The Federal Arbitration Act favors the enforcement of arbitration agreements. However, courts often apply a contract “waiver” rule if employers sit on their rights too long, meaning a party may waive the right to arbitrate if the party doesn’t compel it soon enough. But some courts required an additional showing that one party suffered prejudice when the other didn’t compel arbitration soon enough. But is a showing of prejudice necessary? The U.S. Supreme Court recently said no.
When a fast-food restaurant hired Robyn Morgan, she signed an agreement requiring her to arbitrate any employment dispute. Later, Morgan filed a nationwide collective action alleging that her employer violated the overtime rules under the Fair Labor Standards Act. The parties engaged in litigation and attended an unsuccessful mediation. Throughout this time, Morgan’s employer never mentioned the arbitration agreement. Almost eight months after the lawsuit was filed, the employer moved to stay litigation and compel arbitration under the Federal Arbitration Act (“FAA”). Morgan argued that her employer had waived the right to compel arbitration because it waited too long.
Supreme Court’s Ruling
The Supreme Court decided, “a court must hold a party to its arbitration contract just as the court would to any other kind.” Courts cannot make arbitration-specific rules inconsistent with federal law simply based on the FAA’s policy favoring arbitration. The federal law of waiver is clear: the only necessary showing is the “intentional relinquishment or abandonment of a known right.” Instead of looking at whether Morgan would be prejudiced by forced arbitration so far into litigation, the court should have only looked at whether her employer waived its known right to arbitrate by acting inconsistently with the agreement. Moving forward, if federal contract law would prevent enforcement of an arbitration agreement, despite the FAA’s policy favoring arbitration, “so be it.” Morgan v. Sundance, Inc., No 21-328, 596 U.S. __ (May 23, 2022).
Lesson Learned Employers should consult with their attorneys at the very outset of a lawsuit where the claim is subject to arbitration provision and decide at that time whether to resolve the claim in an arbitration or court setting. If the employer prefers to arbitrate the case, the employer should move to compel arbitration at the outset of the case, rather than after participating in litigation for months.