Reed Smith Client Alerts

On Monday, May 23, 2022, the U.S. Supreme Court released a unanimous opinion in Morgan v. Sundance, Inc., No. 21-328 holding that the Federal Arbitration Act (FAA) does not authorize federal courts to create an arbitration-specific procedural rule requiring a finding of prejudice before a party can be found to have waived its right to arbitration. Specifically, the Court concluded that a party does not have to show it was prejudiced by the other party’s delay in compelling arbitration as a prerequisite to successfully fight a delayed motion to compel arbitration. The opinion has important implications for those who suspect their dispute is governed by a contractual arbitration agreement. In sum, following Morgan, the more diligently parties move to enforce their arbitration clauses, the better.

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.