CASE PREVIEW

Is turnabout fair play under the Federal Arbitration Act?

The Federal Arbitration Act requires courts to enforce arbitration agreements in most circumstances. But what happens if a party begins to litigate a case, and then seeks to compel arbitration several months later? Most courts have held that the arbitration agreement is still enforceable unless the other party has been prejudiced. In Morgan v. Sundance, which will be argued on Monday, the Supreme Court will consider whether this is the correct rule.

Sundance, Inc. is a Taco Bell franchisee that operates over 150 locations in multiple states. Robyn Morgan worked at a Sundance-owned Taco Bell in Iowa in 2015, and the application that she used to apply for her job contained an arbitration clause. Later, Morgan alleged that Sundance systematically violated wage-and-hour law in various ways, and she filed a lawsuit on behalf of all of Sundance’s hourly employees in federal district court in Iowa.

Morgan was not the first of Sundance’s employees to sue over the company’s pay practices; another lawsuit, Wood v. Sundance, had been filed in Michigan, though the court in that case had limited its scope to Sundance’s Michigan restaurants. Sundance responded to Morgan’s suit first by asking the Iowa court to dismiss the case as duplicative of Wood, arguing that Morgan could pursue her case “on an individual basis before this Court.” The Iowa court rejected Sundance’s argument, after which the company answered Morgan’s complaint; that answer also did not assert that Morgan was obligated to arbitrate her case. Then, the Morgan and Wood plaintiffs began joint mediation with Sundance; Sundance provided them with payroll data for nearly 12,000 employees, and they jointly retained an expert to analyze this data. Mediation led to a settlement in Wood but not Morgan.

On May 3, 2019 — just over two weeks after the mediation and about eight months after Morgan filed her complaint — Sundance moved to compel individual arbitration of Morgan’s claims. Sundance wrote that it had not moved to compel arbitration earlier in part because it had feared that the language of its arbitration clause might mean that it would have to arbitrate on a collective basis — but that the Supreme Court’s April 24, 2019, decision in Lamps Plus v. Varela had put those fears to rest.

The district court concluded that Sundance had waived its right to arbitrate, but the U.S. Court of Appeals for the 8th Circuit disagreed. Both courts made their determinations by using a three-part test, asking whether Sundance knew of its right to arbitrate, whether Sundance acted inconsistently with that right, and — importantly — whether Morgan was prejudiced by Sundance’s delay. The third factor was the main source of disagreement between the district and appellate courts; whether it was proper for the courts to take this factor into account at all is the main issue before the Supreme Court.

Section 2 of the FAA says that contracts to arbitrate “shall be … enforceable,” except where there are “grounds as exist at law or in equity for the revocation of any contract.” In earlier cases, the Supreme Court has concluded that this language requires courts to treat arbitration agreements “on an equal footing with other contracts.” That means arbitration agreements can be invalidated under rules that apply to any contract, such as that the agreement was signed under duress — but not under rules that are unique to the arbitration context. This “equal-treatment” rule has usually driven pro-arbitration results; for example, in AT&T Mobility v. Concepcion, the court relied on it to reject a California rule restricting when companies could enforce individual arbitration clauses that they had imposed unilaterally on consumers. But in this case, Morgan argues that the equal-treatment rule should work in her favor, because courts evaluating whether a party has waived a contractual right usually do not require proof that the other party has been prejudiced — that additional requirement, Morgan continues, applies only in the arbitration context.

Morgan emphasizes that “waiver is ubiquitous in American law,” and that waiver need not be express — instead, someone might waive a right by behaving in a way that implies their intention to relinquish that right. Further, she argues that whether a right has been waived usually does not depend on whether someone else has relied on the waiver to their detriment, and that this principle distinguishes waiver from other contract-law concepts, such as estoppel or laches. (“Estoppel” prevents a person who has misled someone else into acting contrary to their own interests from then taking advantage of the situation; laches prevents a person from enforcing their rights after an unreasonable delay that has led the other party to change their position.) Accordingly, Morgan reasons that the equal-treatment rule requires courts to apply these same waiver rules to arbitration contracts, without grafting on a requirement that a plaintiff must show it was prejudiced by the defendant’s failure to invoke arbitration earlier.

Sundance responds in part by arguing that Morgan is wrong about the equal-treatment rule. First, it reasons that the FAA is pro-arbitration, meaning that it is inconsistent with rules that disadvantage arbitration agreements as compared to other kinds of contracts — but not rules that advantage arbitration. Second, Sundance argues that its conduct in the Morgan litigation did not rise to the level of an implied waiver of its right to arbitrate, and that arguments that a party has waited too long to invoke arbitration should be assessed under the rules governing estoppel or laches rather than waiver. Third, Sundance argues that even if it had implicitly waived its right to demand arbitration, waivers can be revoked when the other side would not be harmed by the revocation.

In any event, Sundance argues that Section 2 of the FAA is the wrong place to start. Instead, it asks the court to begin with Section 3, which states that if federal court litigation is “referable to arbitration under” a written agreement, “the court … shall on application of one of the parties” stay the case so that arbitration can proceed, “providing the applicant for the stay is not in default in proceeding with such arbitration.” Sundance argues that it was not “in default,” because it did not “violate[] a clear legal rule or cause[] prejudice” to Morgan. It draws this definition of “default” in part from Black’s Law Dictionary, as well as by analogizing to other contexts. Morgan, however, relies on the same types of sources to argue that “default” can occur even in the absence of harm to the other party; she also argues under various contract law principles that the combined effect of her decision to file a complaint in court plus Sundance’s participation in the litigation was to rescind the arbitration agreement.  

Finally, the parties make dueling policy arguments. Morgan argues that a rule that allows defendants to wait to invoke their right to arbitrate allows for gamesmanship, while undermining the “speed and efficiency” that are the chief benefits of arbitration. Interestingly, the National Academy of Arbitrators shares this view, writing in an amicus brief in support of Morgan that when a party waits to invoke arbitration so that it can “first test[] the waters of the litigation process, arbitration no longer provides a fair, efficient, and beneficial alternative to litigation.” But Sundance responds that deterring gamesmanship can be accomplished through a uniform rule requiring a plaintiff to show it was prejudiced by the defendant’s actions, and asserts that Morgan also engaged in gamesmanship by filing her case in court instead of seeking arbitration in the first place.

The Roberts court has generally been sympathetic to defendants’ arguments, arising under the FAA, that plaintiffs should be limited to raising their claims in individual arbitration. Whether the court stays true to form in this case may turn on whether the justices view Sundance’s strategic choices as gamesmanship that wasted court and party time and resources, or as the reasonable actions of a party considering settlement.