When a party files a lawsuit in court despite agreeing in the contract to arbitrate the dispute, the Federal Arbitration Act (FAA) entitles the responding party to file a motion to stay, or pause, the lawsuit and compel the case to arbitration. While the responding party can demand that a court send the case to arbitration immediately once it is filed, occasionally the parties engage in months, or even years, of litigation before that demand is made. In those cases, courts are faced with the question of whether the demand to move the case to arbitration has come too late, such that the right to arbitration has been waived or lost.
In Morgan v. Sundance, the U.S. Supreme Court recently evaluated the standard by which courts should evaluate the timeliness of a request to send a case to arbitration. In that case, Robyn Morgan worked as an hourly employee at a Taco Bell franchise owed by Sundance. When applying for the job, she signed an agreement to arbitrate any employment dispute. While employed, Morgan filed a lawsuit alleging Sundance violated federal law regarding overtime pay. Sundance participated in the litigation for nearly eight months – including filing a motion to dismiss and participating in mediation – before moving to stay the litigation and compel arbitration under the FAA.
Traditionally, when considering whether a particular “right” has been waived by a party to litigation, federal courts will not consider if the delay has caused the parties any harm. However, in the arbitration context, most federal courts apply a rule of waiver that is specific to arbitration. These courts – including the federal Courts of Appeals covering Alabama, Florida, Mississippi, North Carolina, Tennessee, and Texas – have applied tests which require a showing that the conduct has prejudiced or harmed the other side. In Morgan’s case, the trial court and the Eighth Circuit Court of Appeals applied one such test, which required Morgan to show that Sundance actually prejudiced Morgan through its inconsistent action of participating in litigation before opting to pursue arbitration.
The U.S. Supreme Court was asked to decide whether these “prejudice” requirements were consistent with the text of the FAA. It ruled they are not. Outside of the arbitration context, the court said, “a federal court assessing waiver generally does not ask about prejudice.” Waiver is simply “the intentional relinquishment or abandonment of a known right.” In order to decide whether 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.”
The Supreme Court, therefore, ruled that the lower courts erred in requiring a showing that Sundance’s conduct prejudiced Morgan when evaluating the waiver issue. The case was sent back to the lower courts to evaluate the waiver issue using the proper question: Did Sundance knowingly relinquish the right to arbitrate by acting inconsistently with that right?
The Supreme Court’s decision in the Morgan case may alter the playing field for parties in the construction industry who find themselves in litigation involving contracts containing arbitration provisions. With the “prejudice” requirement removed, courts may give defendants less leeway to litigate cases before asking to enforce an arbitration provision. Previously, parties were sometimes able to leverage the “prejudice requirement” to engage in some litigation – for example, engaging in initial discovery or seeking a motion to dismiss – prior to demanding the case be moved to arbitration. In light of Morgan, courts may be more inclined to view this type of conduct as a waiver of the right to arbitration. The Supreme Court’s ruling in Morgan will also force parties to be diligent in conducting their own review and investigation to determine whether a lawsuit may be covered by an arbitration provision – lest the power to invoke that provision be waived.