Resolving an issue over when a party has waived their right to arbitrate, the United States Supreme Court recently granted plaintiff’s a major victory, holding that litigants are no longer required to show prejudice when opposing a party’s delayed attempt to compel arbitration. Historically, numerous federal courts of appeals have cited the pro-arbitration policy of the Federal Arbitration Act (FAA) for their application of an arbitration-specific procedural rule requiring the party asserting waiver to show that the waiving party’s inconsistent acts caused prejudice. However, the Court’s ruling of Morgan v. Sundance, Inc., No. 21-328, 2022 U.S. LEXIS 2514 (U.S. May 23, 2022), found that the FAA requires courts to treat arbitration agreements the same as all other contractual relations, concluding that the policy favoring arbitration does not permit courts to “devise novel rules to favor arbitration over litigation.”
In Morgan v. Sundance, Inc., Robyn Morgan (Morgan) brought a federal wage-and-hour action against her former employer Sundance, Inc. (Sundance). As part of her employment, Morgan had agreed to arbitrate any claim arising from her employment relationship with Sundance. This provision would generally require, under FAA, that Morgan arbitrate the claims she brought in federal court. Despite the arbitration provision, Sundance waited eight months into the proceedings before filing its motion to compel arbitration; Morgan objected to the request saying it was untimely.
In the appeals court with jurisdiction over the claims, the Eighth Circuit historically looked to a three part test to determine if a party waived its right to arbitration:
- Did the party know of their right to arbitrate?
- Did they act inconsistently with that right?
- Was the objecting party prejudiced by the failure to timely move to arbitrate?
The federal appeals court with jurisdiction Ohio, the Sixth Circuit, had the substantively identical test. Based on its test, the Eighth Circuit ruled that Morgan’s claim should be arbitrated because, as federal law prefers the enforcement of arbitration provisions, Morgan was not prejudiced by the eight month delay.
Morgan v. Sundance
The Supreme Court changed the law, holding that Morgan could litigate the claims because “prejudice” to the non-moving party is irrelevant to the analysis on a motion to arbitrate. The Court reasoned that this provision was simply invented by the courts, and that parties must treat a contract to arbitrate just like any other contractual provision. This ruling indicates a substantial change in the law because parties can no longer assert that their delayed request for arbitration should be granted because, for example, the case has not moved forward.
What Does This Ruling Mean for Employers?
Based on this change in the law, it is even more important for parties to examine the contracts underlying a relationship at the time they become aware of any suit brought against them in federal court. If there is a contract that contains an arbitration provision, the party being sued must promptly file its motion requesting arbitration if that is where they want to litigate the dispute. This examination should happen anytime an employee sues a current or former employer. This change puts a burden on an entity’s HR and compliance personnel to maintain complete and accurate documents concerning all employee and business relationships.
For more information or to discuss the implications of the Supreme Court’s decision further, please contact KJK’s Litigation and Arbitration practice group Chair, Brett Krantz (BK@kjk.com; 216.736.7238).