The United States Supreme Court just issued its unanimous decision in Morgan v. Sundance, Inc., No. 21-328 (U.S. May 23, 2022) (click here for a copy of the decision). In a nutshell, prejudice is not a required condition to find that a party waived its right to compel arbitration under the FAA.
Sometimes a defendant in a lawsuit may delay in arguing that the lawsuit must be dismissed or stayed because of an arbitration clause. A defendant may file a motion to dismiss on other grounds, or a defendant may file an answer to the plaintiff’s complaint without mentioning there is an arbitration agreement covering the dispute. Does such a delay in pointing out there is an arbitration clause waive the right to compel arbitration? In the past, in order to help preserve arbitration and promote a federal policy favoring arbitration, many courts would say that the plaintiff must demonstrate that the plaintiff was somehow prejudiced by the defendant’s delay in asking for arbitration. In effect, waiver was a high hurdle because of this prejudice requirement. Today, the Supreme Court held that federal courts cannot create “such an arbitration-specific procedural rule,” and prejudice is not a requirement under federal law.
The Court reasoned that under federal law, federal courts analyzing waiver tend to ask whether there is “an intentional relinquishment or abandonment of a known right.” This waiver analysis does not require a showing of prejudice, and according to the Supreme Court, it is inappropriate for federal courts to graft on an arbitration-specific requirement to this general waiver analysis. More generally, the Court recognized that courts should not make up a “new procedural rule based on the FAA’s policy favoring arbitration.”
There are, however, important qualifications or limits to the Court’s Sundance decision; the Court ducked some challenging questions in Sundance. For example, this fact pattern (where a defendant in federal court does not immediately ask the court to compel arbitration) could arguably be framed as a waiver, forfeiture, estoppel, or laches problem, but the Court stated it was not addressing these concerns. Furthermore, another critical question is whether this fact pattern is to be analyzed using state law or federal law. The Court stated that “today, we assume without deciding [that federal courts] are right [to apply a federal law of waiver.]” Thus, whether federal law or state law controls in these situations is still an open, undecided issue. The Court’s ruling could be interpreted in a narrow fashion: when a federal court is considering arbitration matters, the federal court should not develop arbitration-specific variants of federal procedural rules.
The practical impact of today’s Sundance decision is that defendants in federal court should not delay in asking the court to compel arbitration. A plaintiff in federal court probably does not have to show prejudice any more in order to demonstrate waiver. For example, defendants in federal court should immediately ask the federal court to enforce any purported arbitration agreement, instead of engaging in other litigation steps, such as moving to dismiss for failure to state a claim. If a defendant chooses to file an answer in federal court, the answer should include the defense that the dispute is covered by an arbitration agreement, and it seems the defendant should immediately follow the answer with a request to compel arbitration or stay litigation so that arbitration can occur. In this regard, I view today’s decision as pro-arbitration. Such a ruling encourages parties to immediately ask for arbitration, instead of delaying, and this rule in effect promotes the speedy resolution of disputes through arbitration.
How does this ruling apply in state courts? It is not entirely clear. The Sundance decision appears to be limited to federal courts. The decision is framed as analyzing whether “federal courts” can create arbitration-specific “procedural rules,” and typically, federal procedural law does not control in state courts. If a state court faces a possible waiver situation, does the state court apply federal law or state law? The Sundance opinion ducked this issue and kicked it down the road for another day. If a state court were inclined to apply a contractual waiver framework to this fact pattern, the state court should probably apply the same waiver doctrine it applies to any other contract. For example, if state waiver law requires a showing of prejudice, presumably, a state court must then treat the arbitration agreement the same as any other contractual right and require a showing of prejudice.
The Sundance decision is a bit frustrating. I wish the Court would have been more precise in developing an interpretative framework under the FAA instead of leaving issues undecided.
Also notice how the Court’s reasoning would undermine other FAA precedent. The Court in Sundance was critical of special rules developed from the FAA’s “policy favoring arbitration,” and the Court was careful to stress that under the FAA, courts should treat arbitration agreements like other contracts. Consider how this rationale would apply to the presumption recognized in the older Moses H. Cone case. In Moses H. Cone, the Supreme Court held that due to the federal policy favoring arbitration, doubts about the scope of arbitrable issues should be resolved in favor of arbitration. Thus, if it is ambiguous whether a consumer’s or worker’s particular claim is covered by an arbitration clause, courts under the older Moses H. Cone case should find the matter to be arbitrable. But under the reasoning of today’s Sundance opinion, special arbitration-specific rules should not arise from the purported policy favoring arbitration, and courts should instead treat arbitration agreements like other contracts. Under the contract law of most states, ambiguities are typically resolved against the drafter, and so in the example just mentioned about an ambiguous arbitration clause in a consumer or worker contract, the court should rely on typical contract principles and find that a claim is not covered by the scope of the ambiguous arbitration clause.