Seyfarth Synopsis: The Supreme Court held that no showing of prejudice is necessary to establish a waiver of the right to arbitrate. The validity and enforceability of arbitration agreements themselves is not affected by this ruling.
Followers of this blog, and of wage and hour litigation generally, have seen an unbroken string of victories at the U.S. Supreme Court for employers who have sought to compel threatened class and/collective actions into individual arbitration. So when a fast-food worker brought a purported nationwide FLSA collective action against her employer in federal district court in Iowa, and the employer ultimately moved to compel arbitration, one might assume that a grant of cert from Supreme Court meant that this collective action is destined to be heard by an arbitrator in individual arbitration. Not so fast.
This time, in Morgan v. Sundance, Inc., the Supreme Court ruled against the employer and held that the employer could not compel this matter to arbitration, at least not yet. How did this happen? Is the Supreme Court now backing off of its pro-arbitration stance? Hardly. Despite some characterizing this week’s arbitration decision as a “win for workers,” the Supreme Court’s ruling is a limited one that applies to a narrow class of cases: those where a party, for whatever reason, did not assert its right to arbitrate at the outset of litigation.
What happened here is that, after the plaintiff filed her putative collective action, the employer filed a motion to dismiss in federal court and then engaged in mediation, neither of which resulted in ending the case. Then, eight months after the complaint was filed, the employer moved to compel arbitration. The plaintiff-employee contended that the employer waited too long and thus waived its contractual right to compel arbitration, but on appeal, the Eighth Circuit held that the delay didn’t equate to a waiver because it didn’t prejudice the employee.
That’s when the Supreme Court stepped in to decide whether courts should consider the impact of the waiver on the plaintiff in deciding whether a defendant waived its right to arbitrate. The Supreme Court held that they should not.
In its holding, the Supreme Court noted that arbitration agreements are like any other contract, and when a court decides if a party waived a right in any other context, the court should consider only: (1) whether the party knew of its contractual right and (2) whether the party intentionally relinquished or abandoned that right. In contracts generally, courts do not consider how the waiver of a right affects the other party. The analysis is focused only on the action of the waiving party. Here, the Supreme Court held that the same analysis applies to the waiver of arbitration agreements. In other words, arbitration agreements are just like any other contract and should be treated as such. The Supreme Court reached this decision despite its oft-cited command that the Federal Arbitration Act constitutes a “congressional declaration of a liberal federal policy favoring arbitration agreements,” explaining that this policy means that the FAA acts to even the playing field between arbitration agreements and other contracts and does not permit courts to take an extra step to privilege arbitration agreements above contracts concerning other subjects.
The Supreme Court therefore remanded the case for a determination of whether the employer waived or forfeited its right to arbitrate, but without consideration of prejudice to the opposing party. It is entirely possible that, under whatever standard is used, the employer still will be able to compel arbitration despite its delay.
What does this mean for employers? Are the validity of arbitration agreements now undermined? No! Nothing in the Supreme Court’s ruling affects the right of employers to mandate that employees agree to arbitrate certain disputes, including wage-hour claims, in arbitration, and on an individual basis only, and nothing in the ruling detracts from an employer’s ability to enforce such an agreement if it timely does so. This ruling is simply a procedural matter. In the vast majority of cases, defendants assert the right to arbitrate immediately, as there is usually no reason to wait. In those cases where employers and their counsel decide that waiting to compel arbitration is in the employer’s best interest, this Supreme Court ruling simply says that courts will no longer consider whether the waiting period injured the plaintiff. Thus, it will be easier for a plaintiff-employee to demonstrate that the employer waived its right to compel arbitration because the additional requirement of prejudice is now removed. So while some have framed this Supreme Court ruling as a win for employees and a detriment to employers on the validity and enforceability of arbitration agreements, including class waivers contained within them, they are just as enforceable as ever. That said, waiting to enforce such agreements just became a bit more risky.