The district court denied Sundance’s motion, concluding that Morgan was prejudiced by having to defend against Sundance’s litigation efforts and that Sundance waived its arbitration rights. On appeal, in a 2-1 decision, the U.S. Court of Appeals for the Eighth Circuit reversed, finding a lack of waiver by Sundance because of “the absence of a showing of prejudice to Morgan.” Notably, Judge Colloton, in his lone dissent, stated that Sundance had “led Morgan to waste time and money” in litigation, and cast doubt on the inclusion of a prejudice requirement in the arbitration waiver framework.
The Eighth Circuit’s reversal followed a long line of cases relying on the application of an arbitration-specific procedural rule in the context of waiver. Under general federal waiver law, a prejudice requirement does not exist, but courts began applying one specifically in the arbitration context based on the Federal Arbitration Act’s (FAA) “liberal national policy favoring arbitration.” As a result of that policy, nine federal circuit courts imposed a prejudice requirement for the waiver of arbitration rights—the First, Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Eleventh Circuits—while only the Seventh and D.C. Circuits went against the grain.
The U.S. Supreme Court granted certiorari to resolve the circuit split. In a narrowly tailored opinion authored by Justice Elena Kagan, the Court held that the Eighth Circuit “erred in conditioning a waiver of the right to arbitrate on a showing of prejudice.” The Court reasoned that the FAA’s “liberal national policy favoring arbitration” was “merely an acknowledgement 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.” According to the Court, “[t]he text of the FAA makes clear that courts are not to create arbitration-specific procedural rules like the one we address here.” Thus, the Court concluded that arbitration contracts are to be treated like all other contracts, and not benefit from a “bespoke rule of waiver” favoring arbitration over litigation. The Court remanded the matter to the Eighth Circuit to focus on Sundance’s conduct and resolve the question of whether Sundance relinquished its arbitration rights “by acting inconsistently with that right[,]” without reference to or application of a prejudice requirement.
In light of the Supreme Court’s decision, companies wanting to invoke their arbitration rights should tread carefully in delaying assertion of arbitration. As shown in Morgan v. Sundance, Inc., there is no longer a predicate showing of prejudice in order to find waiver of arbitration, meaning delay of arbitration could mean the defense disappears. Though the Supreme Court’s ruling left unanswered a myriad of other questions raised by both parties, its reversal of a widely followed rule represents a significant shift with potentially far-reaching consequences.