US Supreme Court Ruling Lowers Bar For Arbitration Waivers (NY)
The Supreme Court of the United States recently ruled against an employer seeking to enforce an arbitration clause in the case of Morgan v. Sundance, Inc. Plaintiff Morgan worked at a Taco Bell franchise owned by defendant and signed an agreement to arbitrate any future employment disputes. However, she later filed a class action lawsuit against the defendant for alleged overtime violations.
Following the action, Sundance initially filed a motion to dismiss, which was denied by the District Court, and later participated in an unsuccessful mediation with plaintiff. Defendant did seek to enforce the arbitration agreement until eight months after the lawsuit was filed, moving to stay the lawsuit and compel arbitration. Morgan’s attorneys argued that defendant had waived its right to arbitrate by litigating for an eight-month period.
The District Court denied defendant’s motion, but the Eighth Circuit reversed, holding that a party waives their right to arbitration if they (1) knew of the right to arbitrate, (2) acted inconsistently with that right, and (3) prejudiced the other party by their inconsistent actions. The Eighth Circuit found that the second and third elements were not met; particularly that Morgan was not prejudiced by the delay because no discovery was conducted, and she would not need to duplicate efforts for the arbitration.
Focusing on the prejudice requirement, the Supreme Court reversed and unanimously held that the lower courts cannot require a showing of prejudice to waive arbitration rights. The Court reasoned that when courts decide waivers, they typically focus on the actions of those who control the rights and not on how those actions affect the opposing party. The Court held that the Federal Arbitration Act was designed to ensure arbitration agreements are enforced like regular contracts and that the Act did not permit, or intend to create, unique rules for waivers. The Court remanded the case back to the District Court to consider the waiver without the prejudice element.
The takeaway from Morgan is that a party who delays enforcing an arbitration clause in a franchise agreement or employment contract can lose the right to arbitrate and the party arguing for a waiver may not have to show prejudice from a litigation delay. Parties seeking to arbitrate such disputes should move promptly or risk losing the right to do so.
Thank you to Ryan Dame for his contribution to this post. Please contact Andrew Gibbs with any questions.