Supreme Court rules Taco Bell franchisee waited too long to compel arbitration of employee wage dispute

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Based on the Supreme Court’s ruling in a recent case, detailed below, parties to litigation looking to enforce arbitration provisions in contracts must not sit on their hands and wait for months prior to seeking a stay of litigation to compel arbitration. If a party waits too long, it may waive its right to compel arbitration even if the other party to the litigation is not prejudiced by the delay.   

Morgan V. Sundance

Robyn Morgan worked as an hourly employee at a Taco Bell franchise owned by Sundance, Inc. in Iowa. When applying for the job, she signed an agreement to “use confidential binding arbitration, instead of going to court,” to resolve any employment dispute. Despite that agreement, Morgan brought a nationwide class action suit against Sundance in federal court for violations of the Fair Labor Standards Act (FLSA). Under the FLSA, employers must pay overtime to covered employees who work more than 40 hours in a week. Morgan alleged that Sundance routinely flouted the FLSA by recording extra hours under the wrong week to prevent any week’s total from exceeding 40 hours.

Sundance initially defended itself against Morgan’s suit as if no arbitration agreement existed. Then—nearly eight months after the filing of Morgan’s suit—Sundance changed course and moved to stay the litigation and compel arbitration under Sections 3 and 4 of the Federal Arbitration Act (FAA).

What is the FAA?

When a party who has agreed to arbitrate a dispute instead brings a lawsuit, the FAA entitles the defendant to file an application to stay the litigation. But defendants do not always seek that relief right away. Sometimes, they engage in months, or even years, of litigation—filing motions to dismiss, answering complaints, and discussing settlement— before deciding they would fare better in arbitration. When that happens, the court faces a question—has the defendant’s request to switch to arbitration come too late?

Usually, a federal court deciding whether a litigant has waived a right does not ask if its actions caused harm. But when the right concerns arbitration, certain courts have held, a finding of harm is essential. A party can waive its arbitration right by litigating only when its conduct has prejudiced the other side. That special rule, the courts say, derives from the FAA’s “policy favoring arbitration.”

In Morgan’s case, the U.S. District Court applied Eighth Circuit Court of Appeal’s precedent to decide the waiver issue in favor of Morgan. Under the Eighth Circuit’s test, a party waives its contractual right to arbitration if it knew of the right, acted inconsistently with that right, and prejudiced the other party by its inconsistent actions. The U.S. District Court held that Sundance prejudiced Morgan by waiting eight months after the suit was filed to compel arbitration. Sundance appealed the U.S. District Court’s decision to the Eighth Circuit, and the Eighth Circuit reversed the decision and sent Morgan’s case to arbitration. Morgan then appealed the Eighth Circuit’s decision to the Supreme Court.

FAA’s “policy favoring arbitration”

The Supreme Court agreed to accept the case to decide a split among Circuit Court of Appeals as to whether or not prejudice is needed for a waiver of arbitration rights under the FAA, and whether courts may create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s “policy favoring arbitration.”

On May 23, 2022, the Supreme Court unanimously held that the FAA’s “policy favoring arbitration” does not authorize federal courts to invent special, arbitration-preferring procedural rules to favor arbitration over litigation. Accordingly, a court must hold a party to its arbitration contract just as the court would to any other kind and prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.

The case is Morgan v. Sundance, Inc., argued on March 21, 2022 and decided on May 23, 2022.

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