SCOTUS rejects rule that arbitration waiver must involve prejudice

When she was hired, Robyn Morgan, a Taco Bell employee, signed an agreement to arbitrate any employment dispute. Despite that agreement, Morgan filed a nationwide collective action asserting a violation of federal law regarding overtime payment.

The employer initially defended against the lawsuit as if no arbitration agreement existed, filing a motion to dismiss (which the trial court denied) and engaging in mediation (which was unsuccessful). Then—nearly eight months after Morgan filed the lawsuit— the employer moved to stay the litigation and compel arbitration under the Federal Arbitration Act (FAA). Morgan opposed, arguing that the employer had waived its right to arbitrate by litigating for so long.

The courts below applied 8th Circuit precedent, under which a party waives its right to arbitration if it knew of the right; acted inconsistently with that right; and prejudiced the other party by its inconsistent actions.

The prejudice requirement is not a feature of federal waiver law generally. The 8th Circuit adopted that requirement because of the "federal policy favoring arbitration."

The US Supreme Court unanimously held that the 8th Circuit erred in conditioning a waiver of the right to arbitrate on a showing of prejudice. Morgan v. Sundance, Inc. (US Supreme Court 05/23/2022) [PDF].

The Court said: "Outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice. Waiver, we have said, 'is the intentional relinquishment or abandonment of a known right.' To decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party. That analysis applies to the waiver of a contractual right, as of any other." Thus, the 8th Circuit applied a rule that applies only to arbitration.

Courts that have required a showing of prejudice have relied on the "federal policy favoring arbitration." However, that policy, the Court said, "is merely an acknowledgment of the FAA's commitment to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts."

The "federal policy favoring arbitration." is to make arbitration agreements as enforceable as other contracts, but not more so. Accordingly, a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation.