On May 23, 2022, the U.S. Supreme Court decided Morgan v. Sundance, Inc., which addressed whether the waiver of a right to arbitrate by first litigating in court requires a showing that the delay in seeking arbitration prejudiced a counterparty. The Court held that the waiver does not require a showing of prejudice—primarily because there is no prejudice requirement outside the arbitration context—and reversed nine circuits that held otherwise. In its decision, the Court made the broader point that a contractual right to arbitrate should be treated just like any other contractual right, and that the Federal Arbitration Act (“FAA”) does not authorize courts to develop special procedural rules in favor of (or against) arbitration. While the Supreme Court routinely refers to a strong “policy favoring arbitration,” this policy means only that arbitration contracts should not be disfavored—not, as suggested by some courts of appeals, that arbitration contracts are entitled to special treatment. As a result, the Court ruled, the question of whether a party waives its right to arbitrate must be determined using ordinary principles of waiver, not a special waiver rule created for arbitration.
When a party who has agreed to arbitrate a dispute instead brings a lawsuit, the FAA entitles the defendant to file an application to stay the litigation and compel arbitration. See 9 U.S.C. § 3. In some cases, however, a defendant may litigate in court for weeks, months, or even years before seeking to stay the litigation in favor of arbitration. In these cases, courts are often asked to consider whether the defendant has waived its right to arbitrate by litigating in court for so long.
In general, the waiver analysis focuses on the actions of the party holding the right in question: a party waives a contractual right, such as the right to arbitrate, by intentionally relinquishing or abandoning it. Many federal courts of appeals, however, have added an extra requirement in the arbitration context, holding that the right to arbitrate can only be waived if the delay in seeking arbitration also prejudiced a counterparty. These courts reasoned that the FAA embodies a “policy favoring arbitration,” see, e.g., Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983), and that this policy raised the bar for finding a waiver of the right to arbitrate. Two courts of appeals disagreed—the D.C. Circuit and the Seventh Circuit—holding that ordinary waiver principles, which do not include a prejudice requirement, govern in the arbitration contract.
In Morgan, Robyn Morgan sued her employer Sundance, Inc., a Taco Bell franchise, in federal district court in Iowa, alleging that Sundance violated the overtime provisions of the Fair Labor Standards Act. Morgan’s employment agreement contained an arbitration clause, but Sundance initially ignored it and defended the lawsuit in court by litigating a motion to dismiss, asserting affirmative defenses, and attempting mediation. Eight months after the suit was filed, however, Sundance moved to stay the litigation and compel arbitration. Morgan argued in response that Sundance had waived its right to arbitrate.
The district court analyzed the waiver issue through the lens of Eighth Circuit precedent, which held that a party waives the right to arbitrate only if its conduct prejudiced the other party. Applying that precedent, the district court concluded that Morgan was prejudiced by Sundance’s delay in seeking arbitration. On appeal, the Eighth Circuit disagreed, ruling that the delay did not prejudice Morgan, because the lawsuit was still in its early stages.
The Supreme Court’s Decision
In a unanimous opinion by Justice Kagan, the Supreme Court reversed, holding that the contractual right to arbitrate should be treated as any other contractual right, and that the FAA does not authorize courts to add a prejudice requirement to the waiver analysis.
The Court held that the FAA does not permit courts to create arbitration-specific variants of procedural rules. Instead, the FAA’s policy favoring arbitration simply places a contractual agreement to arbitrate on the same footing as other contracts—meaning that a contractual right to arbitrate must be treated the same as any other contractual right. Outside the arbitration context, the Court observed, courts hold that a party waives a contractual right by knowingly relinquishing it—regardless of any prejudice to that party’s adversary. Placing arbitration agreements on the same footing as other contracts thus means applying the same waiver rules: a party need not demonstrate prejudice to show waiver.
In so holding, the Court pointed to § 6 of the FAA, which provides that applications under the FAA “be made and heard in the manner provided by law for the making and hearing of motions.” Because “the usual federal rule of waiver does not include a prejudice requirement,” the Court explained, “prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.”
The most obvious result of the Supreme Court’s decision is the direct ruling that courts should not consider prejudice to an opposing party when deciding whether a party has waived its right to arbitrate. The Court’s decision also resolves an important circuit split, helping to ensure that federal courts apply the FAA uniformly.
The Court declined to decide, however, whether state or federal law should apply to the waiver analysis, or even whether the correct analysis is one of “waiver” or of “forfeiture,” or some other doctrine. It is possible that the Eight Circuit will provide some guidance on these issues on remand.
More generally, the decision also reinforces an important principle for interpretation of the FAA: that agreements to arbitrate should be treated as any other contractual agreement. This principle has been reiterated by the Court in almost every recent decision regarding arbitration and so forms a backbone of recent arbitration jurisprudence. The decision in Sundance is notable, however, because while for the last several decades the Supreme Court has relied on its pro-arbitration policy to protect the right to arbitrate, here the Court’s decision will likely result in less arbitration overall by making a waiver finding easier. In this decision, then, the Court appears to have staked out the limits of its “pro arbitration policy” by rooting it firmly in equal, but not preferential, treatment of contracts to arbitrate.