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SCOTUS: Waiver of right to arbitrate
does not require proof of prejudice

Morgan v. Sundance, Inc. (US Supreme 05/23/2021)
Sent to Custom Alerts™ subscribers on 05/23/2022

Robyn Morgan signed an agreement to arbitrate any employment dispute she might have with her employer. Even so, she went to court with a collective action asserting a violation of federal law regarding overtime payment.

The employer waited almost eight months before making a motion to compel arbitration – filing a motion to dismiss (which the trial court denied) and engaging in mediation (which was unsuccessful). Morgan argued that this was a waiver of the employer's right to arbitrate, but the trial court and the 8th Circuit said there was no waiver because Morgan did not prove that she suffered any harm from the delay.

The US Supreme Court – unanimously – reversed, holding that the employee need not prove she was prejudiced by the delay.

This case arose under the Federal Arbitration Act (FAA). The courts below applied 8th Circuit precedent, under which a party waives its right to arbitration if it knew of the right; acted inconsistently with that right; and prejudiced the other party by its inconsistent actions.

The prejudice requirement is not a feature of federal waiver law generally. The 8th Circuit adopted that requirement because of the "federal policy favoring arbitration."

The Supreme Court said: "Outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice. Waiver, we have said, 'is the intentional relinquishment or abandonment of a known right.' To decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party. That analysis applies to the waiver of a contractual right, as of any other." Thus, the 8th Circuit applied a rule that applies only to arbitration.

Courts that have required a showing of prejudice have relied on the "federal policy favoring arbitration." However, that policy, the Court said, "is merely an acknowledgment of the FAA's commitment to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts."

The "federal policy favoring arbitration." is to make arbitration agreements as enforceable as other contracts, but not more so. Accordingly, 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.

Interestingly, the Court assumed, without deciding, that it was proper for the 8th Circuit to resolve cases like this one as a matter of federal law, using the terminology of waiver rather than forfeiture, estoppel, laches, or procedural timeliness. In the end, the Court said, "Our sole holding today is that it may not make up a new procedural rule based on the FAA’s 'policy favoring arbitration.'"

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