Supreme Court Says Harm Is Not Part of FAA Arbitration Waiver Analysis

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The U.S. Supreme Court, in a May 23 decision, ruled that the federal policy favoring arbitration does not allow federal courts to impose a harm requirement when assessing whether a party has waived its right to arbitration by filing a lawsuit. In a unanimous decision resolving a divided circuit on this issue, the Court Morgan v. Sundance, Inc. concluded that the federal policy “is to treat arbitration contracts like any other, not to favor arbitration.” The Court therefore returned with the instruction that the waiver must be assessed on the basis of general contractual principles.

This decision significantly changes the waiver analysis under federal arbitration law as it was understood in most federal circuits. And while its ultimate impact is unclear, parties to arbitration agreements should understand that where a waiver analysis applies, their continued participation in the litigation of an arbitrable dispute is now more likely to be considered. as a waiver of the right to arbitrate, since courts must assess waiver regardless of whether there is prejudice to the other party.

Enforce arbitration agreements before Morgan

Federal waiver law generally does not include an injury requirement, but courts interpret it in the context of arbitration based on the federal policy favoring arbitration. Specifically, most Federal Circuits applied a version of the test used by the United States Court of Appeals for the Eighth Circuit and rejected in Morgan, in which “a party waives its contractual right to arbitration if it was aware of it; ‘has acted in a manner incompatible with this right’; and – criticism here – “has prejudiced the other party by his inconsistent actions”.[1] “The rule specific to Eighth Circuit arbitration derives[d] of a decades-old Second Circuit decision, which in turn based the rule on the FAA’s “pro-arbitration” policy.[2]

MorganThe background

Morgan arose out of a national class action lawsuit brought by an employee, Morgan, against Sundance, Inc. (Sundance), alleging violations of the Fair Labor Standards Act. Sundance initially defended the lawsuit in federal court “as if there was no arbitration agreement.” He decided to dismiss the action in light of a class action lawsuit previously filed by other employees, suggesting that Morgan either join that action or refile his claim on an individual basis; it responded to the complaint and asserted 14 affirmative defenses (none of which mentioned the arbitration agreement); and he arbitrated the dispute. Then, eight months after litigation began — and after the class action alleging similar claims, brought by other employees, was settled — Sundance decided to stay Morgan’s lawsuit and compel arbitration under Sections 3 and 4 of the Federal Arbitration Act (FAA). Morgan objected, arguing that Sundance waived its right to impose arbitration by litigate in court for so long.

The Federal District and the Circuit Court applied the Eighth Circuit’s injury test in deciding the motion. The district court found that Sundance’s delay harmed Morgan, but the appeals court disagreed because formal discovery hadn’t begun and no ‘substantive’ questions were raised. had been contested by the parties. Dissenting, an Eighth Circuit judge noted that prejudice is not necessary to demonstrate waiver outside of the arbitration context. The Supreme Court granted certiorari to resolve a split circuit on the issue.

Reverse SCOTUS based on general contractual principles

The Supreme Court overturned. In a 9-0 opinion, the Court found that, notwithstanding the FAA, an arbitration agreement is no different from any other contract and therefore not subject to “tailor-made” waiver requirements. The Court explained that a federal court “assessing the waiver does not generally ask questions about harm.” Instead, in determining whether a party has intentionally waived or abandoned a known right, courts focus “on the actions of the person who held the right” and rarely assess the effects on the counterparty.

The Court found nothing in the FAA’s pro-arbitration policy that authorized “federal courts to invent special procedural rules that favor arbitration.” Instead, the Court clarified that the “policy … is simply an acknowledgment of the FAA’s commitment to overturn the judiciary’s longstanding refusal to enforce arbitration agreements and place those agreements on the same footing as other contracts.[3] In other words, the Court explained, FAA policy requires courts to treat arbitration contracts “like any other,” but it is not “to favor arbitration.” The Court remanded, explaining that a waiver investigation must focus on Sundance’s conduct and whether it “knowingly waived a right to arbitrate by acting inconsistently with that right.”

The Court also left open the possibility that a waiver analysis may not apply at all, noting that the appellate court may determine whether “a different procedural framework (such as forfeiture) is appropriate.”

Job-Morgan: Waiver may be easier to show

The Court’s elimination of a prejudice requirement in the waiver determination makes it more likely that a tribunal applying a waiver analysis will find that a party has waived its right to pursue arbitration by lengthy participation in the dispute in a manner incompatible with the application of the right to arbitration. The specific jurisdiction waiver law should inform this analysis.

At the same time, the Supreme Court left open the possibility that waiver is not the proper analysis to apply in this case. If the issue is being assessed under forfeiture, estoppel, laches, or any other rule, prejudice to the opposing party (or other considerations) may still be part of the analysis.

Until these issues are resolved, parties should consider acting early and decisively to enforce arbitration agreements, particularly in the face of competing disputes.

Endnotes

[1] MorganSlip Op. at 3 (quoting Erdman Co. vs. Phoenix Land & Acquisition, LLC650 F. 3d 1115, 1117 (8th Cir. 2011).

[2] Identifier. at 5 (quoting Carcich v Rederi A/B Nordie389 F.2d 692, 696 (CA2 1968); Erdman650 F. 3d to 1120, n.4).

[3] ID. (citing Granite Rock Co. c. Teamsters561 US 287, 302 (2010).

© 2022 Perkins Coie LLP

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