Morgan v. Sundance, Inc.

Citation: Not availableDocket: 21-328

Court: Supreme Court of the United States; May 23, 2022; Federal Supreme Court; Federal Appellate Court

Original Court Document: View Document

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Robyn Morgan, a former hourly employee at a Taco Bell franchise, filed a collective action lawsuit against Sundance, her employer, for alleged violations of federal overtime payment laws, despite having signed an arbitration agreement. Initially, Sundance defended the lawsuit without mentioning arbitration, filing a motion to dismiss and participating in unsuccessful mediation. After about eight months, Sundance sought to compel arbitration under the Federal Arbitration Act (FAA), to which Morgan opposed, claiming Sundance had waived its right to arbitrate by its previous litigation actions.

The Eighth Circuit applied its precedent, which requires a showing of prejudice for a waiver of arbitration rights, a standard not universally accepted by other courts. The Supreme Court granted certiorari to address this discrepancy and ultimately held that the Eighth Circuit erred in imposing a prejudice requirement for waiving arbitration rights. The Court clarified that federal courts cannot create arbitration-specific procedural rules that deviate from general federal waiver law, emphasizing that the FAA's policy is to treat arbitration agreements on par with other contracts, not to promote arbitration over litigation. Section 6 of the FAA mandates that applications related to arbitration be handled according to standard federal procedural rules, which do not include a prejudice condition. Thus, the finding of waiver does not require showing prejudice under the FAA.

The Eighth Circuit's waiver inquiry will focus on whether Sundance knowingly relinquished its right to arbitration through inconsistent conduct. The Court of Appeals may address this question on remand or consider a different procedural approach, such as forfeiture. The Supreme Court held that it cannot establish a new procedural rule based solely on the FAA's policy favoring arbitration. 

Petitioner Robyn Morgan, an hourly employee at a Taco Bell franchise owned by Sundance, signed an arbitration agreement but later filed a collective action in federal court for Fair Labor Standards Act violations. Despite the arbitration agreement, Sundance initially defended the lawsuit without mentioning it and even moved to dismiss Morgan's case as duplicative of another collective action. Sundance's actions included suggesting Morgan join the prior suit or refile individually, but she declined, and the court denied the motion. Sundance then answered Morgan's complaint, asserting multiple defenses without addressing the arbitration agreement. 

This case raises questions about the timing of requests to switch to arbitration and whether the defendant's prior litigation conduct prejudiced the opposing party, a requirement that the Supreme Court ruled is not mandated by the FAA.

Sundance initiated a motion to stay litigation and compel arbitration under the Federal Arbitration Act (FAA), after eight months of litigation. Morgan opposed this, claiming Sundance had waived its right to arbitrate due to its prolonged involvement in the case. Sundance countered that its right was asserted promptly following a relevant Supreme Court decision that clarified arbitration would be bilateral. The courts applied Eighth Circuit precedent, which states a party waives its right to arbitration if it is aware of that right, acts inconsistently with it, and prejudices the opposing party through those actions. The District Court found that Morgan was prejudiced, but the Court of Appeals disagreed, reasoning that no formal discovery had begun. A dissenting opinion criticized Sundance for causing unnecessary expenses for Morgan and raised doubts about the Eighth Circuit's requirement for proving prejudice. The Supreme Court granted certiorari to address this circuit split on whether prejudice is necessary for a waiver of arbitration rights. The Court concluded that the Eighth Circuit erred by imposing a prejudice requirement for waiver, asserting that federal law does not typically consider prejudice in waiver assessments. Waiver is defined as the intentional relinquishment of a known right, focusing on the actions of the party holding the right without considering the impact on the opposing party.

A contractual waiver typically does not require proof of "detrimental reliance," as highlighted by Judge Colloton's dissent. The Eighth Circuit's requirement for such proof in arbitration cases represents a unique rule not found in other contexts, originating from a Second Circuit decision that emphasizes a federal policy favoring arbitration. This policy asserts that waivers of arbitration rights should not be easily inferred and that mere delay without prejudice does not suffice for finding a waiver. Over time, many circuits adopted a prejudice requirement, citing a national policy favoring arbitration. However, the Federal Arbitration Act (FAA) does not permit courts to create special procedural rules that favor arbitration. Instead, it mandates that arbitration agreements be treated equally to other contracts. The FAA's Section 6 explicitly requires that applications under the statute follow standard procedural laws, thereby prohibiting the creation of arbitration-specific rules. The Eighth Circuit's current waiver inquiry should not include a prejudice requirement; it should instead focus on whether Sundance knowingly relinquished its right to arbitrate through inconsistent actions. The Supreme Court vacated the Eighth Circuit's judgment and remanded the case for further proceedings, clarifying that no new procedural rules favoring arbitration may be established based on the FAA's policy.