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May 23, 2022

U.S. Supreme Court Rejects Prejudice Requirement for Waiver of Arbitration

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Key Takeaways

  • The Court emphasized that while the Federal Arbitration Act (FAA) reflects a policy favoring arbitration, a court may not devise novel rules to favor arbitration over litigation.

The U.S. Supreme Court today held that waiver of the right to arbitrate does not require a showing that the other party was prejudiced.  The unanimous opinion by Justice Kagan in Morgan v. Sundance reversed the Eighth Circuit, which had held that a party waives the right to arbitrate if it knew of the right, acted inconsistently with that right and prejudiced the other party by its inconsistent actions.  The Court explained that the Eighth Circuit erred by creating an arbitration-specific waiver rule that favored arbitration, whereas federal waiver law generally does not require a showing of prejudice.  The decision resolves a circuit split in which nine circuits (including the Eighth) required a showing of prejudice, while two circuits did not.

The Court emphasized that while the Federal Arbitration Act (FAA) reflects a policy favoring arbitration, a court may not devise novel rules to favor arbitration over litigation.  The pro-arbitration policy of the FAA "is merely an acknowledgement of the FAA's commitment to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts."  The FAA's pro-arbitration policy "is about treating arbitration contracts like all others, not about fostering arbitration."

In this case, the petitioner brought a nationwide collective action against her employer for violating the Fair Labor Standards Act.  The employer initially defended the case in court, where it moved to dismiss the complaint and later filed an answer and numerous affirmative defenses, none of which mentioned arbitration.  It also engaged in mediation.  Not until eight months after the suit was filed did the employer move to compel arbitration under the FAA.  The Eighth Circuit concluded that prejudice must be shown in the arbitration context because of the federal policy favoring arbitration.  It found that there was no waiver of arbitration since the petitioner was not prejudiced and it sent the case to arbitration.  The Court remanded the case to the Eighth Circuit to resolve the waiver issue without considering prejudice.

While the Court in recent years has issued numerous opinions finding that arbitration should have been compelled under the FAA, today's ruling is a reminder that the policy favoring arbitration "make[s] ‘arbitration agreements as enforceable as other contracts, but not more so.'"

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