Morgan vs Sundance: Enforceability of Arbitration Provisions

On May 23, 2022, the Supreme Court of the United States ruled in a unanimous opinion in Morgan v. Sundance, No. 21-328 that the Federal Arbitration Act (“FAA”) serves to make arbitration agreements as enforceable as other contracts; it does not permit the courts to “devise novel procedural rules” to foster arbitration. Specifically, prior to this ruling, almost all federal circuits used an arbitration-specific waiver rule requiring a showing of prejudice to one party in order to demonstrate that the opposing party waived its right to compel arbitration. Under this new ruling, a party seeking to demonstrate that the opposing party waived its right to compel arbitration by litigating for too long need not make a showing that it was prejudiced, which is consistent with federal waiver law.

Petitioner Robyn Morgan was an hourly employee at a Taco Bell franchise owned by Sundance, the respondent. Morgan signed an agreement to use confidential binding arbitration to resolve any employment dispute; however, she brought a nationwide collective action against Sundance in federal court alleging that the company’s calculation of overtime violated the Fair Labor Standards Act.  Instead of immediately moving to compel arbitration under the agreement, Sundance first began to defend itself, filing a motion to dismiss and, once denied, answering Morgan’s complaint, and attending a mediation. When Morgan’s lawsuit did not settle, Sundance moved to stay the litigation and compel arbitration. Morgan opposed, arguing that Sundance waived its right to arbitrate by litigating the matter for eight months. The District Court denied Sundance’s motion, but the Court of Appeals reversed, sending the matter to arbitration.

The lower courts applied the following Eighth Circuit test to decide whether Sundance waived arbitration: a party waives its contractual right to arbitration if it (1) knew of the right, (2) acted inconsistently with the right,and (3) prejudiced the other party by its inconsistent actions. A demonstration of prejudice is not otherwise required under federal waiver law.  

The Supreme Court held that the courts may not create “arbitration-specific variants of federal procedural rules,” despite the FAA’s “policy favoring arbitration.” Outside of the arbitration context, a federal court assessing waiver (of a contractual right, or of any other) focuses on the actions of the person who held the right, rarely considering the effects of the actions on the opposing party.  The arbitration-specific rule in the Eighth Circuit, amongst eight other circuits, was derived from an old Second Circuit decision identifying an “overriding federal policy favoring arbitration” and holding that a “mere delay” in seeking a stay of litigation without some resulting prejudice to the opposing party “cannot carry the day.” Based on that holding, most federal courts (aside from the D.C. and Seventh Circuits) have justified the prejudice requirement.

The Supreme Court ended this decades-old trend in Morgan, holding that the FAA’s policy favoring arbitration does not authorize invention of a factor that does not otherwise exist in the federal procedural rules, and emphasizing that arbitration agreements are to be held on equal footing with other kinds of contracts. The matter will now be remanded to the Eighth Circuit Court of Appeals, where the court must determine which rules govern when a defendant waits to invoke a contractual right, and how those rules will be applied to Sundance’s delay.

In light of this decision, parties seeking to enforce an arbitration provision should move to do so sooner rather than later in order to mitigate the risk that they waived that right.