Supreme Court Eases Standard for Waiving Arbitration Rights
In a short, unanimous opinion written by Justice Kagan, the Supreme Court held an employer may waive its contractual right to arbitrate an employee’s claims by delay alone, regardless whether the delay prejudices the employee. Morgan v Sundance, Inc., ___ US ___ (May 23, 2022). In Morgan, petitioner, a Taco Bell employee, filed a nation-wide class-action lawsuit alleging violations of the Fair Labor Standard Act’s overtime provisions. The employee’s lawsuit was filed prior to the Supreme Court’s decision in Lamps Plus, Inc. v Varela, 587 US ___ (2019), which upheld class-action waivers in arbitration agreements. So, rather than force the employee’s class-action into arbitration, the employer filed a motion to dismiss on procedural grounds and, when that didn’t work, attempted to settle the case, which also failed. After eight months of litigation, the employer moved to compel the employee to arbitrate her claim on an individual basis. The trial court denied the employer’s motion and the Eighth Circuit reversed. The Eighth Circuit held that, because there was no evidence the eight-month delay prejudiced the employee, the employer had not waived its right to arbitrate.
The Supreme Court held the Eighth Circuit applied the wrong standard in reaching its decision because the waiver doctrine did not require the employee to prove prejudice. The Court conceded that a long line of circuit court decisions, dating back to at least 1968, had required employees to prove prejudice as an element of a waiver defense. These decisions, the Court held, incorrectly derived the prejudice requirement from “an overriding federal policy favoring arbitration.” According to the Court, the FAA was simply a Congressional directive for courts to treat arbitration contracts like any other contracts, rather than declining to enforce them as written. As the waiver doctrine did not ordinarily require a showing of prejudice, there was no basis for creating such a requirement for arbitration contracts. Put differently, the FAA does not support arbitration-specific rule of contract construction.
The lesson for practitioners is clear: if you have an arbitration agreement, use it or lose it.