Waiver Of The Right To Arbitrate A Dispute: United States Supreme Court

Federal Arbitration Law does not require a showing of prejudice by an entity or person opposing referral of a matter to arbitration on grounds that the other side participated in a litigation on the subject matter of the dispute.

The Federal Courts in the United States of America have, for a long time, had a difference of opinion on the question whether a litigant waives his right to arbitrate a dispute if the litigant participates in a litigation in a court. Nine Courts of Appeal had held that because of "the strong federal policy favoring arbitration" a waiver of the right to arbitrate requires the showing of prejudice to the side opposing the application to arbitrate. Two Courts of Appeal have rejected this rule. In May 2022, the Supreme Court settled this difference of opinion. The Supreme Court held that the Court of Appeal "was wrong to condition a waiver of the right to arbitrate on showing of prejudice"¹.

Robyn Morgan, the petitioner worked as an hourly employee at a fast food restaurant called Taco Bell that was owned by Sundance, Inc. At the time of her employment, Morgan had signed an arbitration agreement to resolve employment disputes. Despite the arbitration agreement, Morgan filed a class action suit against Sundance alleging that it routinely violated the law in United States for payment of overtime to workers who worked for more than 40 hours a week.

Sundance did not, at that time, make a motion to refer the dispute to arbitration under the US Federal Arbitration Act.

Instead, it participated in the litigation and filed a motion to dismiss the suit on the grounds that there was another class action suit pending in court on the same grounds and she should become a part of that suit or file a suit in her individual capacity. Morgan refused and the motion to dismiss was rejected by the District Court. After the dismissal, Sundance filed an answer (written statement) to the complaint on merits and claimed a number of defenses but did not mention the arbitration agreement. They also participated in a mediation of Morgan's case and the other class action suit which was settled by mediation. Morgan's case was not settled.

Eight months after the suit was filed and after participating in the suit, Sundance filed motion to stay the suit and compel arbitration. Morgan opposed the motion. She claimed that Sundance had waived its right to arbitration. The District Court applied the law then applicable and held that by participating in the litigation while knowing that there is an arbitration agreement, the party waives its right to arbitrate because it prejudices the other side by its inconsistent actions. It dismissed the application of Sundance. Sundance appealed to the Court of Appeals. In its majority opinion, the Court of Appeals applied the rule that the party opposing the arbitration must show prejudice. However, it held that there was no prejudice because the parties had not yet begun formal discovery nor contested any matters "going to merits"²

It reversed the order of the District Court and referred the matter to arbitration. Morgan filed an application for certiorari (equivalent of a leave to appeal) in the United States Supreme Court which was granted.

On May 22, 2022, the Supreme Court reversed the decision of the Court of Appeal. The Court pointed out that "a federal court deciding whether a litigant has waived a right does not ask if the action has caused harm. But when the right concerns arbitration, courts have held a finding of harm is essential: A party can waive its arbitration right by litigating only when its conduct has prejudiced the other side. That special rule, the courts say, derives from the… 'policy favoring arbitration' ". The Court rejected this argument and held that the Federal Arbitration Act's ("FAA") "policy favoring arbitration" does not authorize federal courts to invent special arbitration-preferring procedural rules. The Court also held "The text of the FAA makes clear that courts are not to create arbitration-specific procedural rules like the one here. Section 6 of the FAA provides that any application under the statute – including an application to stay litigation or compel arbitration – "shall be made and heard in the manner provided by law for the making and hearing of motions" (unless the statute says otherwise). A directive to treat arbitration applications "in the manner provided by law" for all other motions is simply a command to apply the usual federal procedural rules, including any rules relating to a motion's timeliness. Because the usual federal rule of waiver does not include a prejudice requirement, Section 6 instructs that prejudice is not a condition of finding that a party waived its right to stay litigation or compel arbitration under the FAA."

"Stripped of its prejudice requirement, the Eighth Circuit's current waiver inquiry would focus on Sundance's conduct. Did Sundance knowingly relinquish the right to arbitrate by acting inconsistently with that right? On remand, the Court of Appeals may resolve that question, or determine that a different procedural framework (such as forfeiture) is appropriate. The Court's sole holding today is that it may not make up a new procedural rule based on the FAA's "policy favoring arbitration." Pp. 4–7."

The Supreme Court also held that outside the context arbitration, a federal court, while determining if there has been a waiver or not, does not generally ask about prejudice. Relying on an earlier Supreme Court decision, it pointed out that waiver "is the intentional relinquishment or abandonment of a known right."³

The court does not consider the effects of waiver on the other side. The Supreme Court set aside the decision of the Court of Appeal and remanded the case for further proceeding consistent with its opinion. This decision of the Supreme Court is of importance because it changes the effect of a party starting a litigation against another party with whom it has an arbitration.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.