United States Supreme Court Rejects Prejudice Requirement for Employees Asserting that their Employer has Waived its Arbitration Right When it Litigates before Moving to Compel Arbitration
In a unanimous decision issued on May 23, 2022, the Supreme Court in Morgan v. Sundance (596 US _ (2022)) held that courts may not make up new procedural rules based on the Federal Arbitration Act’s (FAA) policy of favoring arbitration. Specifically, the Supreme Court’s decision overturned the 8th Circuit precedent that imposed a requirement to show “prejudice” when asserting that a party has waived its right to arbitration after the employer has litigated a case seeking dismissal or asserting discovery, then later moving to compel arbitration.
The 8th Circuit’s test (similar to the (the 9th Circuit test) to determine whether a party has waived its right to arbitration included the following elements: (1) whether the party knew of the right; (2) whether the party “acted inconsistently with that right”; and (3) whether the other party was prejudiced by inconsistent actions taken by the alleged waiving party.
California state Courts require a different test. Code of Civil Procedure section 1281.2 allows the trial court to deny a petition to compel arbitration where “[t]he right to compel arbitration has been waived by the petitioner.” The term “waiver” as used in the statute is “ ‘a shorthand statement for the conclusion that a contractual right to arbitration has been lost.’ ” St. Agnes Medical Center v. PacifiCare of California et al. (2003) 31 Cal.4th 1187, 1195, fn. 4, 8 Cal.Rptr.3d 517, 82 P.3d 727 (St. Agnes).) Both federal and state law favor arbitration as a “ ‘speedy and relatively inexpensive means of dispute resolution.’ ” Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899.) Because the law favors arbitration, waiver will not be lightly inferred and the party asserting waiver “bears a heavy burden of proof,” with any doubts to be resolved in favor of arbitration. St. Agnes, supra, 31 Cal.4th at p. 1195, 8 Cal.Rptr.3d 517, 82 P.3d 727.)
“The relevant factors establishing waiver include whether the party’s actions are inconsistent with the right to arbitrate; whether the litigation machinery has been substantially invoked and the parties were well into the preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate; whether a party delayed for a long period before seeking a stay; whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place; and whether the delay affected, misled, or prejudiced the opposing party.” Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1204, 142 Cal.Rptr.3d 312; accord, St. Agnes, supra, 31 Cal.4th at p. 1196, 8 Cal.Rptr.3d 517, 82 P.3d 727.) “ ‘California courts have found a waiver of the right to demand arbitration in a variety of contexts, ranging from situations in which the party seeking to compel arbitration has previously taken steps inconsistent with an intent to invoke arbitration [citations] to instances in which the petitioning party has unreasonably delayed in undertaking the procedure. [Citations.] The decisions likewise hold that the “bad faith” or “willful misconduct” of a party may constitute a waiver and thus justify a refusal to compel arbitration. [Citation.]’ ” (Iskanian v. CLS Transportation Los Angeles, LLC. (2014) 59 Cal.4th 348, 374-375, 173 Cal.Rptr.3d 289, 327 P.3d 129 (Iskanian).) Waiver is not a mechanical process and no one factor is predominant. (St. Agnes, supra, 31 Cal.4th at p. 1195, 8 Cal.Rptr.3d 517, 82 P.3d 727.)
The 9th Circuit requires
In its decision, written by Justice Kagan, the Supreme Court rejected the prejudice prong of this three-part test on grounds that it isn’t a feature of general federal waiver law and held that the 8th Circuit erred when it invoked the federal pro-arbitration policy to create a new procedural requirement for waiving a party’s right to arbitration.
Citing Granite Rock Co. v. Teamsters, 561 U. S. 287, 302, the Morgan court held that the federal policy in favor of arbitration does not support the imposition of additional procedural requirements but should be viewed merely as “an acknowledgment 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 Petitioner in Morgan worked as an hourly employee at a Taco Bell franchise owned by respondent Sundance. The Petitioner, Robyn Morgan, signed a contract that included an arbitration provision whereby Morgan agreed to submit any employment disputes to arbitration. In spite of this arbitration clause, Morgan subsequently lodged a nationwide collective lawsuit claiming that Sundance had violated the Fair Labor Standards Act by failing to pay her for overtime work. In response, Sundance filed an answer which did not assert its right to arbitrate; filed a motion to dismiss; and then went on to defend itself in the lawsuit after its motion to dismiss was rejected.
Subsequently, Sundance made a motion at the district court to stay the litigation and asserted its arbitration rights under the FAA nearly eight months after the lawsuit was filed. Morgan opposed the motion on grounds that Sundance had waived its right to arbitrate by engaging in litigation for such a long time. The district court agreed with Morgan and denied the motion, reasoning that Sundance had waived its right to arbitration by participating in the litigation. However, the 8th Circuit Court of Appeals reversed on grounds that the FAA policy of favoring arbitration gave rise to a requirement that the party asserting that an arbitration right has been waived must show prejudice. Yet there was a split of authority on this issue because other courts had rejected such prejudice requirement. The Supreme Court thus granted certiorari in order to resolve the split and held that the federal policy of favoring arbitration under the FAA did not provide support for the imposition of a requirement that a party seeking to avoid arbitration on grounds of waiver must show prejudice.
The Supreme Court noted that Section 6 of the FAA provides that any application under the statute—including an application 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. In its unanimous opinion, the Court said the phrase “in the manner provided by law” means that courts should simply apply ordinary federal procedural rules when ruling on arbitration applications and that ordinary federal waiver rules do not include a prejudice requirement. Accordingly, the Court found that the language of the FAA does not permit courts to create an arbitration-specific procedural rule such as the prejudice requirement imposed by the 8th Circuit Court of Appeals.
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For the entire opinion, see the following website: https://www.supremecourt.gov/opinions/21pdf/21-328_m6ho.pdf