The U.S. Supreme Court has regularly stated that arbitration agreements subject to the Federal Arbitration Act should not have special rules above and beyond those for ordinary contracts. The Supreme Court recently reaffirmed that this principle applies to contract defenses, including waiver. In Morgan v. Sundance, Inc., a unanimous Court held that a party opposing a motion to compel arbitration based on the defense of waiver need not demonstrate that it was prejudiced. The only relevant consideration is whether the actions of the party seeking arbitration demonstrated a knowing waiver of the right to arbitrate.
In Morgan, the Plaintiff filed suit in September 2018 against a Taco Bell franchisee alleging violations of the Fair Labor Standards Act on behalf of herself and a putative class of employees. In May 2019, Sundance filed a Motion to Compel Individual Arbitration and Dismiss Plaintiff’s Complaint, which the District Court denied.
The District Court described the procedural history of the case as background for its denial of Morgan’s Motion to Dismiss. After being served with the Complaint, Sundance requested and received an extension of time to answer, based on purportedly needing additional time to investigate. In November 2018, Sundance moved to dismiss “in the interests of comity and judicial economy” based on a similar lawsuit pending in Michigan. The Court denied the Motion to Dismiss in March 2019. The parties also participated in a class-wide private mediation in April 2019, during which the parties engaged in fairly extensive “informal discovery.” Sundance also engaged in discussions with Morgan regarding a litigation plan and scheduling order in advance of the scheduling conference. The parties had not engaged in any “formal discovery,” such as written interrogatories or requests for production of documents. According to the District Court’s description of the facts, Sundance never mentioned, either to counsel for Morgan or in any Court document, the existence or possible applicability of an arbitration agreement before filing its Motion to Compel Arbitration.
In denying the Motion to Compel Arbitration, the District Court applied the existing Eighth Circuit rule from Lewallen v. Green Tree Servicing, LLC, that a party waives its right to arbitration if it: 1) knew of an existing right to arbitration; 2) acted inconsistently with that right; and 3) prejudiced the other party by the inconsistent acts. The District Court found that eight months of motion practice, participation in mediation and informal discovery, and the failure to mention arbitration all indicated Sundance’s waiver, and that Morgan was prejudiced as a result. The Eighth Circuit reversed the District Court, with the majority applying the Lewallen rule to find that Sundance did not waive its right to arbitrate. The Court of Appeals found that Sundance had not participated substantively in the “litigation machinery,” noting that most of the motion practice related to dismissal based on the Michigan case.
Interestingly, the Court of Appeals majority stated that early mediation is not part of the “litigation machinery,” but is rather a means of avoiding protracted litigation. The Court of Appeals did not address how participating in class-wide mediation where a party is asserting individual arbitration affected the waiver analysis. In dissent, Judge Colloton pointed out that Sundance’s Answer addressed the merits of the Complaint and included fourteen affirmative defenses – but did not include arbitration.
The Eighth Circuit was one of a handful of circuits to impose a “prejudice” requirement in order to find that a party had waived its right to arbitrate. The Supreme Court granted certiorari to resolve the circuit split.
The Supreme Court held that the Eighth Circuit’s rule violated Section 2 of the Federal Arbitration Act. For a unanimous Supreme Court, Justice Kagan wrote that despite the oft-cited maxim that the FAA has a “policy favoring arbitration,” federal courts are not empowered to craft arbitration-specific rules. Arbitration contracts must be enforced to same the extent as other contracts, and no more.
The Court noted that waiver is the intentional relinquishment or abandonment of a known right. The test of waiver asks only whether a party knew of an existing right and acted inconsistently with that right. Waiver does not depend on prejudice to another party, so the Eighth Circuit Lewallen rule improperly added an additional requirement for arbitration contracts. Going forward, District Courts everywhere may only ask whether a party seeking arbitration “knowingly relinquish[ed] the right by acting inconsistently with that right.”
- The Supreme Court’s decision adds a measure of predictability in determining whether a party has waived its right to compel arbitration. However, the decision will likely make it easier for plaintiffs to stay in federal court. Therefore, it is important for parties who may want to proceed to arbitration to determine at as early a date as practical whether to file a motion to compel arbitration.
- The Eighth Circuit suggested that participating in mediation is not engaging the “litigation machinery.” As many District Courts have mandatory early mediation, this would seem to permit a party (in some cases) to seek arbitration after an unsuccessful mediation. Depending on the facts and circumstances, this may be a risky maneuver.
- In analyzing prejudice, courts have expressed concern that because the scope of discovery in federal court is generally broader than in arbitration, a party could be prejudiced by being compelled to arbitrate after formal discovery. Although the prejudice element has now been eliminated, it is likely that courts will simply consider any formal discovery to be inconsistent with the right to arbitrate. Courts will likely take a very dim view of parties who seek arbitration after much more discovery than the exchange of Rule 26 initial disclosures.
- As the prejudice requirement has been eliminated, a party may consider asserting arbitration as a defense in its initial pleading. This may clarify that a party does not intend to waive its right to arbitrate as it determines whether an arbitration agreement may apply. As always, even if a party seeks to compel arbitration, the party is not relieved of its duties under Rule 12 to file a responsive pleading.
- In employment cases, in particular, the early case investigation must include a review of the applicable employment agreements, handbooks, and arbitration programs. The savings in time and money that arbitration offers are undermined the longer a party litigates in federal court. If an arbitration agreement applies, it should not come as a surprise to counsel late in the case, and there is no good reason to delay in filing a motion to compel.