In its 2021–22 term, the U.S. Supreme Court continued to expand on its interpretation of the Federal Arbitration Act (FAA) through decisions in Morgan v. Sundance and Southwest Airlines Co. v. Saxon, among others. Key findings from these decisions, paired with statutory developments limiting arbitration in the context of sexual assault and harassment, warrant practitioners’ careful attention as the arbitration landscape evolves.
The FAA, enacted by Congress in 1925, “was a response to hostility of American courts to the enforcement of arbitration agreements, a judicial disposition inherited from then-longstanding English practice. To give effect to this purpose, the FAA compels judicial enforcement of a wide range of written arbitration agreements.” Circuit City Stores v. Adams, 532 U.S. 105, 111 (2001). Over the last twenty years, the Supreme Court has further developed its jurisprudence under the FAA. See, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (holding that Section 2 of the FAA preempts state law precluding class or collective action arbitration waivers); Epic Sys. Corp. v. Lewis, 584 U.S. ___, 138 S. Ct. 1612 (2018) (holding that arbitration agreements providing for individualized proceedings must be enforced, notwithstanding the saving clause of the FAA or Section 7 of the National Labor Relations Act).
Despite this backdrop in favor of arbitration, there has been a marked change in the legislative and judicial approach to arbitration. The “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” formally amending the FAA to ban mandatory arbitration agreements for sexual assault and harassment claims, was passed on March 3, 2022. Moreover, the Supreme Court’s recent jurisprudence suggests an appreciation that the Court’s policy in favor of arbitration is not without its limits.
Robyn Morgan, an employee at a Taco Bell franchise owned by Sundance, Inc., filed a nationwide collective action alleging violations of the Fair Labor Standards Act. Although Morgan signed an arbitration agreement, Sundance failed to raise the existence of the arbitration agreement in its motion to dismiss or as an affirmative defense. After eight months of litigating the matter, Sundance moved to stay the litigation and to compel arbitration under Sections 3 and 4 of the FAA. Morgan opposed the motion, arguing that “Sundance had waived its right to arbitrate by litigating for so long.” The United States District Court for the Northern District of Iowa granted the motion compelling arbitration, which was later affirmed by the Eighth Circuit The Supreme Court summarized the proceedings below, noting that the district court had applied circuit precedent stating that a “party waives its contractual right to arbitration if it knew of the right; ‘acted inconsistently with that right’; and—critical here—‘prejudiced the other party by its inconsistent actions.’” This rule was in line with decisions in the First, Second, Third, Fourth, Fifth, Sixth, Ninth and Eleventh Circuits, but not the Seventh and D.C. Circuits. Accordingly, the Supreme Court granted certiorari to resolve the circuit split.The Supreme Court vacated and remanded the decision back to the lower court, holding that the Eighth Circuit cannot “create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration.’” The Court noted that the FAA’s policy favoring arbitration was “merely an acknowledgement of the FAA’s commitment to overrule the judiciary’s long standing refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” 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.” While the Supreme Court highlighted the FAA’s purpose, it is likely that its decision and those of lower courts will hew to a stricter interpretation of the FAA in the future. Accordingly, practitioners representing employers are advised to enforce arbitration agreements at the onset of litigation to avoid waiver given the Court’s rejection of an arbitration-specific standard requiring parties asserting waiver to demonstrate prejudice.
Latrice Saxon, a ramp supervisor, brought an FLSA collective action against her employer, Southwest Airlines. Southwest moved to dismiss Saxon’s complaint for improper venue on the basis that her employment contract required her to arbitrate wage disputes individually. In response, Saxon claimed that ramp supervisors were a “class of workers engaged in foreign or interstate commerce” and therefore exempt from the FAA’s coverage. See 9 U.S.C. § 1.
The Northern District of Illinois granted Southwest’s motion to dismiss, holding that only those involved in “actual transportation,” and not those who merely handle goods, fell within the exemption at issue. Saxon appealed the dismissal, the Seventh Circuit reversed and remanded, and Southwest sought review by the Supreme Court. The Supreme Court affirmed the Seventh Circuit’s decision and held that Saxon belongs to a “class of workers engaged in foreign or interstate commerce” and was thus exempted from the FAA’s coverage. Although the Supreme Court adopted a broader definition of the relevant “class of workers,” it also expressly acknowledged the limited scope of its holding, recognizing that “the answer will not always be so plain when the class of workers carries out duties further removed from the channels of interstate commerce or the actual crossing of borders.” Because the Southwest opinion engaged in a fact specific inquiry and rejected a blanket transportation worker exemption to the FAA, there remains some ambiguity about how broad an employee’s participation in transportation can be to render them exempt from the FAA. Nonetheless, like Morgan, this decision affirms the Court’s more discerning approach to the FAA’s application, despite a historic policy generally favoring its application.
