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In Morgan v. Sundance, Inc., No. 21-328, 2022 WL 1611788, at *1 (U.S. May 23, 2022), the United States Supreme Court just dealt another blow to employers’ use of arbitration agreements. As regular readers of our blog know, our employee’s rights attorneys hate arbitration agreements and take every effort to fight against them. (Best Law Read: President Biden Signs The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act Into Law; Myth Busted: Arbitration Not Cheaper Than Litigation; How Do I Get Out Of My Employer’s Arbitration Clause?).

The way employers’ arguments typically go is that pursuant to the Federal Arbitration Act (FAA) arbitration is favored and therefore, courts should essentially find a way to push the case into arbitration. Many courts unfortunately accept this argument and treat alleged arbitration agreements substantially more favorable than any other contract. For instance, many courts will ignore “the paradigm elements essential to contract formation [which are], offer, acceptance, consideration.” Helle v. Landmark, Inc., 15 Ohio App.3d 1, 8, 472 N.E.2d 765, 773 (6th Dist.1984). These courts will simply say that the employee was told or notified of the arbitration requirement; or that they signed an application that mentioned arbitration despite the fact that the applicant received no consideration and neither party will be bound by it.

In Morgan, the United States Supreme Court took the case up from the United States Court of Appeals for the Eighth Circuit, which tacked on a requirement for the employee to show that the employer waived any right to arbitration. In Morgan, an hourly employee at a Taco Bell franchise signed an arbitration agreement. No argument was addressed in the United States Supreme Court about whether the contract was properly formed. Instead, the issue argued in front of the high court was whether the employer waived the right to arbitrate.

The employee filed a nationwide collective action asserting that Sundance had violated the Fair Labor Standards Act (“FLSA”) regarding overtime payment. After the wage theft claim was filed, the employer proceeded in court to defend the claims, including filing a motion to dismiss (which the District Court denied), and then used the court to mediate the claims. Eight months into the lawsuit, the employer pulled out the arbitration agreement and moved the district court to force the case into arbitration.

The United States Court of Appeals for the Eighth Circuit held that a party only waives its right to arbitration if (1) it knew of the right; (2) “acted inconsistently with that right”; and (3) “prejudiced the other party by its inconsistent actions.” The United States Supreme Court rejected this standard, holding that the “prejudice requirement is not a feature of federal waiver law generally. The Eighth Circuit adopted that requirement because of the ‘federal policy favoring arbitration.’” Id. at *1. As such, in order to show that an employer waived the right to arbitration, an employee must only show that: (1) the employer knew of the right; and (2) acted inconsistently with that right. Under this standard, there can be no added other requirements, such as some other courts who require a showing that the employer somehow benefited from the litigation process in order to establish a waiver. Indeed, the High Court says that only one question remains: “Did Sundance knowingly relinquish the right to arbitrate by acting inconsistently with that right?” Id. at *2. That is it.

The standard set by the United States Supreme Court does not say that the inconsistent actions are limited to participating in litigation. Courts outside the issue of arbitration have found waiver pre-litigation. For example, in Little Beaver Enterprises v. Humphreys Railways, Inc., 719 F.2d 75, 79 (4th Cir. 1983), the United States Court of Appeals for the Fourth Circuit held that a provision demanded written notice may be waived if other notice is provided and the other party does not demand written notice as contracted for:

Like other contract provisions, the requirement of written notice may be waived. 6 S. Williston Contracts §§ 887B, 887BB (3d ed. 1962 & Supp.1982); see also 28 Am.Jur.2d Estoppel and Waiver § 162 (1966 & Supp.1983). The waiver need not be expressed to be effective; it is sufficient if the acts or conduct of one party evidences an intention to relieve the other party of his duty to strictly comply with the contract terms. 28 Am.Jur.2d Estoppel and Waiver § 160 (1966 & Supp.1983). Generally, this implied waiver is most often recognized where the party’s conduct is inconsistent with any other intention than the waiver of contract rights or where the party accepts alternative performance which provides roughly the same protections as strict performance would have provided.

In Reno v. Beckett, 555 F.2d 757, 769 (10th Cir. 1977), the United States Court of Appeals for the Tenth Circuit held: “To establish a waiver here, appellants must show some positive action or inaction by appellees inconsistent with retention of the absolving clause, and appellants must show that such action or inaction occurred at a time when the … clause was still operative.” Arguably, taking no action to demand or initiate arbitration in response to a notification of claims before the lawsuit is filed would fit this requirement.

However, more important than narrowing the requirements for waiver, the United States Supreme Court held: “The Court’s sole holding today is that it may not make up a new procedural rule based on the FAA’s ‘policy favoring arbitration.’” Id. at *2. The Court further held that “a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation.”

In making this holding, it blocks employers’ mantra of pointing to the FAA to gain special and more favorable treatment for arbitration. “The text of the FAA makes clear that courts are not to create arbitration-specific procedural rules like the one here.” Id. at *1.

While I’m quite certain employers will continue to seek favorable treatment for arbitration agreements, the United States Supreme Court has given another weapon to fight such arguments.

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