Federal courts will no longer provide special treatment to arbitration provisions, which will now be treated like any other contractual covenants.

The Supreme Court of the United States’ unanimous decision in Morgan v. Sundance, Inc. is a sea change that reverses longstanding precedent adopted by nine circuit courts requiring a party opposing arbitration to demonstrate prejudicial harm before an arbitration clause is considered waived. The Court’s ruling eliminates a significant protection for litigants in federal court who seek to compel arbitration. Litigants seeking to enforce contractual arbitration provisions pursuant to the Federal Arbitration Act (FAA) are cautioned to do so early in federal court proceedings to avoid a potential waiver.

Procedural History

Petitioner Robyn Morgan, an hourly employee at a Taco Bell owned by respondent Sundance, signed an employment agreement containing an arbitration clause. Sundance was accused of manipulating payroll records to avoid paying overtime. Morgan brought a collective action asserting wage theft under the Fair Labor Standards Act. Before filing a motion to compel arbitration, Sundance defended the action in federal court for eight months. Sundance filed a motion to dismiss that was denied and then engaged in unsuccessful mediation. Applying Eighth Circuit precedent, the lower court denied Sundance’s motion, finding that the company knew of its right to arbitration, but acted in a manner that was inconsistent with that right and prejudiced Morgan through its inconsistent actions. On appeal, the Eighth Circuit reversed, concluding that Morgan did not demonstrate prejudice.

The Supreme Court’s Decision

The Court noted that the Eighth Circuit relied upon a Second Circuit decision that interpreted the FAA as “an overriding federal policy favoring arbitration” and held that “mere delay” without prejudice to an opposing party is insufficient to waive an arbitration clause[1]. Multiple other circuit courts adopted the prejudice requirement and applied the Second Circuit’s reasoning.

Morgan specifically rejects the Second Circuit’s reasoning and holds that the FAA does not authorize courts to create procedural rules that favor arbitration[2]. The Court held that agreements to arbitrate should be on equal footing with other contracts[3]. The Court interpreted Section 6 of the FAA as a directive to federal courts to treat applications brought under the FAA in the same manner as all other motions and prohibit specific rules intended to operate in “favor of (or against) arbitration.”[4]

Absent the prejudice requirement, the case was remanded and the Eighth Circuit was directed to consider whether Sundance knowingly relinquished its right to arbitrate by acting in a manner that was inconsistent with that right[5].

Conclusion

Federal courts will no longer provide special treatment to arbitration provisions, which will now be treated like any other contractual covenants. Absent special treatment and prejudice requirements, litigants are cautioned to promptly file arbitration demands rather than risk waiving their rights through continued litigation in court.

For More Information

If you have any questions about this Alert, please contact Walter A. Saurack, Sharon L. Caffrey, Eve I. Klein, any of the attorneys in our Arbitration, Mediation and Alternative Dispute Resolution Group, any of the attorneys in our Trial Practice Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Notes

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