Supreme Court Holds that Prejudice Is Not Required to Find Waiver of Right to Arbitration

According to the U.S. Supreme Court, it is not necessary to find that an employee has been prejudiced by the employer’s delay in invoking an arbitration agreement in order to determine whether the employer has waived the right to arbitration.

Background of the Case. In Morgan v. Sundance, Inc., an employee filed a nationwide collective action against her employer, alleging violations of the Fair Labor Standards Act. After engaging in litigation for almost 8 months, the employer then sought to compel arbitration based on an arbitration agreement signed by the employee when she applied for employment. The employee opposed, arguing that the employer had waived its right to arbitrate.

The U.S. Court of Appeals for the Eighth Circuit applied its prior case precedent under which a party waives its right to arbitration where it knew of the right, acted inconsistently with that right, and prejudiced the other party by its actions. Here, the Eighth Circuit found no prejudice to the employee and therefore no waiver. Although the prejudice requirement is not part of general federal waiver law, the Eighth Circuit, along with eight other Circuit Courts, had adopted it based on the “federal policy favoring arbitration.” Other federal Circuit Courts, however, have rejected such a requirement.

The Supreme Court’s Ruling. The Supreme Court rejected the prejudice requirement, finding that federal courts may not create arbitration-specific variants of federal procedural rules, like waiver rules based on the Federal Arbitration Act’s “policy favoring arbitration.” The policy is simply an acknowledgement that agreements to arbitrate, which were previously disfavored by courts, should be placed “upon the same footing as other contracts.” A party may be held to an arbitration contract just as any other contract, but courts may not create “novel” rules to favor arbitration over litigation.

What This Means for Employers. Arbitration agreements will be treated as standard contracts, and general contract law will apply to determine whether a contract may be enforced. However, the specific framework for determining whether an employer has relinquished its contractual right to require arbitration of employment matters was not decided by the Supreme Court. This case involved a waiver argument, but the Supreme Court specifically declined to decide whether that was the appropriate framework, or whether some other framework, such as forfeiture, should apply – that decision was left to the lower courts to decide, which can and will likely lead to different approaches in different jurisdictions.

But the larger lesson here is that employers facing litigation from an employee should promptly determine whether the employee has signed an arbitration agreement and, if the employer wishes to invoke such an agreement, should move expeditiously to do so.