Use It or Lose It: Supreme Court Rules Against Special Rules Favoring Arbitration When Deciding Waiver of That Right

On May 23, 2022, the U.S. Supreme Court, in a unanimous decision, decided Morgan v. Sundance, Inc., No. 21-328, in favor of an employee who sued her employer, a Taco Bell franchisee, for wage theft. The Court concluded that waiving arbitration rights does not require a showing that the party seeking to have their case heard in federal court would be prejudiced by continuing with arbitration. The case, although decided on narrow grounds, demonstrates the risk that a party takes when it decides to delay enforcing a contractual arbitration provision. By eliminating the prejudice requirement, the Court removed a safety valve that saved parties who decided to forgo arbitration for a period of time, then ultimately opted for arbitration. As a result of the holding, a party seeking to invoke the right to arbitrate should not delay, or they will risk forfeiture of the right to arbitrate at a later time.

Plaintiff, Robyn Morgan and her employer, the franchisee, had an agreement to arbitrate any employment disputes. Morgan filed a nationwide collective action against the franchisee-defendant, instead of arbitration, when she sought to challenge the calculation of her overtime pay. Defendant filed a motion to stay the litigation and compel arbitration after eight months of litigation. The litigation included filing and arguing a motion to dismiss, filing an answer to the complaint, and participating in mediation.

In opposing the motion, plaintiff argued that defendant had waived its right to arbitrate through its protracted delay. The district court ruled in her favor, but the Court of Appeals reversed the ruling under the grounds that plaintiff had not been “prejudiced,” or harmed, by the delay, so the arbitration agreement could be enforced.

The Supreme Court heard the case due to a circuit court split, where nine circuits had ruled a showing of harm was required to waive arbitration agreements and two ruled it was not.

Justice Elena Kagan authored the decision and wrote that the Federal Arbitration Acts “policy favoring arbitration” does not grant courts the authority to manufacture special rules in arbitration’s favor. “A court must hold a party to its arbitration contract just as the court would to any other kind” however, “a court may not devise novel rules to favor arbitration over litigation.” The Court made it clear that federal law does not favor arbitration over litigation or litigation over arbitration.

The “prejudice” rationale adopted by the circuit courts added novel rules to the courts determination of waiver. “The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” On remand, the appeals court may consider ordinary procedural rules regarding its analysis of waiver or forfeiture in determining enforcement of the arbitration provision.

Although the case was decided on narrow grounds, it highlights the importance of deciding to promptly invoke the contractual right to arbitrate under a private contract. Waiting too long could amount to a waiver or forfeiture of that right and the Supreme Court has made it clear that lower courts cannot apply special rules in favor of arbitration going forward. Litigants who want to invoke an arbitration clause should file an early motion to stay litigation and/or to compel arbitration. Without taking this affirmative action, the litigant risks losing their right to arbitrate.