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Federal Courts May Not Make Up New Arbitration-Specific Procedural Rules
Robyn Morgan worked as an hourly employee at a Taco Bell franchise owned by Sundance. When she applied for the job, Morgan signed an agreement to arbitrate any employment dispute. Despite that agreement, Morgan filed a class action suit alleging Sundance had violated the Fair Labor Standards Act regarding overtime wages.
Sundance initially defended itself as if no arbitration agreement existed – it moved to dismiss the suit because it was duplicative of a class action previously brought by other Taco Bell employees. The trial court denied the motion, and Sundance raised a number of affirmative defenses, but none mentioned the arbitration agreement. Sundance also settled the other suit, but Morgan’s suit did not settle.
Then, eight months after Morgan filed the suit, Sundance filed a motion to compel arbitration under the Federal Arbitration Act (FAA). Morgan opposed the motion, arguing that Sundance waived its right to arbitration by litigating for so long. Under the test adopted by the Eight Circuit Court of Appeals, a party waives its contractual right to arbitration if it knew of the right and “acted inconsistently with that right,” and “prejudiced the other party by its inconsistent actions.” The trial court found this test was met in this case. On appeal, the Eight Circuit disagreed and sent the case to arbitration. The majority of the Eight Circuit panel reasoned that the parties had not begun formal discovery or contested the suit on the merits. Eight other federal courts of appeal also adopted an additional requirement that a plaintiff had to show they suffered from prejudice or harm by a defendant’s delay in enforcing an arbitration provision in litigation, while two courts of appeal rejected such a rule.
The U.S. Supreme Court reversed the Eight Circuit and overruled the eight other courts of appeal that also adopted the requirement of prejudice. The Supreme Court held that federal courts “cannot condition a waiver of the right to arbitrate on a showing of prejudice” and the Eight Circuit’s arbitration-specific rule runs afoul of the FAA. The Supreme Court reasoned that the FAA’s policy is to make arbitration agreements as enforceable as other contracts and therefore, the FAA does not authorize federal courts to invent procedural rules regarding arbitration. Moreover, the text of the FAA makes clear that courts cannot make up arbitration-specific procedural rules like the Eight Circuit’s test, as it directs federal courts to treat motions regarding arbitration in accordance with the usual federal procedural rules, such as rules relating to a motion’s timeliness.
Morgan v. Sundance, Inc. (2022) 142 S. Ct. 1708.
The Supreme Court held that arbitration agreements must be treated like any other enforceable contract. In other words, arbitration agreements cannot be disfavored or favored by virtue of requiring arbitration. Therefore, legal defenses against arbitration agreements should be treated the same as other legal defenses against other types of contracts. The Court also makes clear the policy of the Federal Arbitration Act is one that favors arbitration.