On Monday, the U.S. Supreme Court, in Morgan v. Sundance, Inc., overturned the arbitration-specific waiver rules in nine circuits that had held a finding of prejudice was essential to determining whether a party had waived its right to arbitrate. Instead, courts should apply “ordinary procedural rules” — such as the federal law that waiver is the intentional relinquishment or abandonment of a known right (without a prejudice requirement) — to determine whether an arbitration agreement is enforceable.
What do arbitration-waiver rules have to do with class actions?
Thanks to a series of U.S. Supreme Court decisions — including Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp.; AT&T Mobility v. Concepcion; and American Express Co. v Italian Colors — arbitration clauses can be an effective tool for avoiding class-action litigation. Under the Supreme Court’s jurisprudence, there is essentially a presumption that arbitration will not be on a class basis unless the arbitration agreement provides for class arbitration. In fact, the Morgan case involved an FLSA collective action, which is an analog to class actions.
What happened in the Morgan case?
Morgan claimed that her employer violated the FLSA by failing to pay employees the overtime wages they were due. The employer initially defended itself as if no arbitration agreement existed. The employer filed a motion to dismiss claiming the suit was duplicative of an earlier suit, and when the motion to dismiss was denied, it filed an answer that asserted 14 affirmative defenses but never mentioned the arbitration agreement. The employer also engaged in mediation with Morgan. Then, after nearly eight months of litigation, the employer moved to compel arbitration.
The Eighth Circuit held that the employer had not waived the right to arbitrate because its actions did not prejudice Morgan. The Supreme Court, however, reversed noting that prejudice is not needed to establish waiver outside the arbitration context.
Significantly, the Supreme Court did not hold that the employer’s actions in litigating the case in court necessarily resulted in a waiver of the right to arbitrate. Instead, the Court’s “sole holding” was that courts may not make up new, arbitration-specific procedural rules to decide whether a party has waived its opportunity to compel arbitration.
What does the ruling in Morgan mean?
The Court remanded Morgan so that the Eighth Circuit could apply an “ordinary procedural rule” to determine whether the arbitration agreement could still be enforced. How the ordinary procedural rules get applied in the arbitration context remains to be seen. Going forward, defendants faced with a class action who may want to compel arbitration should be aware of their conduct to avoid triggering a waiver argument.