Just Like Everything Else – Arbitration Is All About Timing

 

Recently, the United States Supreme Court reminded employers who wish to arbitrate disputes with their employees that they must assert the right to arbitrate promptly.  Specifically, in Morgan v. Sundance, Inc., 142 S.Ct. 1708 (2022), the Supreme Court made it easier for employees to show that an employer’s delay constitutes a waiver of the right to arbitrate.

 

Background:

 

In Morgan, the plaintiff, Robyn Morgan, worked as an hourly employee at the defendant’s Taco Bell franchise.  When she applied for the job, she signed an agreement to “use confidential binding arbitration, instead of going to court” to resolve any disputes she would have regarding her employment.

 

However, in September 2018, Morgan sued Sundance, Inc. for violations of the Fair Labor Standards Act (“FSLA”).  Morgan argued that the employer violated the FLSA, which requires employers to pay overtime to covered employees who work more than 40 hours in one week, by recording hours an employee worked in one week in another week to escape the overtime requirement.

 

In response, Sundance filed a motion to dismiss, which the district court denied.  Sundance then answered Morgan’s complaint but did not assert its right to arbitrate Morgan’s claims.  Instead, the employer began mounting a substantial defense in federal court which included asserting several counterclaims and affirmative defenses.

 

A short time later, Morgan participated in a settlement mediation with plaintiffs in a separate but similar lawsuit in Michigan.  The Michigan case was settled, but Morgan’s case moved forward. Finally, nearly eight months after Morgan filed her complaint, Sundance moved to compel arbitration.  Unsurprisingly, the employee opposed the motion and argued that the employer waived the right to arbitrate by waiting so long to move to compel the arbitration.  The district court applied the Eighth Circuit’s waiver test for arbitration cases, which held that a party waives its contractual right to arbitrate if it:

1. Knew of the right.
2. Acted inconsistently with the right.
3. Prejudiced the other party by its inconsistent actions.

 

Following its analysis, the district court denied the motion, concluding Sundance’s participation in the litigation waived its right to arbitration.  Upon review, the Eighth Circuit disagreed and sent the parties to arbitration.

 

The Supreme Court agreed to hear the case on the single issue of whether courts may “create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the [Federal Arbitration Act’s] ‘policy favoring arbitration.’”

 

The Supreme Court held that they cannot, observing that “[o]utside the arbitration context, a federal court assessing waiver does not generally ask about prejudice.” In demanding proof of prejudice before finding a waiver, a “rule found nowhere else,” the Eighth Circuit created a “bespoke rule of waiver for arbitration.” Ultimately, 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.” The Supreme Court sent the case back to the Eighth Circuit to reexamine the matter without the prejudice requirement.

 

Takeaways:

Employers should act quickly if they want to ensure a matter is compelled to arbitration.  Following the Supreme Court’s decision in Morgan, an employee does not need to prove that an employer’s delay prejudiced them in any way.  The result is that it will be easier for an employee to show that their employer waived the right to arbitrate by waiting too long to assert the right. Thus, employers with arbitration provisions in their employment agreements or employee handbooks should act urgently if they hope to enforce them.

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