Morgan (Morgan) filed a putative class action under the Fair Labor Standards Act (FLSA) against her employer, Sundance, which owned a Taco Bell franchise. Morgan alleged that Sundance violated FLSA overtime pay rules.

Sundance initially defended the lawsuit by moving to dismiss the complaint as duplicative of another class action brought by other Taco Bell employees. When Sundance’s motion was denied, it then answered Morgan’s complaint and asserted 14 affirmative defenses, none of which referenced the arbitration agreement Morgan signed when she initially applied for her job. The agreement required her to “use confidential binding arbitration, instead of going to court” to resolve any employment disputes.

Following a joint mediation in which the other collective action settled, but Morgan’s lawsuit did not, and eight months after Morgan filed her lawsuit, Sundance moved to stay the litigation and compel arbitration under Sections 3 and 4 of the FAA. The district court and the Eighth Circuit analyzed Morgan’s waiver argument under precedent requiring a finding of prejudice to the party opposing arbitration, in addition to the other federal law requirements for waiver of a contractual right (knowledge of the right and action inconsistent with the right). The Eighth Circuit disagreed with the district court’s finding that Morgan was prejudiced by Sundance’s litigation of the matter and therefore sent the case to arbitration.

Supreme Court Reiterates that Arbitration Contracts Should Be Evaluated on Equal Footing as Any Other Contract, and Courts Cannot Create Special Arbitration Rules

Before discussing whether prejudice was a requirement for waiver of arbitration, the Supreme Court clarified the issues it was not addressing. First, the Court did not address the proper role of state law in evaluating whether litigation conduct results in the loss of one’s right to arbitrate. Second, the Court did not decide whether waiver, rather than forfeiture, estoppel, laches, or procedural timeliness, is the proper framework for analyzing loss of a party’s right to arbitrate. Instead, the Court assumed that waiver provides the appropriate framework, noting that most federal courts to address the issue have analyzed it under the terminology of waiver.

The Supreme Court applied familiar principles from its previous arbitration decisions in concluding that the Eighth Circuit erred in imposing a special “prejudice” requirement when analyzing waiver in the context of arbitration agreements. As the Court has often stated, the FAA’s policy favoring arbitration “is about treating arbitration contracts like all others, not about fostering arbitration.” In other words, the FAA was intended to “make arbitration agreements as enforceable as other contracts, but not more so.” Under this interpretation of the FAA’s policy, it follows that federal courts exceeded their authority in creating a special procedural rule requiring a showing of prejudice that does not exist under the usual federal rule of waiver for other contracts.

The Court found further support for its holding under Section 6 of the FAA, which provides that any application under the statute (e.g., a motion to stay litigation or compel arbitration) “shall be made and heard in the manner provided by law for the making and hearing of motions, except as otherwise herein expressly provided.” Justice Kagan reasoned that the command to treat arbitration applications in the “manner provided by law” requires courts to “apply the usual federal procedural rules” rather than tilting the scales for or against arbitration. Because the usual federal rule of waiver does not include a prejudice requirement, Section 6 of the FAA instructs that prejudice should not factor into courts’ analysis of whether a contractual right to arbitrate has been waived.

Conclusion

While the Court made it easier to establish a waiver of arbitration through a pursuit of litigation, the Court’s holding in Sundance can nonetheless be considered a reaffirmation of a core principle underlying the Court’s arbitration jurisprudence — namely, that the FAA’s “policy favoring arbitration” is intended to put arbitration agreements on equal footing as other contracts.

Since most federal circuits² have applied the same prejudice requirement as did the Eighth Circuit, parties with arbitration rights should take caution in pursuit or defense of litigation. The prejudice requirement offered more leeway than the now operative “typical” federal waiver rule, so any conduct inconsistent with one’s right to arbitrate may result in relinquishment of this right.