In a unanimous decision, the Supreme Court has rejected the rule that a party’s conduct inconsistent with the right to arbitrate will constitute a waiver of that right only if the opposing party was prejudiced by the conduct. In Morgan v. Sundance, Inc., issued May 23, the Court concluded that this rule, followed by nine federal circuits, was inconsistent with federal waiver law generally and was not justified by the federal policy favoring arbitration established by the Federal Arbitration Act (FAA).

The plaintiff brought a nationwide collective action under the Fair Labor Standards Act filed in the Southern District of Iowa. The plaintiff, however, had signed an agreement to “use confidential binding arbitration, instead of going to court,” to resolve any employment dispute. The employer litigated the case for nearly eight months as if no arbitration agreement existed: filing a motion to dismiss, answering the complaint after the motion to dismiss was denied (without mention of the arbitration agreement as an affirmative defense), and unsuccessfully attempting to mediate the claim. Only then did the employer seek to stay the litigation and compel arbitration. The plaintiff opposed, arguing the employer had waived its right to arbitrate.

Under prevailing Eighth Circuit precedent, waiver of the right to arbitrate could be found only where a party seeking arbitration “(1) knew of its existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by its inconsistent actions.” Erdman Co. v. Phoenix Land & Acquisition, LLC, 650 F.3d 1115, 1117 (8th Cir. 2011). Here, the district court concluded the petitioner had been prejudiced by the employer’s conduct and denied the motion to compel arbitration. The employer appealed, and the Eighth Circuit reversed, concluding that because the parties had not conducted discovery or contested the merits of the case, the delay resulting from the employer’s efforts to dismiss the matter had not prejudiced the petitioner. The petitioner then sought and obtained certiorari review on the question of whether the Eighth Circuit appropriately applied the arbitration-specific prejudice requirement to conclude no waiver had occurred.

The Supreme Court disposed of the question in a brisk seven-page opinion authored by Justice Kagan and joined by all members of the Court. The Court first observed that, outside the arbitration context, waiver law focuses on the conduct of the party holding the right, not the effect of that conduct on the counterparty, and thus asks only if the potentially waiving party intentionally relinquished or abandoned a known right. The Court then traced the origins of the prejudice requirement in the arbitration context to “a decades-old Second Circuit decision,” Carcich v. Rederi A/B Nordie, 389 F. 2d 692 (2d Cir. 1968). That decision premised the rule on the “overriding federal policy favoring arbitration,” concluding that mere delay without some resulting prejudice could not “carry the day” and overcome this preference for arbitration. Nearly every circuit court presented with this issue had subsequently followed suit, with only the Seventh Circuit and D.C. Circuit rejecting this approach.

The Supreme Court, however, found this longstanding rule to be misplaced. The FAA, the Court concluded, requires courts to treat arbitration agreements the same as all other contractual relations, and the policy favoring arbitration does not permit courts to “devise novel rules to favor arbitration over litigation.” Rather, if an “ordinary procedural rule” would “counsel against arbitration,” courts may not create arbitration-specific requirements to foster arbitration. The Court accordingly rejected the application of an arbitration-specific prejudice inquiry in determining whether the right to arbitrate has been waived.

In reaching this conclusion, the Court declined to address multiple issues raised by the parties, including alternative theories like forfeiture, estoppel, or laches, and the role of state law in analyzing these issues. Rather, because the appellate courts had generally applied a federal waiver analysis to resolve these issues, the Supreme Court assumed without deciding that this approach was appropriate. Accordingly, these issues remain open and present potential bases for asserting — or opposing — waiver of arbitration rights.

As the Supreme Court recognized, this decision strips the waiver inquiry of the prejudice requirement and directs courts assessing waiver of the right to arbitrate to consider only the conduct of the party seeking to compel arbitration, i.e., whether the party “knowingly relinquish[ed] the right to arbitrate by acting inconsistently with that right.” This ruling increases the risk that arbitration rights will be waived by engaging in litigation activity before asserting the right to arbitrate, and litigants must carefully consider whether a particular litigation strategy is “inconsistent” with arbitration. While the question of what conduct will amount to a knowing relinquishment of the right to arbitration doubtless will become a focus of future waiver cases, the safest course of action continues to be prosecuting a motion to compel arbitration — and nothing else — from the outset of any court case.

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Nathan Marigoni

Nathan represents clients in consumer litigation and business disputes, with a focus on complex litigation, consumer class actions, and appeals.

Photo of Anthony Kaye Anthony Kaye

Tony works behind the scenes as well as out front to help financial institutions successfully navigate Consumer Financial Protection Bureau (CFPB) investigations. He has significant experience defending clients in individual and class action lawsuits filed by consumers, and he has regularly managed teams…

Tony works behind the scenes as well as out front to help financial institutions successfully navigate Consumer Financial Protection Bureau (CFPB) investigations. He has significant experience defending clients in individual and class action lawsuits filed by consumers, and he has regularly managed teams of lawyers defending large portfolios of related cases.

Tony also helps financial services institutions in a wide variety of other government investigations, examinations, and enforcement actions.

Financial institutions routinely turn to Tony for guidance on compliance matters, including compliance with military lending laws, adequacy of consumer disclosures and agreements, arbitration agreements, credit reporting, fair lending, and navigating state and federal UDAAP/UDAP laws.

Tony has represented clients before the Utah and Nevada Supreme Courts, the U.S. Courts of Appeals for the District of Columbia, Third, Ninth, Tenth, and Eleventh Circuits, and the U.S. Supreme Court. In addition to judicial and administrative proceedings, he has substantial experience resolving disputes through mediation and arbitration.

Photo of Alan D. Wingfield Alan D. Wingfield

Alan Wingfield is a partner in the firm’s Consumer Financial Services practice, with a focus on Financial Services Litigation and consumer law compliance counseling. Alan has represented businesses in many venues nationally in class action and individual consumer litigation. Alan’s practice includes compliance…

Alan Wingfield is a partner in the firm’s Consumer Financial Services practice, with a focus on Financial Services Litigation and consumer law compliance counseling. Alan has represented businesses in many venues nationally in class action and individual consumer litigation. Alan’s practice includes compliance counseling to help businesses with the myriad federal and state consumer protection laws and laws regulating financial services companies.