Yesterday, the Supreme Court established a clear rule that a party litigating in federal court cannot later compel arbitration by arguing that there was no harm to the opposing party. In Morgan v. Sundance, the Court unanimously held that a party opposing arbitration does not need to show that it experienced any prejudice in order to establish that the party attempting to invoke arbitration waived that right by pursuing litigation in federal court.[1]
The Court’s decision in Sundance resolved a circuit split over what test federal courts should apply to assess whether a party waived its right to compel arbitration. The Seventh Circuit and D.C. Circuit employed a two-element test for waiver, which required a party to show (1) knowledge of an existing right to compel arbitration and (2) intentional acts inconsistent with that right to arbitration. But the First Circuit, Second Circuit, Third Circuit, Fourth Circuit, Fifth Circuit, Sixth Circuit, Ninth Circuit, and Eleventh Circuit added a third element that made establishing waiver more difficult: the party opposing arbitration had to show that it experienced prejudice.[2] In a short seven-page opinion by Justice Elena Kagan, the Court endorsed the two-factor test.
The plaintiff in Sundance brought a nationwide collective action against her employer in federal court for violations of the Fair Labor Standards Act, despite having signed a confidential binding arbitration agreement for all employment disputes.[3] After litigating the case for nearly eight months in federal court, including filing a motion to dismiss, the defendant filed a motion to compel arbitration.[4] The plaintiff opposed the motion, arguing that the defendant had waived its right to arbitration by litigating for too long.[5]
Following the lead of eight other circuits, the Eighth Circuit applied the three-element test to determine waiver because of “the strong federal policy favoring arbitration.”[6] But in a surprising departure from the majority circuit rule, the Supreme Court rejected that approach, explaining that the Federal Arbitration Act does not authorize federal courts to create special, arbitration-preferring procedural rules.[7]
Sundance is a cautionary tale for parties seeking to enforce arbitration agreements. Without the additional hurdle of showing prejudice, plaintiffs will have a lower burden to show waiver if a defendant choses to litigate in federal court. Moving forward, companies will need to strategically consider whether and when to pursue arbitration in order to ensure they do not engage in acts that may waive their right to arbitration later on. If a company affirmatively litigates in federal court, arbitration likely will not be a fallback option.
[1] Morgan v. Sundance, Inc., No. 21-328, 2022 WL 1611788, at *4 (U.S. May 23, 2022).
[2] Id. at 3.
[3] Id. at 2.
[4] Id.
[5] Id. at 2-3.
[6] Id. at 3.
[7] Id. at 4–5.