If you have an arbitration agreement, do you have to compel arbitration when the lawsuit is filed or can you wait awhile? This week, the Supreme Court concluded that a party litigating in federal court cannot later compel arbitration by arguing that the delay caused no harm or prejudice to the opposing party. If you have mandatory arbitration agreements, the decision in  Morgan v. Sundance Inc. has implications for you. When an employer does not compel arbitration at the outset of litigation, does that constitute a waiver of its right to compel arbitration? This has been the subject of a growing circuit split in federal appeals courts.

The Circuit Split

The federal circuit courts have used two different tests to decide whether a party waived its right to compel arbitration. Nine federal circuits use a three-part test in which the party attempting to prove a waiver must show (1) the party attempting to compel arbitration had knowledge of an existing right to compel arbitration; (2) the party attempting to compel arbitration committed intentional acts inconsistent with that right to arbitration; and (3) the party opposing arbitration experienced prejudice. Only two circuits – the Seventh Circuit and the D.C. Circuit – utilize a two-part version of this test, doing away with the third requirement that the party opposing arbitration must show it had experienced prejudice.

Morgan v. Sundance

Robyn Morgan worked at a Taco Bell franchise owned by Sundance, and, as is standard for employees of that franchise, she signed an employment contract containing a binding arbitration clause. The clause required employees to “use confidential binding arbitration instead of going to court” to resolve employment disputes.

Morgan claimed Sundance failed to properly pay her overtime and filed a nationwide collective action lawsuit. Sundance litigated the case, moving to dismiss, filing an answer, and attempting mediation. After about eight months, Sundance moved to compel arbitration. Morgan argued Sundance had waived its right to compel arbitration by virtue of the eight-month delay. Sundance argued that, pursuant to the Eighth Circuit’s adoption of the three-part test to prove waiver, Morgan could not show she had been prejudiced by the delay.

Courts Cannot Create “Novel Rules to Favor Arbitration”

In a majority opinion by Justice Elena Kagan, the Supreme Court rejected the three-part approach taken by most federal courts of appeal. The Supreme Court reasoned that the requirement to show prejudice is not imposed by the Federal Arbitration Act but was rather a court-created procedural rule “found nowhere else,” calling it a “bespoke rule of waiver for arbitration.” The nine federal circuits that apply this “bespoke rule” reason that the FAA’s “policy favoring arbitration” grants the authority to devise such a rule. The Supreme Court disagreed, stating that the FAA’s policy favoring arbitration “does not authorize federal courts to invent special arbitration-preferring procedural rules” and further holding that courts must “hold a party to its arbitration contract just as the court would to any other kind” of contract.

The case will now be remanded to the Eighth Circuit for further proceedings.

Takeaways

If your employment contracts include a mandatory arbitration clause, take heed. When an employee files a lawsuit, carefully weigh whether you want to engage in litigation or compel arbitration. The Supreme Court’s refusal to include prejudice in the test to show waiver lowers the bar for a plaintiff seeking to show that you have, in fact, waived your right to compel arbitration.

So, when you get an employee lawsuit, check to see if you have a mandatory arbitration clause. If you do and choose to litigate initially, you may be waiving your right to compel arbitration. Under the two-part rule, the questions will be (1) whether you knew you could compel arbitration and (2) whether you committed intentional acts inconsistent with that right to arbitration — and litigating any portion of the case could result in waiver.