In Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), the Supreme Court held that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the Federal Arbitration Act.
Morgan worked as an hourly employee at a Taco Bell franchise owned by Sundance. When she applied for the job, Morgan signed an agreement to arbitrate employment disputes. Morgan later filed in court a collective action asserting that Sundance had violated federal law regarding overtime compensation. Initially, Sundance defended against the lawsuit in court, filing an unsuccessful motion to dismiss and engaging in an unsuccessful mediation. Then, nearly eight months after Morgan filed the lawsuit, Sundance moved to stay the litigation and compel arbitration under the Federal Arbitration Act (FAA). Morgan opposed the motion, arguing that Sundance had waived its right to arbitrate by litigating for so long.
The Eight Circuit granted the motion holding, in relevant part, that Sundance’s delay had not prejudiced Morgan. That decision applied Eighth 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. However, the prejudice requirement is not a feature of federal waiver law generally. The Eighth Circuit adopted that requirement because of the “federal policy favoring arbitration.” Other courts had rejected such a requirement. The Supreme Court took the case to resolve the split over whether federal courts may adopt an arbitration-specific waiver rule demanding a showing of prejudice. 142 S. Ct. at 1708 – 1712.
The Court’s Decision
The Court vacated and remanded, holding that there was no arbitration-specific waiver rule requiring a showing of prejudice. Assuming that federal law governed the issue, the Court observed that federal courts may not create “arbitration-specific variants” of federal procedural rules, like those concerning waiver, based on the FAA’s “policy favoring arbitration.” The Court observed that that policy “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.” Granite Rock Co. v. Teamsters, 561 U.S. 287, 302, 130 S.Ct. 2847 (2010) (internal quotation marks omitted). 142 S. Ct. at 1712 – 1714.
The Morgan Court therefore held that 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. The Court emphasized that the federal policy is about treating arbitration contracts like all others, not about fostering arbitration. 142 S. Ct. at 1712 – 1714.
Supporting this conclusion, the Court observed that the text of the FAA makes clear that courts are not to create arbitration-specific procedural rules like the one the Eight Circuit applied. For example, Section 6 of the FAA provides that any application under the FAA — including an application to stay litigation or compel arbitration — “shall be made and heard in the manner provided by law for the making and hearing of motions” (unless the statute says otherwise). The Court noted that this directive to treat arbitration applications “in the manner provided by law” for all other motions is simply a command to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness. Therefore, the Court reasoned, because the usual federal rule of waiver does not require prejudice, Section 6 of the FAA supports the conclusion that prejudice is not a condition of finding that a party waived its right to stay litigation or compel arbitration under the FAA. 142 S. Ct. at 1712 – 1714.
The Court then concluded that after eliminating the prejudice requirement, the waiver inquiry would focus on Sundance’s conduct: for example, whether Sundance knowingly relinquished the right to arbitrate by acting inconsistently with that right. The Court noted that on remand, the Court of Appeals could resolve that question, or could determine that a different procedural framework was appropriate. The Court’s sole holding was that courts were not permitted to make up a new procedural rule based on the FAA’s “policy favoring arbitration.” 142 S. Ct. at 1712 – 1714.
In sum, Morgan held that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the Federal Arbitration Act. This is because courts are not permitted to make up new arbitration-specific procedural rules based on the FAA’s “policy favoring arbitration.”
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