This Report summarizes opinions issued on May 16 and 23, 2022 (Part I); and cases granted review on May 16, 2022 (Part II).
Opinion: Morgan v. Sundance, Inc., 21-328
Morgan v. Sundance, Inc., 21-328. The Court unanimously ruled that the Federal Arbitration Act (FAA)’s “policy favoring arbitration” does not permit courts to condition a waiver of the right to arbitrate on a showing of prejudice to the opposing party. Robyn Morgan worked at a Taco Bell franchise owned by Sundance, Inc. By signing her employment application, Morgan consented to confidential binding arbitration to resolve any employment disputes. But when that day came, she turned to the courts and filed a nationwide collective action. Nearly eight months into the litigation Sundance filed a motion to stay and compel arbitration, after already filing an unsuccessful motion to dismiss and an answer, neither of which referenced the arbitration agreement. Morgan opposed the motion to stay and compel arbitration on the ground that Sundance waived its right to arbitrate by litigating for so long. Sundance claimed it asserted the right to arbitration soon after the decision in Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), clarified that a court may not compel class/collective arbitration where the arbitration agreement is ambiguous on that point. The district court and Eighth Circuit both applied the Eighth Circuit’s arbitration-specific rule for deciding waiver. Under that test, a party waives a known contractual right to arbitrate if it (1) “‘acted inconsistently with that right,’” and (2) “‘prejudiced the other party by its inconsistent actions.’” The district court found that Morgan had been prejudiced, while the Eighth Circuit concluded that no prejudice resulted because the parties had not yet begun formal discovery or contested matters on the merits. In an opinion by Justice Kagan, the Court vacated and remanded.
The Court began with a look at how federal courts assess waiver outside the arbitration context. It found that a showing of prejudice is not necessary because whether someone intentionally relinquishes a known right focuses on the actions of the person who held the right, not on the effects of those actions on the opposing party. Next, the Court examined the arbitration-specific waiver test, which came from an old Second Circuit case that looked at FAA policy and “declared” that there is “‘an overriding federal policy favoring arbitration.’” Based on that policy, the Second Circuit determined that because waiver of the right to arbitrate cannot be taken lightly, mere delay without some resulting prejudice is insufficient to establish waiver. That rule and reasoning spread over the years. The Court here admitted to frequently citing the FAA’s “policy favoring arbitration” itself, but clarified that the phrase “connotes something different”: “The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” Said the Court: “If an ordinary procedural rule—whether of waiver or forfeiture or what-have-you—would counsel against enforcement of an arbitration contract, then so be it. The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”
Finally, the Court considered the text of the FAA, which “makes clear that courts are not to create arbitration-specific procedural rules” based on the” policy favoring arbitration.” Section 6 of the FAA provides that applications to stay litigation or compel arbitration “shall be made and heard in the manner provided by law for the making and hearing of motions.” The Court interpreted that language as “a command to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness. Or put conversely, it is a bar on using custom-made rules, to tilt the playing field in favor of (or against) arbitration.” Based on that understanding, held the Court, “prejudice is not required for a finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.” The Court vacated the Eighth Circuit judgment and remanded the case for consideration of waiver with a focus on Sundance’s conduct.