Arbitration Agreements Must Be Placed On Equal Footing With Other Contracts -- So Courts Can't Make Up Special Procedural Rules That Apply Only To Arbitration.
In a unanimous opinion penned by Justice Elena Kagan, the Supreme Court holds that courts cannot create arbitration-specific federal procedural rules, such as the rule that prejudice is necessary to find a waiver of the right to arbitrate, based on the Federal Arbitration Act policy favoring arbitration. Morgan v. Sundance, No. 31-328 (US S.Ct. 5/23/22).
Petitioner Morgan, an employee, sued respondent Sundance, which owned the Taco Bell franchise where Morgan worked, alleging Sundance fudged time-keeping records so as to avoid paying overtime to employees. Her contract with her employer included a mandatory arbitration agreement. Sundance filed a motion to dismiss, answered, and mediated, before deciding after eight months to arbitrate. The District Court, finding prejudice to Morgan by the conduct of Sundance, and waiver of the right to arbitrate, denied the motion to arbitrate. The Eighth Circuit Court of Appeals disagreed, finding no prejudice, and thus no waiver of the right to arbitrate.
A common definition of waiver is that it involves the intentional relinquishment of a known right. Applying that definition, a party that knows of its right to arbitrate and acts inconsistently with that right, can be found to have waived the right to arbitrate. But many courts have added the additional element of prejudice before they will find waiver of the right to arbitrate. Applying a definition of waiver that includes the element of prejudice has enabled defendants to test the waters in litigation, and then decide later to arbitrate, arguing that there has been no prejudice to plaintiff.
The Morgan v. Sundance case is interesting because it requires consideration of two conflicting policies: The FAA favors arbitration, and the FAA also requires that arbitration agreements be treated on equal footing with other contracts. Here, the two policies came into conflict. In Morgan v. Sundance, the "equal footing" argument wins out. Arbitration does not get special treatment -- in this case, special treatment that would have favored the employer. Thus, in evaluating whether there has been a waiver, it is improper to add an additional element, prejudice, that would not typically be found in other instances where courts ask whether there has been an intentional relinquishment of a known right.
How this case will be handled on remand is somewhat muddied: "The parties have also quarreled about whether to understand that inquiry as involving rules of waiver, forfeiture, estoppel, laches, or procedural timeliness. We do not address those issues." So on remand, the court could choose a different procedural framework. But the waiver framework seems like it would offer a pretty clean approach: the respondent knew of its right to arbitrate, chose to litigate, inconsistent with its right to arbitrate, and thus intentionally relinquished a known right.
COMMENT: Several years ago, my colleague Mike Hensley and I had a case before the Ninth Circuit, in which we argued that our defendant client, a cosmetology school, had not waived its right to arbitrate because the plaintiff had not been prejudiced by our client's conduct. The Ninth Circuit panel disagreed with our position and found a waiver had occurred. Martin v. Yasuda, 829 F.3d 1118 (2016). Later, in the district court once again, our client's motion for summary judgment on the underlying merits was granted. Procedural battles over the right to arbitrate are important, but do not necessarily govern the outcome.
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