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Does your company have employees that sign agreements to arbitrate any disputes arising from their employment contracts? Then a recent U.S. Supreme Court case serves as a cautionary tale for companies looking to enforce these arbitration agreements.  The lesson is to demand arbitration as early as possible or else you risk waiving the right if you make a motion to compel arbitration later down the road.

On May 23, 2022, the United States Supreme Court decided Morgan v. Sundance, Inc., which concerned the correct test to apply when deciding whether a party has waived the right to arbitrate.  In this case, Plaintiff was an hourly employee at a Taco Bell owned by Sundance.  He later filed a nationwide collective action suit against Sundance, alleging wage and hour violations.  In Plaintiff’s employment contract, he signed an agreement to arbitrate any employment disputes.  However, the Defendant litigated the case in federal court for several months making motions to dismiss, answering the complaint, and attending mediation, before ultimately making a motion to compel arbitration under the Federal Arbitration Act (“FAA”).  The issue for the Court was whether the Defendant had waived their right to arbitrate the matter.

The case comes from the 8th Circuit where a party waives his arbitration rights if the party (1) had knowledge of the right, (2) acted inconsistently with the right, and (3) prejudiced the other party with their inconsistent actions.  Some Circuits have adopted a similar rule, but others have rejected the prejudice requirement.  The 8th Circuit reasoned that the FAA’s federal policy favoring arbitration supported a “prejudice” requirement for waiver.  Applying that framework, the District Court found the prejudice requirement satisfied, and denied Sundance’s motion to compel arbitration.  However, the 8th Circuit reversed, finding that there was no prejudice to the Plaintiff because no discovery occurred and no matters going to the merits of the claim had been decided.  The Supreme Court granted certiorari to resolve the Circuit split as to this issue.

In a unanimous opinion, the Court held that the 8th Circuit erred in conditioning a waiver of the right to arbitrate on prejudice to the other party.  The Court further held that court should not create arbitration-specific federal procedural rules because of the general policy favoring arbitration.

The holding effectively ends the “prejudice” requirement for waiver of the right to arbitrate.  This means that if a party has knowledge of the right to arbitrate and acts inconsistently with that right, they waive their right.  Thus, if a party seeks to compel arbitration after litigating the case in court, they run the substantial risk of forfeiting their right to arbitrate, unless they can prove lack of knowledge (a difficult task for employers).  The takeaway is to make sure to demand arbitration early-on in the litigation, as it will be very difficult to compel arbitration later down the road without the ability to argue a lack of prejudice to the opposing party.