Supreme Court Rejects Prejudice Element of Waiver Analysis When Enforcing Agreements to Arbitrate

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Supreme Court Rejects Prejudice Element of Waiver Analysis When Enforcing Agreements to Arbitrate The Supreme Court on May 23, 2022, in its decision in Morgan v. Sundance, Inc., rejected the “arbitration specific waiver rule demanding a showing of prejudice” to the party opposing the petition to enforce the arbitration agreement. That rule had been followed for decades by nine Circuits.[1] Post Morgan, the analysis reverts to the standard contract waiver analysis “focus[ing] on the actions of the person who held the right; … [rather than] the effects of those actions on the opposing party.”[2] Although the case is an employment matter, the new rule applies whenever a party seeks to stay litigation and send the matter to arbitration under Sections 3 and 4 of the Federal Arbitration Act in essentially all commercial litigation contexts.

Plaintiff/Petitioner Robyn Morgan sued in federal district court on a collective action against Sundance—the owner of the fast food franchise where she worked. Sundance litigated in the court for eight months and its actions included moving to dismiss (it lost), and participating in mediation. Sundance later moved the court for an order staying the litigation and sending the matter to arbitration relying in its motion on FAA Sections 3 and 4. Morgan opposed the motion on the basis that Sundance waived the right to do so because it waited too long to enforce the agreement to arbitrate.

The District Court, applying a well-settled Eighth Circuit test cited in Erdman v. Phoeniz Land, determined Morgan was prejudiced by the late request to enforce the arbitration agreement and denied Sundance’s request. Under the Erdman test, a party waives the right to arbitrate if it was aware of the right to arbitrate, “acted inconsistently with that right”; and “prejudiced the other party by its inconsistent actions.”[3] On appeal, the Eight Circuit held that the Erdman rule applied but disagreed with the District Court’s finding that Sundance’s actions prejudiced Morgan. Morgan appealed the issue and the Supreme Court granted her petition for review.

The parties raised several arguments in their briefs and at oral argument. Notably, the parties argued over whether the courts should review petitions to enforce arbitration agreements using the rules applicable to “waiver, forfeiture, estoppel, laches, or procedural timeliness.”[4] The Court did not expressly decide those arguments—it did not prescribe the rubric to be applied, because it “assumed without deciding [the lower courts were] right to do so [under the wavier rubric].” But the Court held unanimously that there is no support in the FAA for a “bespoke rule of waiver for arbitration.”[5] The Court reviewed the text of the FAA and concluded that there is no authorization for “federal courts to invent special, arbitration-preferring procedural rules.”[6] Thus, there is no textual support for additional, heightened requirements such as demonstrating prejudice in opposing a motion to compel arbitration.

As the Court put it, the FAA’s policy favoring arbitration dealt with the court’s early hostility to arbitration agreements and the resulting reluctance to enforce such agreements. Now those agreements stand on equal footing with any other contract terms.

“The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”

The test is now whether a litigant knowingly relinquished a known right—a standard waiver analysis applied to contract matters of all stripes. But the Court left open the door as to whether the inquiry is simply focused on waiver as opposed to other principles such as forfeiture of the right.[7]

[1] Joca-Roca Real Estate, LLC v. Brennan, 772 F. 3d 945, 948 (CA1 2014); see O. J. Distributing, Inc. v. Hornell Brewing Co., 340 F. 3d 345, 355–356 (CA6 2003); PaineWebber Inc. v. Faragalli, 61 F. 3d 1063, 1068–1069 (CA3 1995); S & H Contractors, Inc. v. A. J. Taft Coal Co., 906 F. 2d 1507, 1514 (CA11 1990); Miller Brewing Co. v. Fort Worth Distributing Co., 781 F. 2d 494, 497 (CA5 1986); ATSA of Cal., Inc. v. Continental Ins. Co., 702 F. 2d 172, 175 (CA9 1983); Carolina Throwing Co. v. S & E Novelty Corp., 442 F. 2d 329, 331 (CA4 1971) (per curiam); Carcich v. Rederi A/B Nordie, 389 F. 2d 692, 696 (CA2 1968).