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Use it or Lose it: SCOTUS Eases Arbitration Waiver Analysis in Most Circuits, States

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Many contracts these days, including employment contracts, have provisions requiring that disputes be arbitrated rather than filed in a court. Nevertheless, a party to such an agreement will often file a lawsuit in court, and the other party has to file a motion asking the court to send the dispute to arbitration. When a party does not assert the right to arbitrate during the beginning stages of the lawsuit, they are often found to have waived the right to insist on arbitration.

Up until now, a party asserting that the other side waived the right to arbitrate had to show that the delay by the other party prejudiced it. For example, the party might argue that the delay by the other party in seeking arbitration caused it to engage in lengthy discovery (usually very limited in arbitration) and take legal positions it would not have if the matter had promptly been sent to arbitration.

On May 23, 2022, the U.S. Supreme Court unanimously decided in Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022) that there was no need for the party to show they have been prejudiced by the other party’s delay in seeking arbitration. This ruling simplifies the waiver analysis of all but two federal circuits, including the 9th Circuit (the circuit covering California, Oregon, Washington, and Alaska, among other states).

Prior to this decision, all but the Seventh and D.C. Circuits required a showing of prejudice to the other party to demonstrate that a party had waived its right to arbitrate. Prior to Morgan, the majority of circuits held that a party waives its right to arbitration if it knew of the right; “acted inconsistently with that right”; and “prejudiced the other party by its inconsistent actions.” Erdman Co. v. Phoenix Land & Acquisition, LLC, 650 F. 3d 1115, 1117 (8th Cir. 2011); see also ATSA of Cal., Inc. v. Continental Ins. Co., 702 F. 2d 172, 175 (9th Cir. 1983). The additional prejudice element was established to acknowledge the “federal policy favoring arbitration.“ Id.

In its short, unanimous decision, the Court disavowed the need to show prejudice to demonstrate a waiver of a right to arbitration. The Court reasoned that, “the federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” The Federal Arbitration Act (FAA) and the ensuing “federal policy favoring arbitration” was merely an affirmation that arbitration agreements must be enforced as regular contracts, not disfavored like the judiciary was previously inclined to do. The typical waiver analysis of other contracts requires no showing of prejudice, and thus no showing is required when examining an agreement to arbitrate. Ultimately, the Court did not determine whether Sundance had in fact waived its right to arbitrate, but remanded to the lower court to determine whether Sundance knowingly relinquished the right to arbitrate by acting inconsistently with that right —the traditional waiver analysis for most contracts.

Morgan will not only change the analysis in federal courts, but also in many state courts, which typically rely on federal law due to the preemptive scope of the FAA, and have likewise required a showing of prejudice. See, e.g., Romney for Estate of Romney v. Franciscan Med. Grp., 199 Wn. App. 589, 602, 399 P.3d 1220, 1227 (2017)(requiring a showing of prejudice to establish waiver); Drummond v. Bonaventure of Lacey, LLC, 20 Wn. App. 2d 455, 461, 500 P.3d 198, 201 (2021)(“The FAA also displaces laws that ‘covertly‘ undermine arbitration agreements.”)

Bottom line lesson for employers: If you have an arbitration agreement in place and want to rely on it to require an employee to arbitrate their claims, you need to assert that right at the earliest opportunity or risk losing it.

The legal issues impacting workplaces are ever changing (Employment Law in Motion!) and since publication, new or additional information not referenced in this blog post may be available. Employers should feel free to call on the Miller Nash team if you have questions or need assistance, and always consult with an attorney for legal guidance.