The case originates in a nationwide collective action labor dispute initiated by Robyn Morgan in Iowa federal court. Morgan, a former employee of Sundance, sued Sundance in September 2018 for violations of the Fair Labor Standards Act, alleging that it failed to pay her, and other similarly situated employees, for overtime. Sundance responded by defending the lawsuit on the merits, including by moving to dismiss Morgan’s complaint and, later, by answering it. However, approximately eight months into the litigation, following an unsuccessful mediation attempt, Sundance moved to stay the litigation and compel arbitration pursuant to the FAA. Morgan opposed the motion, arguing that Sundance had waived its right to arbitrate by litigating for so long.
In deciding whether Sundance had waived its right to compel arbitration, both the U.S. District Court for the Southern District of Iowa and the U.S. Court of Appeals for the Eighth Circuit relied on Eighth Circuit precedent to the effect that “a party waives its contractual right to arbitration if it knew of the right; ‘acted inconsistently with that right’; and—critical here—‘prejudiced the other party by its inconsistent actions. Morgan v. Sundance, Inc., No. 21-328, 2022 U.S. LEXIS 2514, at *7 (S.D. Iowa May 23, 2022) (quoting Erdman Co. v. Phoenix Land & Acquisition, LLC, 650 F. 3d 1115, 1117 (8th Cir. 2011)) (emphasis added). However, while the District Court found that all of the foregoing requirements were satisfied, the Eight Circuit disagreed that Morgan had been prejudiced and sent the case to arbitration. At that point, nine circuits had relied on “the strong federal policy favoring arbitration” to require a showing of prejudice before finding a waiver of arbitration, while two others rejected that rule.
The Supreme Court granted certiorari to resolve the circuit split and held that “the Eighth Circuit was wrong to condition a waiver of the right to arbitrate on a showing of prejudice.” Id. at *9. Importantly, the Court’s opinion largely focused on the impropriety of court-fashioned rules that treat procedural issues involving arbitration differently from any other right. Indeed, it unequivocally rejected the “creat[ion] of arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration’” and noted that said policy “does not authorize federal courts to invent special, arbitration-preferring procedural rules.” Id. at *9-10 (quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 24, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983)). Further, while carefully refraining from expressing a view as to the role state law might play in resolving when a party’s litigation conduct results in the loss of a contractual right to arbitrate, the Court indicated that the waiver inquiry should focus on the waiving party’s conduct. Id. at *9, 12 (“To decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party.”)
Following Morgan, a party opposing a motion to compel arbitration in the United States will no longer need to show that it has been prejudiced by the other side’s delay in enforcing its arbitration right. This eliminates a significant barrier to such parties’ opposition and, instead, makes it more difficult for parties seeking to compel arbitration after litigating the case to succeed. Thus, parties that suspect their dispute is governed by a contractual arbitration agreement should avoid a waiver by moving diligently to enforce their arbitration clauses. The opinion also calls into question any special judge-made rules addressing arbitration.
Client Alert 2022-139
