Morgan v. Sundance, Inc.

Issues

Does a party waive its contractual right to arbitrate a claim whenever it engages in litigation proceedings on that claim or only when the opposing party is prejudiced by those litigation proceedings?

Oral argument:

March 21, 2022

Court below:

United States Court of Appeals for the Eighth Circuit

This case asks the Supreme Court to interpret the Federal Arbitration Act (“FAA”) to assess whether arbitration clauses in contracts may be waived by entering litigation. The FAA provides standards that courts must apply when enforcing contractual agreements to arbitrate disputes. Robyn Morgan argues that the FAA requires courts to interpret arbitration agreements to be no less and no more enforceable than other contractual provisions. Therefore, Morgan contends that she does not need to show that she was prejudiced in order to establish that her employer, Sundance, Inc. (“Sundance”), waived an agreement to arbitrate. Sundance counters that the FAA merely provides minimum standards for arbitration clauses, and even if it did not, proving waiver in this instance requires a showing of prejudice. The outcome of this case has heavy implications for arbitration proceedings and employment contracts.

Questions as Framed for the Court by the Parties

Whether the arbitration-specific requirement that the proponent of a contractual waiver defense prove prejudice violates the Supreme Court’s instruction in AT&T Mobility LLC v. Concepcion that lower courts must “place arbitration agreements on an equal footing with other contracts.”

Facts

Congress passed the Federal Arbitration Act in 1925. Brief for Petitioner, Robyn Morgan at 5. The FAA’s purpose was to make arbitration agreements, previously disfavored in legal proceedings, as enforceable as other contracts. Id. at 6. To that end, Section 2 of the FAA explicitly states that agreements to arbitrate are valid and enforceable. Id. The FAA also has multiple provisions dictating the relationship between litigation proceedings and arbitration. Id. For instance, Section 3 of the FAA allows parties to stay court proceedings while arbitration is ongoing. Id. at 7. Section 4 of the FAA allows a party to petition the court to compel arbitration of claims when the opposing party begins litigation proceedings in violation of contract provisions. Id.

Sundance, Inc. (Sundance) owns Taco Bell franchises throughout the United States. Brief for Petitioner at 8. Robyn Morgan was an employee of one such franchise in Iowa from August 2015 until October 2015. Id. As a part of Morgan’s employment, Morgan signed an employment contract. Brief for Respondent, Sundance, Inc. at 7. This contract included a mandatory arbitration clause stating that Morgan agreed to arbitrate, rather than go to court over, any disputes between Morgan and Sundance. Id.

In September 2018, three years after Morgan ended her employment with Sundance, she sued Sundance for lost wages. Morgan v. Sundance, Inc., at 713. Morgan filed a collective action in federal court against Sundance under the Fair Labor Standards Act (“FLSA”). Id. Morgan brought the action on behalf of herself and all other hourly employees that worked for Sundance over the past three years. Brief for Respondent at 8. Morgan argued that Sundance violated the FLSA by not paying employees for overtime that the employees worked. Morgan v. Sundance, Inc., at 713. Morgan thus chose to litigate her claim instead of seeking arbitration pursuant to her employment contract. Brief for Respondent at 8.

In response, Sundance first moved to dismiss the claim, instead of immediately pursuing arbitration under the employment contract. Morgan v. Sundance, Inc. at 713. Sundance argued that Morgan’s claim was prohibited under the “first-to-file” rule, which prevents duplicative lawsuits from being heard in multiple courts. Id. Sundance alleged that a Michigan lawsuit, Wood v. Sundance, (the “Michigan case”) was already filed and pled the same FLSA claims as Morgan. Brief for Respondent at 8. The U.S. District Court for the Southern District of Iowa denied Sundance’s motion because it found that Morgan’s case and the Michigan case were not duplicative. Brief for Petitioner at 10. After this denial, Sundance then answered Morgan’s complaint. Morgan v. Sundance, Inc., at 713. Sundance later invited Morgan to join mediation along with the plaintiffs in the Michigan case. Id. Morgan participated in the mediation. Brief for Petitioner at 10. The Michigan case eventually settled as a result of the mediation, but Morgan did not settle her case. Id.

In May 2019, eight months after the start of litigation, Sundance moved to compel arbitration of Morgan’s dispute after the mediation talks stalled. Morgan v. Sundance, Inc., at 713. Morgan opposed the motion and argued that Sundance waived its contractual right to arbitration when Sundance engaged in the judicial proceedings. Brief for Respondent at 9–10. Morgan also argued that Sundance waived its right to arbitration because Sundance unduly delayed filing the motion to compel arbitration. Id. at 9.

The district court ultimately denied Sundance’s motion to compel arbitration, holding that Sundance waived its right to arbitration when it engaged in litigation proceedings. Morgan v. Sundance, Inc., at 713. Sundance appealed to the Eighth Circuit and the Eighth Circuit reversed. Id. at 715. The Eighth Circuit concluded that Sundance did not waive its right to arbitration because Morgan was not prejudiced by the litigation proceedings. Id. at 715. Morgan appealed and the United States Supreme Court granted certiorari on November 15, 2021. Brief for Petitioner at 1.

Analysis

WHETHER THE PREJUDICE REQUIREMENT IS VALID UNDER SECTION 2 OF THE FAA

Morgan argues that requiring prejudice to prove that Sundance waived the arbitration clause at issue runs contrary to Section 2 of the FAA. Brief for Petitioner, Robyn Morgan at 32. Morgan contends that the vast majority of states do not require a showing of prejudice to waive a contractual provision. Id. at 19. Morgan maintains that this holds true even for provisions which are similar to arbitration agreements, such as alternative dispute resolution and forum selection provisions. Id. at 21. According to Morgan, the lack of a prejudice requirement in a waiver claim distinguishes waiver from the doctrines of estoppel and laches which require a showing of prejudice. Id. at 24, 28. However, Morgan highlights that nearly all states require a showing of prejudice to prove the waiver of an arbitration agreement. Id. at 29

Morgan then argues that imposing a prejudice requirement for the waiver of arbitration agreements, but not other contractual provisions, violates Section 2 of the FAA. Id. at 32. By Morgan’s account, Section 2 requires that courts put arbitration agreements on “equal footing” with other contractual provisions. Id. Morgan asserts that the Supreme Court in Concepcion v. United States interpreted Section 2 to require courts to treat arbitration clauses as no more or less enforceable than any other contractual provision. Id. at 34. Thus, Morgan contends that the Eighth Circuit erred by giving preferential, rather than equal, treatment to the arbitration provision at issue, contrary to Section 2’s equal-treatment principle. Id. at 37.

Sundance responds that Section 2 of the FAA requires Morgan to show prejudice to prove that Sundance cannot invoke the arbitration clause at issue. Brief for Respondent, Sundance, Inc. at 27. First, Sundance argues that the concept of waiver does not apply because the agreement did not specify a time by which Sundance had to exercise the arbitration provision. Id. at 34. Instead, Sundance posits that when a party waits too long to assert a right or represents that a right will not be asserted, the doctrines of laches and estoppel apply respectively. Id. at 35. Therefore, because these doctrines both require a showing of prejudice, Sundance concludes that Morgan must show prejudice in this case. Id. at 36. Next, Sundance contends that even if waiver applies, under state waiver law a waiving party may retract its waiver where there is no prejudice to the other party. Id. at 37. Consequently, Sundance asserts that waiving an arbitration clause in this circumstance requires a showing of prejudice. Id.

Additionally, Sundance rejects Morgan’s assertion that Section 2 requires courts to put arbitration agreements on “equal footing” with other contractual provisions. Id. at 28. Sundance asserts that the FAA simply provides a minimum standard for treatment of arbitration clauses. Id. at 29. Accordingly, Sundance concludes that a court does not violate the FAA by giving an arbitration clause preferential treatment. Id. In support of this contention, Sundance highlights language in Concepcion which states that the FAA imposes a policy “favoring” arbitration. Id. Further, Sundance posits that Section 2 addresses contract-law defenses to the validity of an arbitration agreement, not whether arbitration was waived. Id. at 30. As such, Sundance argues that the FAA leaves lower courts free to impose a more favorable reading of arbitration clauses. Id.

WHETHER THE PREJUDICE REQUIREMENT IS VALID UNDER OTHER SECTIONS THE FAA

Morgan contends that no other section of the FAA requires Morgan to show prejudice to establish that Sundance waived the arbitration clause. Brief for Petitioner at 38. Specifically, Morgan contests the Eighth Circuit’s holding that such a requirement is imposed by Section 3 of the FAA, which instructs courts to stay proceedings when a suit is referrable to arbitration, and the party requesting the stay is not in default. Id. at 38. Morgan notes that the Supreme Court has previously read “default” to refer to a unilateral failure to perform a contractual duty. Id. at 39. Morgan adds that proving default in other contexts, such as debt proceedings and civil procedure, does not require prejudice. Id. at 41–42. Indeed, Morgan adds that even Section 4 of the FAA uses the term “default” in this manner by using the term interchangeably with the term “failure to comply.” Id. at 44.

In opposition, Sundance contends that under Section 3, Morgan must show prejudice to establish that Sundance waived the arbitration agreement. Brief for Respondent at 14. Sundance asserts that the Supreme Court has traditionally resolved issues involving stays of arbitration proceedings under Section 3, not Section 2. Id. at 17. Sundance then argues that when an arbitration agreement does not impose a deadline the Section 3 default provision requires a showing of prejudice. Id. at 17. Sundance asserts that this provision is consistent with the ordinary meaning of the word “default,” which traditionally is not implicated in the absence of a deadline or prejudice. Id. at 19. Sundance posits that because the arbitration agreement here contains no deadline, Morgan must show that any failure to invoke the arbitration clause caused her prejudice in order to establish that Sundance waived the provision. Id. at 27. Finally, Sundance contends that its interpretation of “default” is consistent with the term’s use in Section 4. Id. at 24. Sundance highlights that Section 4 allows a motion to compel arbitration where one party was “aggrieved” by a default, which contemplates a showing of prejudice. Id.

WHETHER THE PREJUDICE REQUIREMENT IS CONSISTENT WITH THE FAA GENERALLY

Morgan argues that the prejudice requirement conflicts with the Congressional purpose in enacting the FAA. Brief for Petitioner at 46. Morgan asserts that Congress passed the FAA to ensure parties can arbitrate quickly and cost effectively. Id. However, Morgan notes that imposing a prejudice requirement on the waiver of arbitration provisions would make sending a case to arbitration slow and expensive. Id. at 47. First, Morgan contends that the arbitration process would be slowed because courts would have to make complicated determinations as to whether a party was in fact prejudiced. Id. Second, Morgan posits that a prejudice requirement would incentivize parties to try experimental legal theories in court before exercising the arbitration clause. Id. In support of this contention, Morgan highlights a series of lower court decisions in which a prejudice requirement allowed parties to engage in gamesmanship. Id. at 49–50 Morgan argues that both effects would increase the cost and decrease the speed of arbitration, contravening the underlying purpose of the FAA. Id. at 49. As such, Morgan concludes that the prejudice requirement contravenes Congressional purpose and therefore should not be read into the FAA. Id. at 50

Sundance counters that requiring a showing of prejudice to establish that a party waived an arbitration agreement furthers the Congressional purpose in enacting the FAA. Brief for Respondent at 41. Sundance argues by instituting a prejudice requirement, courts such as the Eighth Circuit foreclose arbitration to parties who delay arbitration for gamesmanship purposes because such gamesmanship would likely prejudice the other party. Id. at 43. Further, Sundance contends that a prejudice requirement ensures that arbitration would not be denied to parties who make good-faith attempts to settle a dispute in court before resorting to arbitration. Id. Sundance contends that the cases which Morgan claims promote gamesmanship in fact involved parties acting in good faith before the parties decided to arbitrate. Id. at 45. Further, Sundance argues that a prejudice requirement would not slow down judicial proceedings preceding arbitration. Id. at 46. To that point, Sundance notes that prejudice is a traditional common law standard often applied by courts, and therefore the prejudice requirement is still consistent with the FAA’s goal of promoting speedy arbitration. Id. As such, Sundance concludes that the prejudice requirement comports with Congressional purpose and therefore should be read into the FAA. Id. at 48–49

Discussion

EFFICIENCY AND TIME-SAVING OF ARBITRATION

American Association for Justice (“AAJ”), in support of Morgan, argues that the primary goal of the Federal Arbitration Act (“FAA”) is to promote efficiency and timesaving in dispute resolution. Brief of Amicus Curiae American Association for Justice, in Support of Petitioner at 17. AAJ asserts that proceedings are unduly delayed when defendants first pursue litigation before compelling arbitration. Id. at 16. Law Professors add that the prejudice requirement for waiver induces parties to seek litigation before compelling arbitration. Brief of Amici Curiae Law Professors, in Support of Petitioner at 13. Law Professors argue that pursuing litigation before arbitration undermines the primary benefit of arbitration, which is the speedy and efficient resolution of disputes. Id. at 14. Law Professors explain that time and cost savings are eliminated when arbitration is preceded by litigation that takes months or years. Id. at 13–14.

Restaurant Law Center, in support of Sundance, contends that the current rule promotes settlement and early dismissal motions, which both promote efficiency. Brief of Amicus Curiae Restaurant Law Center, in Support of Respondent at 10–11. Restaurant Law Center reasons that some pre-arbitration solutions may be more efficient and practical than arbitration. Id. Restaurant Law Center argues that in cases like Morgan’s, it makes sense for defendants first to raise motions to dismiss or pursue mediation. Id. Restaurant Law Center contends that Morgan’s rule requiring arbitration to be raised at the early stages of litigation forces defendants to compel arbitration instead of pursuing settlement or dismissal. Id. Restaurant Law Center concludes that by disfavoring settlement, Morgan’s rule promotes inefficiencies. Id.

FAIRNESS OF THE SCHEME

Minnesota, et al. (“States”), in support of Morgan, argue that the prejudice requirement is unfair as it unreasonably favors wealthier litigants. Brief of Amici Curiae Minnesota, et al., in Support of Petitioner at 13. States contend that parties with more financial resources can first attempt litigation of claims to deplete their opponent’s resources and then later force their opponent into arbitration. Id. States argue that this gives powerful parties two bites at the apple, allowing them to “test the waters” via litigation and revert to arbitration if things do not go as intended. Id. at 13. States assert that the prejudice requirement thus favors wealthier parties and is unfair when parties have asymmetric wealth and resources, which is often the case in employment contracts. Id. at 20.

In contrast, Restaurant Law Center argues that defendants would suffer from a rule requiring compelled arbitration early in litigation proceedings. Brief of Restaurant Law Center at 9. Restaurant Law Center asserts that plaintiffs prepare for months before formally filing complaints against defendants and then those defendants have just weeks to prepare answers and defenses. Id. at 5–7. Restaurant Law Center argues that with large defendants, both finding relevant arbitration agreements and confirming their applicability takes time. Id. Therefore, Restaurant Law Center asserts that it is unfair to force defendants to compel arbitration at early stages before defendants may have time to even confirm the need to compel arbitration. Id. at 9.

CONSISTENCY AND PREDICTABILITY

Law Professors assert that the prejudice requirement makes legal processes unpredictable. Brief of Law Professors at 21. Law Professors argue that the prejudice requirement makes it difficult to know how arbitration clauses will be enforced and therefore undermines those agreements. Id. States add that this makes arbitration agreements less commercial. Brief of States at 20. States note that parties price in arbitration clauses when negotiating contracts with the expectation that the clauses will be enforced. Id. at 23. States argues that the prejudice requirement upsets these expectations.

Law Professors also argue that the prejudice requirement results in different outcomes between circuits. Brief of Law Professors at 22. Law Professors note that holdings within circuits are often different even when cases have similar fact patterns. Id. States add that circuits apply different tests for prejudice. Brief of States at 18. States agree that even the same prejudice standard leads to inconsistent results within circuits. Id. Law Professors conclude that it is “untenable” to maintain such a vague and inconsistent policy. Brief of Law Professors at 23. Law Professors thus propose applying ordinary contract law rules to arbitration agreements to ensure predictability and applicability. Id.

The Chamber of Commerce, in support of Sundance, argues that Morgan’s proposed rule requiring motions to arbitrate at early stages likewise leads to unpredictable outcomes. Brief of Amicus Curiae Chamber of Commerce, in Support of Respondent at 23. The Chamber of Commerce argues that Morgan’s proposed rule lacks guideposts. Id. at 24. The Chamber of Commerce asserts that parties will not know the point in proceedings at which they must compel arbitration. Id. The Chamber of Commerce concludes that this rule is unduly harsh, because parties do not know when they “cross the line” but when they do, they forfeit any right to arbitrate. Id.

The Chamber of Commerce also asserts that Morgan’s rule promotes inconsistent application. Id. The Chamber of Commerce contends that courts will likely apply the rule inconsistently because the rule does not state a specific point in litigation proceedings at which arbitration is forfeited. Id. The Chamber of Commerce asserts that defenses relating to arbitration should have the same guidelines as other defenses under the FAA and the Federal Rules of Civil Procedure. Id. at 23. The Chamber of Commerce argues that applying already-existing standards promotes consistent application as well as predictability for defendants. Id.