Source: Naomi D. Barrowclough at Lowenstein Sandler
Arbitration clauses in commercial and consumer contracts can be an effective tool for limiting the time and expense associated with litigation. However, parties always may decide to litigate, assuming neither party seeks to arbitrate. When one party engages in litigation conduct and only later moves to compel arbitration, the other party may argue that the arbitration right has been waived.
Federal and state courts disagree, however, on the proper standard for determining when a party has waived its right to arbitrate. In particular, courts are divided over whether a party seeking to avoid arbitration must affirmatively show that it has been prejudiced by the opposing party’s delay. Most courts (including the Second and Third Circuits) make prejudice a prerequisite to finding waiver in the arbitration context (thereby furthering the federal policy in favor of arbitration).
However, the Seventh and D.C. Circuits apply a traditional contractual waiver test that looks at whether a party’s litigation conduct is inconsistent with an intent to arbitrate, without regard to prejudice; and the Tenth Circuit applies a less rigid multifactor test, that considers prejudice as one factor among many. As noted in the petition for certiorari filed by the plaintiff in Morgan v. Sundance, Inc., “[t]his question not only divides the federal courts of appeals, but divides federal courts from geographically co-located state courts of last resort ….”
The question of what actually constitutes prejudice – in the jurisdictions that consider it – gives way to even greater differences in the standard’s application.
Clarity is on the way, as on Jan. 28, 2022, the Supreme Court scheduled oral argument for March 21, 2022, in Morgan v. Sundance, Inc., No. 21-328, a case that will squarely answer whether a party opposing arbitration on the ground of waiver must prove that it was prejudiced by the other party’s delay. Said another way, the Supreme Court will address whether “the arbitration-specific requirement that the proponent of a contractual waiver defense prove prejudice” violates the Supreme Court’s instruction in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) that lower courts must “place arbitration agreements on an equal footing with other contracts”
In Morgan v. Sundance, the plaintiff filed a putative Fair Labor Standards Act class action against defendant Sundance, an owner of more than 150 Taco Bell franchise locations, for failure to pay overtime. Sundance initially moved to dismiss Morgan’s complaint, citing the first-to-file rule and claiming that a similar suit filed in another court barred the plaintiff’s action.
Approximately four months later, the district court denied Sundance’s motion to dismiss, upon which Sundance answered Morgan’s complaint but did not assert its right to arbitrate. After Sundance answered, Morgan participated in a settlement mediation with plaintiffs from the related case. The mediation did not resolve Morgan’s claims, and nearly eight months after the filing of Morgan’s complaint, Sundance moved to compel arbitration.
The district court denied the motion, concluding that by participating in the litigation, Sundance waived its right to arbitration. The Eighth Circuit Court of Appeals reversed, holding that Sundance’s conduct, even if inconsistent with an intent to arbitrate, did not “materially prejudice” Morgan, as Morgan was merely required to respond to a motion to dismiss on a “quasi-jurisdictional issue, not the merits of the case.” Morgan v. Sundance, Inc., 992 F.3d 711 (8th Cir. 2021).
The Supreme Court’s upcoming ruling could make it easier for plaintiffs to argue that a defendant has waived its right to arbitration. For example, if the Court dispenses with the prejudice requirement entirely, a plaintiff will be able to argue a defendant has waived its arbitration right by inconsistent litigation conduct alone, regardless of any impact on the plaintiff.
Alternatively, if the Court preserves the prejudice requirement, it could choose to address what litigation conduct actually constitutes prejudice, bringing greater uniformity to waiver analysis across jurisdictions.
