U.S. Supreme Court Adds Arbitration Issue: Is Proof of Prejudice Needed to Defeat a Motion to Compel

This morning, the U.S. Supreme Court granted certiorari and agreed to hear the petition in Morgan v. Sundance, Inc., No. 21-328, in which the Question Presented is:

Does the arbitration-specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction [in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)] that lower courts must “place arbitration agreements on an equal footing with other contracts?”

In this case, Robyn Morgan, an employee at an Osceola, Iowa, Taco Bell, brought a proposed Fair Labor Standards Act class action in court against employer Sundance Inc., a company that owns more than 150 Taco Bell franchises, according to Morgan’s cert petition.

Morgan alleged in the class action that Sundance did not pay Taco Bell franchise employees for all the hours they worked. Sundance eventually moved to require Morgan to arbitrate her claims.

In substance, this dispute involves the question of whether one party arguing that a second party has waived its right to arbitration must show prejudice resulting from the second party’s delay in asserting the right to arbitrate the dispute.

An Iowa federal district court determined that Sundance had waived its right to require arbitration because the company waited too long, and that Morgan was harmed by costs and efforts in defending the court litigation, instead of getting ready for arbitration.

The requirements to be met to show waiver of a right to arbitrate, said the Eighth U.S. Circuit Court of Appeals, are:

A party waives its right to arbitration if it: “(1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts.”

The Court of Appeals rejected Morgan’s argument that Sundance waited too long and engaged in too much judicial conduct to effectively waive Sundance’s right to arbitrate the dispute. In doing so, the Court of Appeals held that Morgan had failed to show prejudice sufficient to succeed on the waiver argument. Morgan v. Sundance Inc., 992 F.3d 711 (8th Cir. 2021) (available at https://bit.ly/3nqL7sJ).

The appellate panel–in a 2-1 decision–disagreed with the lower U.S. District Court finding of prejudice, concluding that part of the delay was attributable to the time the district court spent deciding Sundance’s motion to dismiss on quasi-jurisdictional grounds, no discovery was conducted, and the efforts on the motion to dismiss did not duplicate efforts Morgan would have to spend in the arbitration. The majority opinion stated:

The district court found Morgan was prejudiced by having to respond to Sundance’s motion to dismiss over the eight-month span of litigation. We disagree. Four months of the delay entailed the parties waiting for disposition of Sundance’s motion to dismiss. No discovery was conducted. And, the record lacks any evidence that Morgan would have to duplicate her efforts during arbitration. Instead, most of Morgan’s work focused on the quasi-jurisdictional issue [addressed by Sundance’s motion to dismiss], not the merits of the case. For these reasons, we hold Morgan was not prejudiced by Sundance’s litigation strategy.

Morgan then petitioned the Supreme Court in August to determine whether she was required to show prejudice to prove that Sundance waived its right to arbitrate, arguing that she would not be required to make such a showing for other types of contracts under applicable law.

Morgan has now persuaded the Court to take up the case for a hearing on the extent of AT&T Mobility’s reach sometime in 2022. The Court’s order this morning accepting the case—the sole cert granted in today’s order list—can be found here.

An argument date is expected to be scheduled soon. If argued this term, it will be the second arbitration case to be heard in the 2021-2022 Court year. Earlier this month, the Court heard arguments in Badgerow v. Walters, No. 20-1143, a case involving the federal courts’ jurisdiction under the Federal Arbitration Act. For more, see Russ Bleemer, “Supreme Court Hears Badgerow, and Leans to Allowing Federal Courts to Broadly Decide on Arbitration Awards and Challenges,” CPR Speaks (Nov. 2, 2021) (available at https://bit.ly/30tIRI5).

Here is the Court’s official Morgan v. Sundance docket page, with case materials. More materials and analysis can be found on Scotusblog, here.

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Mark Kantor is a member of CPR-DR’s Panel of Distinguished Neutrals. Until he retired from Milbank, Tweed, Hadley & McCloy, he was a partner in the firm’s Corporate and Project Finance Groups. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). He also is Editor-in-Chief of the online journal Transnational Dispute Management. He is a frequent contributor to CPR Speaks, and this post originally was circulated to a private list serv and adapted with the author’s permission.

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