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By: Grace Callanan
On May 23, 2022, the Supreme Court published its decision in Morgan v. Sundance related to the Federal Arbitration Act (the “Act”). The Court ruled that the Act is designed to put arbitration clauses or contracts on equal footing with any other type of contract or contract clause. Despite the Act’s “policy favoring arbitration,” it does not permit courts to develop novel arbitration-specific procedural rules that treat arbitration clauses or contracts more favorably.
The plaintiff in Morgan v. Sundance was employed at a Taco Bell franchise owned by Sundance, Inc. The plaintiff filed a lawsuit because she believed Sundance violated federal law related to overtime pay. Sundance engaged in the litigation by answering the complaint, filing a motion to dismiss, and attempting mediation with the plaintiff. However, when all of these routes failed to terminate the case, Sundance moved to stay the proceedings and compel arbitration based on an arbitration clause included in a job application the plaintiff had submitted. In response, the plaintiff argued that Sundance had waived its right to compel arbitration because it had engaged in the litigation for eight months before moving to enforce the clause.
To determine whether Sundance waived its right to compel arbitration, the district court used a test, rooted in circuit precedent, which considers 1) whether the party was aware of its right to arbitrate the dispute, 2) whether it acted inconsistently with that right, and 3) whether the plaintiff was prejudiced by the delay in compelling arbitration. While federal courts typically, in deciding whether a litigant has waived a contractual right, do not ask if the actions caused the other party harm, the Eighth Circuit adopted such a requirement in its test for waiver of arbitration due to the “federal policy favoring arbitration.” However, other circuits had rejected the requirement of prejudice in determining whether the right to compel arbitration had been waived.
The district court in Morgan found that the plaintiff was prejudiced by the delay in compelling arbitration and therefore refused to send the matter to arbitration. However, upon appeal, the Eighth Circuit decided the plaintiff was not prejudiced and reversed. The Supreme Court then took up the matter to settle the split between federal circuits on whether a federal court can create an arbitration-specific procedural rule that requires a showing of prejudice in determining whether the right to arbitration has been waived.
The Supreme Court decided unanimously that courts cannot invent special, arbitration-preferring procedural rules, like the prejudice test to determine whether a party has waived its right to compel arbitration. The Supreme Court held that federal courts may not create arbitration-specific variants to federal procedural rules and instead courts “must hold a party to its arbitration contract just as the court would to any other kind.” The decision reinforces the concept that arbitration clauses do not get preferential treatment, but rather should be treated equally to other types of contracts.
In light of this decision, parties must be aware that arbitration agreements will not receive favored treatment, but rather equal treatment to other contractual clauses. Parties should be very careful in making sure they do not waive their right to compel arbitration as courts will no longer be more forgiving based on the subject matter of the clause.
If you have any questions about the impact of this ruling on your contractual agreements, please do not hesitate to contact Grace Callanan at [email protected] in the Government and Tort & Catastrophic Loss Practice Sections at Freeman Mathis & Gary, LLP, or your local FMG attorney.
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