Supreme Court rules against arbitration in "waiver" case

The Federal Arbitration Act says that arbitration agreements, including those governing employment, must be honored. The FAA's reach is so broad that most challenges to arbitration usually fail in the Supreme Court. Not this one. This unanimous ruling says the company waited too long to invoke the arbitration clause.

The case is Morgan v. Sundance, Inc., issued by the Supreme Court on May 23. Morgan worked for Taco Bell. She filed a lawsuit over unpaid overtime, and her attorneys framed the case as a nationwide collective action. Problem was that Morgan signed an arbitration agreement at the outset of her employment. Many workers sign such an agreement without giving it much thought. We think about it when it's time to sue and the lawyers realize that no lawsuit is forthcoming and that the only to litigate the dispute is in arbitration, which -- let's be honest -- usually favors the employer.

What happened here is that Sundance, which owns the Taco Bell franchise, did not move to compel arbitration when Morgan filed her lawsuit. Sundance initially acted as if the arbitration agreement never happened. It moved to dismiss the lawsuit on other grounds, that the case was duplicative of another collective action. Sundance then filed an answer with 14 affirmative defenses, none of which mentioned the arbitration agreement. Then the case went to court-ordered mediation. After mediation failed, Sundance waited another eight months before moving to stay the litigation and compel arbitration under the FAA. The lower court said arbitration was in order because Sundance's waiver did not prejudice Morgan as the parties were just getting started in the litigation.

The Supreme Court reverses and says there is no "prejudice" component to arbitration-related waivers. Look buddy, waiver is waiver. While the FAA's policy favors arbitration, "the Eighth Circuit was wrong to condition a waiver of the right to arbitrate on a showing of prejudice." In federal practice, we don't ask about prejudice to the other party when someone waives a procedural right. That is now the rule in arbitration cases. 

The Second Circuit angle is that the prejudice component that the Supreme Court struck down in this case emanates from Carcich v. Rederi, 389 F.2d 692 (2d Cir. 1968), a very old case. Carcich ruled as it did because of the "overriding federal policy favoring arbitration." That reasoning spread around the federal system over the years. After 54 years, the Carcich precedent is put to rest. 

On remand, the Court says, the parties now have to litigate in federal court whether Sundance knowingly relinquished the right to arbitrate by acting inconsistently with that right.The Court of Appeals may consider whether a different procedural framework, such as forfeiture, is appropriate. But the Eighth Circuit cannot "make up a new procedural rule based on the FAA's 'policy favoring arbitration.'"