SCOTUS: Arbitrate Now Or Forever Hold Your Peace
Published date | 29 June 2022 |
Subject Matter | Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution |
Law Firm | Butler Snow LLP |
Author | Victoria Giese |
Believe it or not, our Supreme Court justices can unanimously agree on some things. For example, all nine justices were on board to resolve a circuit split regarding waiver of an arbitration agreement. Companies that include arbitration agreements in their contracts should be aware of the Court's recent decision Morgan v. Sundance, Inc., which limits a litigant's options if it wants to avoid waiving its right to arbitrate.
Before the Court decided Morgan, nine federal circuits invoked the Federal Arbitration Act's ("FAA") "strong policy favoring arbitration" to support an arbitration-specific waiver rule. Under that rule, a party waived its contractual right to arbitration if:
(1) it knew of the right;
(2) it acted inconsistently with that right; and
(3) it prejudiced the other party by its inconsistent actions.
Morgan v. Sundance, Inc., 142 S.Ct. 1708, 1712 (2022).
The circuit split emanated from the third requirement: prejudice to the other party. The Seventh and D.C. Circuits both allowed a finding of waiver of arbitration on a showing of only the first two elements, without imposing a prejudice requirement. The First, Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Eleventh Circuits, however, required a showing of prejudice as a crucial part of their waiver analysis.
The prejudice component required courts to analyze the status of the litigation so far: had formal discovery started? Had either party contested the case on the merits? According to the circuits that implemented it, the prejudice test balanced the FAA's "policy favoring arbitration" with the opposing party's time, money, and efforts already poured into the litigation.
Last month, the Supreme Court sided with the minority and did away with the prejudice requirement. It reasoned that, outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice. Waiver, as the Court has...
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