Waiver of Arbitration Right Does Not Require Prejudice

The U.S. Supreme Court, in a unanimous decision, has held that waiver of the right to arbitrate should not be based on prejudice to or detrimental reliance by the party opposing arbitration. This will significantly affect the ability of a party to compel arbitration if that party has procrastinated in its decision.

A Taco Bell employee filed a lawsuit against the employer. The employer first tried to dismiss the lawsuit and then sought mediation, neither action meeting success. Eight months after the lawsuit had been filed, the employer sought to compel arbitration. The lower courts assessed the motion in the context of (a) action inconsistent with the intent to arbitrate, and (b) prejudice to the other side arising from the delay.

Under the Federal Arbitration Act, section 6, an application to compel arbitration “shall be made and heard in the manner provided by law for the making and hearing of motions . . .” Thus, the courts have evaluated such a motion in accordance with federal practice and procedure.

As the Supreme Court noted, federal courts considering the issue of waiver have typically held that “a finding of harm is essential.” Although nine federal circuits have applied a prejudice standard (prong (b) above), and only two have rejected it, the high court landed on the side of rejecting the additional standard.

The court noted that waiver of a right normally “focuses on the actions of the person who held the right.” There is no consideration of the effect of that action on the other party. The prejudice standard appears to have arisen from “an overriding federal policy favoring arbitration.” As noted by Justice Kagan, the policy has been to place agreements to arbitrate “upon the same footing as other contracts,” but not to give special status to arbitration agreements.

Accordingly, 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. . . If an ordinary procedural rule—whether of waiver or forfeiture or what-have-you—would counsel against enforcement of an arbitration contract, then so be it. The federal policy is about treating arbitration contracts like all others, not about fostering arbitration. (citations omitted)

So whether a party has waived its right to arbitrate will depend only on what that party has done or failed to do. And the analysis will not consider whether the opposing party has (or hasn’t) suffered any prejudice. The case is Morgan v. Sundance, Inc., 2022 U.S. LEXIS 2514 (May 23, 2022).