In the recent case of Morgan v. Sundance, Inc., the U.S. Supreme Court declined to enforce an arbitration provision after the employer delayed too long in moving to compel arbitration. Resolving a split amongst federal courts of appeal, the Supreme Court held that arbitration agreements are to be treated like any other contract and that a party may not rely upon a lack of prejudice to the other side to avoid a waiver of its right to arbitrate.
Background
Robyn Morgan signed an agreement with her employer, Sundance, Inc., to arbitrate disputes between the parties. Despite this agreement, she filed a lawsuit against Sundance in federal court alleging overtime pay violations under the Fair Labor Standards Act. Eight months after the lawsuit was filed, Sundance moved to compel arbitration of Morgan’s claims. In response, Morgan argued that Sundance waived its right to arbitrate by waiting too long to file its motion and, therefore, her case should proceed in federal court. Notably, prior to filing its motion, Sundance had filed an answer with affirmative defenses that did not mention the arbitration agreement and participated in mediation.
The Eighth Circuit rejected Morgan’s waiver argument and granted Sundance’s motion to compel arbitration. It reasoned that Morgan failed to show she was prejudiced by Sundance’s delay. The Eight Circuit was one of nine federal courts of appeal that imposed this prejudice requirement when analyzing whether a party waived its right to arbitrate. [1]
The Supreme Court’s Decision
Overturning the Eight Circuit’s decision and allowing Morgan to proceed with litigation, the Supreme Court held that the Federal Arbitration Act (FAA) policy favoring waiver is not a green light for federal courts to “invent special, arbitration-preferring procedural rules.” The Court reasoned that, outside the arbitration context, “a federal court assessing waiver does not generally ask about prejudice.” Because waiver is defined as “the intentional relinquishment or abandonment of a known right,” it is the actions of the party who holds the right that is the focus, not the impact (prejudice) on the opposing party.
What this means for employers
When faced with litigation, employers must act early if they want to enforce an agreement to arbitrate. It is imperative, therefore, that all parties involved in the execution of arbitration agreements, including legal counsel and human resources personnel, be up to date and have clear communication about the existence and location of those agreements.
[1] The federal appellate court with jurisdiction in Ohio (the Sixth Circuit) also imposed this prejudice requirement when assessing whether a party waived its right to arbitrate.
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