The District Court and Eighth Circuit Holdings in Morgan v. Sundance
The plaintiff in Sundance worked as an hourly employee at one of the defendant’s franchised restaurants. Even though she signed an agreement to “use confidential binding arbitration, instead of going to court” to resolve any employment disputes, she later filed a nationwide collective action against the defendant for violations of the Fair Labor Standards Act, alleging that the defendant violated the act’s requirements to pay overtime wages. Rather than moving to compel arbitration, the defendant defended itself “as if no arbitration agreement existed.” It moved to dismiss the suit as duplicative of another collective action suit, answered the complaint after the district court denied its motion, and engaged in a joint mediation with the named plaintiffs in both collective actions. The other collective action suit settled, but this one obviously did not.
Eight months after the plaintiff filed suit, the defendant moved to stay the litigation and compel arbitration under sections 3 and 4 of the Federal Arbitration Act (FAA). The plaintiff argued that the defendant’s extended participation in the litigation waived its right to arbitrate. Applying Eighth Circuit precedent, the district court held that a party waives its contractual right to arbitration if it “knew of the right,” “acted inconsistently with that right,” and—most pertinent here—“prejudiced the other party by its inconsistent actions.” Finding that the prejudice requirement had been satisfied, the district court denied the motion to compel arbitration. On appeal, the Eighth Circuit reversed and remanded. The Eighth Circuit applied the prejudice requirement but found it had not been satisfied, sending the case to arbitration because the parties had “not yet begun formal discovery” or contested any matters related to the merits. The Supreme Court granted certiorari.
The Supreme Court’s Rejection of Arbitration-Specific Procedural Rules
The Supreme Court rejected an arbitration-specific waiver rule that would demand a showing of individualized prejudice and focused its opinion on “arbitration-specific variants of federal procedural rules” based on the “FAA’s policy favoring arbitration.” For waiver, the Court noted that the focus is on “the actions of the person who held the right” but that a court “seldom considers the effects of those actions on the opposing party.” The Court emphasized that the FAA’s policy favoring arbitration does not “authorize federal courts to invent special, arbitration-preferring procedural rules.” The Court highlighted that the policy intends to make arbitration agreements as enforceable as other agreements, not more.
More broadly, the Court outright rejected the creation of “novel rules to favor arbitration over litigation.” The Court found that this rejection is supported in the text of the FAA itself, because section 6 requires that federal courts treat arbitration applications “in the manner provided by law” or, in other words, using the “usual” procedural rules. In this context, the Court held, “Section 6 instructs that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.”
The Court declined to review the facts necessary to make a ruling as to whether the defendant knowingly relinquished its right to arbitrate by acting inconsistently with that right. Therefore, it remanded the case to the court of appeals to resolve that question.
Particularly where a claim appears meritless, it may be tempting for a defendant to file a motion to dismiss or otherwise engage in the litigation only to get rid of it. This may be even more enticing when a defendant is facing a class action complaint, particularly in light of the Supreme Court’s recent Lamps Plus, Inc. v. Varela decision, 139 S. Ct. 1407 (2019), which largely forecloses class-wide arbitration unless it is specifically provided for in the operative agreement. Perhaps, for example, a defendant may want to attempt resolution of the claims on a class-wide basis in court, rather than deal with numerous individual arbitrations.
Yet, the Sundance decision demonstrates that this risk may not be worth it. Without the need for a plaintiff to show prejudice, under Sundance’s precedent, the plaintiff need only show that the defendant acted inconsistently with the right to arbitrate. It is a much lower bar to show that a defendant simply engaged in litigation than it is to show that engaging in that litigation wasted the plaintiff’s time or resources.
The Court’s decision also has further-reaching implications: Defendants should be careful not to rely on the general policy favoring arbitration as a guarantee that they will eventually be able to arbitrate. The Sundance decision shows that the Court is likely to reject other “arbitration-specific variants of federal procedural rules,” meaning that waiver, forfeiture, and any other procedural bars normally available under the federal rules will not be affected by the policy favoring arbitration. Heeding this decision, parties should carefully consider the risks of engaging in a lawsuit filed by a plaintiff subject to an arbitration agreement, as compared with immediately seeking to compel arbitration.