Don’t Delay, Arbitrate Today—Supreme Court Removes Requirement To Demonstrate Prejudice In Asserting Waiver Of Right To Arbitration

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Employers who wish to arbitrate disputes with their employees should assert the right to arbitrate promptly—a recent Supreme Court decision has made it easier for employees to show that an employer’s delay constitutes a waiver of the right to arbitrate. In Morgan v. Sundance, Inc., 142 S.Ct. 1708 (2022), the plaintiff worked as an hourly employee at the defendant’s Taco Bell franchise.  When she applied for the job, she signed an agreement to “use confidential binding arbitration, instead of going to court” to resolve any disputes she would have regarding her employment. Id. at 1711.  Notwithstanding that agreement, the employee filed a collective action in federal court for alleged violations of the Fair Labor Standards Act (“FLSA”).  Specifically, the employee argued that the employer violated the FLS, which requires employers to pay overtime to covered employees who work more than 40 hours in one week by recording hours an employee worked in one week in another week to escape the overtime requirement.

Instead of moving to arbitrate, the employer began mounting a substantial defense in federal court.  Indeed, the employer first moved to dismiss the suit as duplicative of others.  After that motion was unsuccessful, the employer answered the complaint and asserted a number of affirmative defenses—none of which, however, referenced the arbitration agreement.  The parties then mediated the case, and some of the issues between the parties were settled.

Eight months after filing the complaint, the employer moved to stay the case and compel arbitration in the remaining matters. Unsurprisingly, the employee opposed the motion and argued that the employer waived the right to arbitrate by waiting so long to compel. The district court applied the Eighth Circuit’s waiver test for arbitration cases, which held that a party waives its contractual right to arbitrate if it: (1) knew of the right; (2) acted inconsistently with the right; and (3) “prejudiced the other party by its inconsistent actions.” Id. at 1712 (citations omitted).  The district court found that the employer waived the right to arbitrate, believing that the employer’s delay prejudiced the employee. Upon review, the Eighth Circuit disagreed and sent the parties to arbitration.

The Supreme Court agreed to hear the case on the single issue of whether courts may “create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the [Federal Arbitration Act’s] ‘policy favoring arbitration.’” Id. at 1712 (citations omitted).  The court held that they cannot, observing that “[o]utside the arbitration context, a federal court assessing waiver does not generally ask about prejudice.” Id. at 1713. In demanding proof of prejudice before finding a waiver, a “rule found nowhere else,” the Eighth Circuit created a “bespoke rule of waiver for arbitration.” Id.  Ultimately, 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.” Id.  The Supreme Court sent the case back to the Eighth Circuit to reexamine the matter without the prejudice requirement.

Takeaways:

Employers should act with urgency if they wish to proceed to arbitration. Before the Supreme Court’s decision in Morgan, nine federal circuits required an employee asserting waiver to demonstrate the employer’s delay resulted in prejudice. Now, an employee does not need to demonstrate that the delay prejudiced them in any way.  The result is that it will be easier for an employee to show that the employer waived the right to arbitrate by waiting to assert the right.  Thus, employers with arbitration provisions in their employment agreements or employee handbooks should act with urgency if they hope to enforce them.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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