In May 2022, the Supreme Court of the United States (“SCOTUS”) unanimously held that an arbitration contract is to be treated “just as the court would any other [contract].” Morgan v. Sundance, Inc., 596 U.S. ___ at 6 (2022). The decision resolves a circuit split among appellate courts and vacates an Eight Circuit holding that the treatment of arbitration clauses require a bespoke procedural rule not present in the review of other contracts.
Robyn Morgan previously worked for Sundance, Inc. at a Taco Bell franchise in Osceola, Iowa. As a part of Sundance’s application for employment, Morgan submitted to an arbitration clause that would shift a dispute from the courtroom to confidential binding arbitration. Id. at 2.
Morgan sued Sundance in federal court for violating the Fair Labor Standards Act, including nonpayment of overtime wages. Id. She asserted that Sundance would take hours worked from one week and shift them to a different week to avoid paying overtime wages. Id. In response, Sundance did not assert its right to arbitration initially, and proceeded “as if no arbitration agreement existed.” Id. Sundance pursued dismissal of Morgan’s complaint and was denied. Sundance then filed an answer to Morgan’s complaint. In its answer, Sundance asserted many affirmative defenses (fourteen, to be exact), but arbitration was absent from the list. Morgan and Sundance eventually met for mediation and were unable to come to an agreement. Id.
Approximately eight months after Morgan filed suit (and only after an unsuccessful mediation), Sundance requested to compel arbitration as agreed to in Morgan’s original application for employment. Morgan opposed, suggesting Sundance waived its right to arbitration by proceeding with the litigation in the manner and for the length of time it did. Id.
Lower courts applied Eight Circuit precedent that a party waives a contractual right to arbitration if it knew of the right, acted inconsistently with the right, and the inconsistency prejudiced the other party. Erdman Co. v. Phoenix Land & Acquisition, LLC, 650 F.3d 1115, 1117 (CA8 2011). The District Court found prejudice against Morgan before the Court of Appeals disagreed and reversed, landing Morgan in arbitration. Morgan, 596 U.S. ___ at 3.
SCOTUS granted certiorari specifically to address a circuit split and reject the requirement that waiver of an arbitration clause requires a showing of prejudice. Id. at 4. Noting that outside of arbitration, when a federal court discusses the presence or absence of waiver, there is no requirement that the waiver cause prejudice to the other party. Id. at 5. The Court discussed the history and introduction of the requirement, originally by the Second Circuit in 1968, and suggested federal policy favors arbitration. Further, if the opposing party is not prejudiced, courts should permit the reintroduction of arbitration. Id. at 6.
SCOTUS took issue with the added requirement to show prejudice and likened the requirement to an additional procedural rule, not present in other contracts. Id. Further, the Court read the Federal Arbitration Act as clearly stating no additional or custom procedural rules should be created to either favor or disfavor arbitration as a method of resolution. Id. at 7. For this reason, the requirement to show prejudice when assessing if arbitration has been waived should not be necessary.
With the rejection and vacating of the Eight Circuit’s judgment, SCOTUS sent the case back for review of Sundance’s conduct and whether the conduct is a waiver of the arbitration clause. Id.
The holding impacts simple strategic sequencing principles of pretrial procedure. Specifically, to lean on a valid and binding arbitration agreement as a type of fallback or “wait-and-see” option while exploring alternative procedural remedies now comes with increased risk. Arbitration as an option should likely be acknowledged as present, even acted upon, if a party wishes to not risk their conduct presenting as a waiver of an existing contractual right to arbitration.
Steve Lydick, E|S law clerk, assisted in preparing this article.
If you have questions about arbitration clauses in employment contracts, contact Heather Veik or any of the E|S employment attorneys at 402-397-2200.