The Supreme Court has decided Morgan v. Sundance Inc., No. 21-328, ruling unanimously that there is no prejudice requirement under the Federal Arbitration Act (“FAA”) for a court to find a waiver of arbitration rights.
We reported in December 2021 that the Supreme Court had granted Certiorari in four cases involving arbitration, among them Sundance. Specifically, the Court on November 15 agreed to review Morgan v. Sundance Inc., 992 F.3d 711 (8th Cir. 2021), a case we analyzed in SAA 2021-43 (Nov. 18). In the underlying case, the Eighth Circuit held that a party asserting another had waived its right to arbitrate has to prove prejudice. The Court heard oral argument on March 21 (the transcript is here; audio recording is here).
Case Below and Waiver of Arbitration Rights
We covered this case in detail in SAA 2021-47 (Dec. 16) and in a feature article, After a Lull in 2021, a Busy Year Ahead Arbitration-wise for SCOTUS, 2021:48 Sec. Arb. Alert 1 (Dec. 23, 2021). We borrow from our past coverage to provide below a thumbnail on the issues involved. Cases involving whether a party has waived its right to compel arbitration typically involve whether that party participated in litigation and waited too long. The basic elements are whether the offending party: 1) had knowledge of its right to demand arbitration; 2) acted inconsistently with that right; and 3) thereby prejudiced the other party. The case below focused on the third element, with the Eighth Circuit majority holding that Sundance did not wait too long to press its arbitration rights and its conduct had not prejudiced Morgan:
“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, not the merits of the case. For these reasons, we hold Morgan was not prejudiced by Sundance’s litigation strategy.  In the absence of a showing of prejudice to Morgan, we conclude Sundance did not waive its contractual right to invoke arbitration.”
Issue Before SCOTUS
The question presented in the August 2021 Certiorari Petition was: “Does the arbitration-specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction that lower courts must ‘place arbitration agreements on an equal footing with other contracts?’ [in] AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011).” The Petition notes that there is a significant split on the issue:
“This Court should grant certiorari to resolve a longstanding circuit split on the question whether a party asserting waiver of the right to arbitrate through inconsistent litigation conduct must prove prejudice, and if so, how much. This question not only divides the federal courts of appeals, but divides federal courts from geographically co-located state courts of last resort.…”
The Oral Argument
The oral argument took place as scheduled with eight Justices participating. As revealed in a Press Release, Justice Thomas was out ill. Chief Justice Roberts announced up front before the argument that he would: “participate in consideration and decision of the cases on the basis of the briefs and the transcripts of oral argument.” We had thought the issues were fairly simple as framed in the Petition: is this State rule of law, requiring a finding of prejudice, arbitration-specific and thus preempted by the FAA or does it apply to contracts in general and thus FAA compatible? But, the arguments were anything but simple. The discussion at times was esoteric (ed: not just our view), with the meanings of waiver, estoppel, forfeiture, and laches being debated. The prejudice requirement was not covered until well into the argument. The debates settled down to whether the outcome was governed by FAA section 3 (“ … providing the applicant for the stay [of litigation of an arbitrable matter] is not in default in proceeding with such arbitration”) or section 4 (“… if the jury find that an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof”). At one point, there was a short colloquy about whether the Petition should be dismissed as improvidently granted – just as happened in Henry Schein, Inc. v. Archer and White Sales, Inc., No. 19-963.
Unanimous SCOTUS: No Prejudice Requirement
The unanimous Opinion by Justice Kagan holds that the FAA’s pro-arbitration slant does not require a showing of prejudice:
“Most Courts of Appeals have answered that question [of waiver] by applying a rule of waiver specific to the arbitration context. Usually, a federal court deciding whether a litigant has waived a right does not ask if its actions caused harm. But when the right concerns arbitration, courts have held, a finding of harm is essential: A party can waive its arbitration right by litigating only when its conduct has prejudiced the other side. That special rule, the courts say, derives from the FAA’s ‘policy favoring arbitration.’ We granted certiorari to decide whether the FAA authorizes federal courts to create such an arbitration-specific procedural rule. We hold it does not.”
FAA Does Not Support An Arbitration-Specific Rule
Justice Kagan adds that an arbitration-specific rule – even one fostering arbitration – is not supported by the FAA:
“And indeed, the text of the FAA makes clear that courts are not to create arbitration-specific procedural rules like the one we address here. Section 6 of the FAA provides that any application under the statute—including an application to stay litigation or compel arbitration— ‘shall be made and heard in the manner provided by law for the making and hearing of motions’ (unless the statute says otherwise). A directive to a federal court to treat arbitration applications ‘in the manner provided by law’ for all other motions is simply a command to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness. Or put conversely, it is a bar on using custom-made rules, to tilt the playing field in favor of (or against) arbitration. As explained above, the usual federal rule of waiver does not include a prejudice requirement. So Section 6 instructs that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.”
No ”Arbitration Quartet”
We had in past coverage wondered out loud of SCOTUS was setting up another “Steelworkers Trilogy” scenario, when the Court six decades ago simultaneously decided three landmark arbitration cases involving the United Steelworkers. The three cases, United Steelworkers v. American Manufacturing Co., 363 U.S. 564 (1960); United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593 (1960); and United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574 (1960), were all heard the same week (April 27-28, 1960), and the decisions were all announced seriatim on the same day (June 20, 1960). “Is SCOTUS planning a redux with the ‘Arbitration Quartet’?, we mused. Now, we have our answer.
(ed: *As described above, the briefs and oral argument featured many issues. The Court avoids them: “We decide today a single issue, responsive to the predominant analysis in the Courts of Appeals, rather than to all the arguments the parties have raised.” **The May 23 CPR Blog has a nice analysis: Supreme Court Rejects Prejudice Requirement for Defeating a Motion to Compel Arbitration. ***We eschewed predicting the outcome here, opining that the case was “too close to call.”)
This article first appeared on the Securities Arbitration Alert Blog, here.
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