Employment Law Report
Employer Vigilance: A Must in Enforcing Arbitration Agreements
By: Michelle D. Wyrick, with significant assistance from Molly Grace Baldock, one of our Summer Associates
A recent holding by the United States Supreme Court should caution employers utilizing arbitration agreements. Employers should be vigilant and compel arbitration as early as possible in the face of a lawsuit, or potentially waive their ability to enforce arbitration altogether. The issue of waiver recently came before the Court in Morgan v. Sundance, where a Taco Bell employee brought a collective action lawsuit against the employer for failure to properly pay her overtime, despite having signed an agreement to arbitrate any employment disputes.
Sundance, owner of the Taco Bell franchise, responded to the lawsuit and engaged in litigation for eight months — practically behaving as if the arbitration agreement did not exist. When Sundance attempted to compel arbitration eight months into litigation, Ms. Morgan argued that Sundance had waived its right to enforce the arbitration agreement. The question of waiver presented the Supreme Court with an issue on which the federal appellate courts were split.
A majority of the circuits, including the Eighth Circuit where Morgan was heard on appeal, had applied a three-part test. To demonstrate waiver, a party had to 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. The courts adopted the third factor because of a “federal policy favoring arbitration,” which they inferred from the Federal Arbitration Act (FAA). In contrast, both the Seventh Circuit and the D.C. Circuit had applied a two-part test that omitted the third requirement of prejudice.
In a unanimous opinion, the Supreme Court sided with the minority of circuits and held that the FAA does not authorize federal courts to create such an arbitration-specific procedural rule. Justice Kagan, writing for the Court, explained that outside of the arbitration context, a federal court assessing waiver does not generally ask about prejudice. Thus, the Eighth Circuit and other circuits following it were applying a rule found nowhere else. The Supreme Court rejected this understanding of the FAA’s policy. Instead, the Court articulated that the FAA’s policy is to make arbitration agreements as enforceable as other contracts, but not more so. The Court viewed the Eighth Circuit’s arbitration-specific procedural rule as favoring arbitration over litigation. In rejecting such favoritism, the Court explained that the goal of the FAA was merely to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and place them on the same footing as other contracts.
The main takeaway from the Morgan decision is that employers must be vigilant in enforcing their arbitration agreements. Without the prejudice requirement, the bar is lower for an employee to show that the employer has waived the right to compel arbitration. So long as the employee can demonstrate the employer’s knowledge of the right to compel arbitration and conduct inconsistent with that right, they can avoid enforcement of the arbitration agreement. Under Morgan, employers can still avoid waiver by proving their lack of knowledge of the right to arbitrate, but this is exceedingly difficult for employers to prove.
Employers who believe that a dispute with an employee is governed by an arbitration agreement should consult with legal counsel and assert their rights to arbitration in a timely manner. If a lawsuit is filed, employers with arbitration agreements should demand arbitration as early as possible, or else run the risk of forfeiting the right to arbitrate.
To be clear, the Morgan decision is not a complete departure from the Court’s generally pro-arbitration leaning over the last fifteen years. It should not be read as a dramatic shift, but rather, a procedural clarification. The sole impact Morgan has on employers is limited to those who fail to assert the right to arbitrate at the outset of litigation. An employer can no longer insist that it can initially engage in litigation and then later move to compel arbitration because the plaintiff suffered no prejudice.