In a much-anticipated opinion, the Supreme Court unanimously held this morning that a party claiming waiver of the right to arbitrate need not show prejudice, in Morgan v. Sundance, Inc., Case No. 21-328 (May 23, 2022). While the holding on this point is clear, the Court very explicitly declined to address a series of related issues raised by the parties. Thus, the opinion will likely make it easier to assert waiver, but many questions remain unanswered.
The case arose from a claim asserted by an hourly employee of a Taco Bell franchise, who had signed an agreement to arbitrate when he applied for work. In addition to his own claim, he asserted a nationwide collective action for unpaid wages under the Fair Labor Standards Act. For reasons the opinion does not disclose, the employer litigated the matter in federal court for nearly eight months, including filing a motion to dismiss and participating in mediation, both of which were unsuccessful. It then moved to compel arbitration pursuant to the Federal Arbitration Act (FAA).
The lower courts, following the view of most circuits, required that the employee demonstrate prejudice to establish waiver. These courts reasoned that the strong federal policy in favor of arbitration expressed in the FAA dictated that the person claiming waiver also demonstrate some prejudice.
In reviewing the court of appeals’ decision, Justice Elena Kagan, writing for the full Court, first relied on the traditional definition of waiver in federal court: the intentional relinquishment of a known right. She noted that that definition did not include an element of prejudice. She also cited the Court’s prior case law holding that arbitration agreements were to be treated like any other contracts. Her opinion emphasized that “the FAA makes clear that courts are not to create arbitration-specific procedural rules.”
The Court limited its decision to this one issue: the need for prejudice. It held that as prejudice was not a requirement, the issue was whether the employer “knowingly relinquished the right to arbitrate by acting inconsistently with the right.”
The Court’s decision did not address the point at which a party might waive the right to arbitrate by participating in litigation, leaving that to the determination of the lower courts. It also declined to address issues relating to estoppel and other procedural matters.
The Morgan decision clears up one issue but leaves many others open. For example, could a “different procedural framework” be applicable? Could state law apply to the determination? Could both federal and state law be applicable to certain “waiver” issues? In any event, employers with arbitration agreements, particularly those with class action waivers, should assert the right to arbitrate early in the litigation.
Bottom Line: A party claiming waiver of the right to arbitrate need not demonstrate prejudice; it must demonstrate only that the other party intentionally relinquished the right to arbitrate.