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United States Supreme Court Holds Federal Courts May Not Create Arbitration-Preferring Procedural Rules Based on the FAA’s “Policy Favoring Arbitration”

Morgan v. Sundance, Inc., No. 21-328 (United States Supreme Court May 23, 2022) (Kagan, J., delivered the opinion for a unanimous Supreme Court).

In Sundance, the United States Supreme Court confirmed that the Federal Arbitration Act (“FAA”) requires federal courts to put arbitration contracts on an equal footing with other kinds of contracts—not to apply special rules to favor arbitration.

Petitioner Robyn Morgan (“Petitioner”) worked as an hourly employee at a Taco Bell franchise owned by Respondent Sundance, Inc. (“Sundance”).  When applying for the job, she signed an arbitration agreement.  Despite this agreement, she subsequently brought a nationwide collective action against Sundance in federal court for violations of the Fair Labor Standards Act (“FLSA”).  Nearly eight months into the litigation (including after filing a motion to dismiss the suit, answering the complaint, and attending a mediation), Sundance moved to stay the litigation and compel arbitration under Sections 3 and 4 of the FAA.  Petitioner opposed the motion, arguing that Sundance had waived its right to arbitrate.

Under the Eighth Circuit’s waiver test, a party waives its contractual right to arbitration if it: (1) knew of the right; (2) acted inconsistently with that right; and (3) prejudiced the other party by its inconsistent actions.  The prejudice requirement is not a feature of federal waiver law generally, but Eighth Circuit precedent adopted it in the arbitration context based on the “federal policy favoring arbitration.”  Id. at 3 (citing Erdman Co. v. Phoenix Land & Acquisition, LLC, 650 F.3d 1115, 1120 (8th Cir. 2011)).  Whereas the district court found the prejudice requirement satisfied, the Court of Appeals did not and instead sent Petitioner’s case to arbitration, reasoning that the parties had not yet begun formal discovery or contested any matters on the merits.

Eight other Circuits employed similar “prejudice” rules in the context of arbitration and two had rejected a similar rule.[1]  The Supreme Court granted certiorari to resolve the Circuit split and held that the FAA does not authorize federal courts to create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s “policy favoring arbitration.”  As a result, it invalidated the Eighth Circuit’s “prejudice” factor.[2]

The Supreme Court explained that outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice.  Instead, to decide whether a waiver has occurred, including a waiver of a contractual right, the court focuses on the actions of the person who held the right, not the effects of those actions on the opposing party.  It stated that the FAA’s “policy favoring arbitration” does not authorize federal courts to “invent special, arbitration-preferring procedural rules.”  Rather, “[t]he policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so.’”  Id. at 6 (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967)).  Simply put, it is “about treating arbitration contracts like all others, not about fostering arbitration.”  Id. 

The Court also found support for its conclusion in Section 6 of the FAA, which provides that any application under the statute (including one 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).  The Court explained, “[a] directive to a federal court 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.”  Id. at 7.

This opinion confirms that parties to an arbitration agreement should be aware of the applicable state law pertaining to waiver generally and disregard any rule applicable to arbitration contracts only in analyzing the possibility of waiver.

For further information, please contact your Ricketts Case, LLP attorney.

[1] The eight Circuits adopting similar “prejudice” rules in the context of arbitration were the First, Second, Third, Fourth, Fifth, Sixth, Ninth, and Eleventh Circuits.  The two Circuits that rejected a similar rule were the Seventh Circuit and the District of Columbia Circuit.

[2] The Supreme Court only considered the analysis raised by the Courts of Appeals, which generally resolve such cases as a matter of federal law, using the terminology of waiver.  The Supreme Court did not consider the arguments raised by the parties, which were: (a) what role state law might play in resolving when a party’s litigation conduct results in the loss of a contractual right to arbitrate, and (b) whether the inquiry involves rules of waiver, forfeiture, estoppel, laches, or procedural timeliness.  These questions remain unresolved by the Supreme Court’s opinion.