by Stacey Nakasian | In a recent decision, the United States Supreme Court held that a party who knowingly litigated a claim in court that was subject to arbitration could not later move the dispute to arbitration even though no prejudice resulted to the opposing party. This decision overrules the test previously used in most federal circuits for determining when a party waives its right to arbitration.
Arbitration provisions are increasingly common in all sorts of contracts, from construction to employment to consumer agreements. Such provisions require contracting parties to resolve their disputes through arbitration rather than court litigation. If a party to such a contract brings a lawsuit relating to a dispute covered by the arbitration provision, the other party may request that the dispute be submitted to arbitration instead. Courts routinely grant such requests and, in doing so, often rely on a judicial policy in favor of arbitration. The United States Supreme Court, however, recently clarified that that policy does not include special rules for contract waiver in the context of arbitration agreements.
In Morgan v. Sundance, Inc., (2022), an employee sued her employer in federal court alleging a violation of the Fair Labor Standards Act. The dispute was subject to a clear and undisputed arbitration agreement. Despite that fact, the employer did not immediately seek to have the federal action submitted to arbitration. Instead, the employer moved to dismiss the action on other grounds and participated in an unsuccessful mediation. Only after those proceedings, which took almost eight months, did the employer move to compel arbitration. The question considered by the Supreme Court was whether the employer, through its actions in the litigation, waived its right to enforce the arbitration agreement.
The Eight Circuit Court of Appeals found no waiver based on the following test: (1) whether the party seeking to enforce the arbitration provision knew of its contractual right to arbitration, (2) whether the party acted inconsistently with that right, and (3) whether the party’s actions prejudiced the other party to the dispute.
The Supreme Court reversed and held that no showing of prejudice is required to establish waiver of a right to arbitrate. The Court noted that general contract law does not requires a showing of prejudice to establish waiver of a contract right. The prejudice requirement applied by the Eight Circuit, according to Supreme Court, was wrongly added by courts in the arbitration context to advance their policy in favor of arbitration. The Supreme Court advised that the federal policy favoring arbitration is a policy to make arbitration agreements as enforceable as other contracts, but not more so.
Under the new rule adopted by the Supreme Court, a party who even for a brief time litigates a claim in federal court that it knows is subject to arbitration provision risks waiving its right to compel arbitration of the dispute. Based on this ruling, lawyers should advise clients that if they fail to promptly invoke and enforce their rights to arbitration, they may be found by a court to have waived them.
Robert Duffy and Stacey Nakasian are members of the American Arbitration Association’s panel of arbitrators. They understand that parties choose arbitration to avoid the expense and time involved litigating disputes through the court system. As arbitrators, Bob and Stacey are committed to managing cases to achieve efficiencies while ensuring that matters are fully and fairly adjudicated.