With Arbitration Agreement, You Snooze, You May Lose, Says Supreme Court

Author: David B. Weisenfeld

May 24, 2022

An employer that fails to act on a mandatory arbitration agreement when faced with an employment lawsuit may not necessarily be able to compel arbitration several months later, a unanimous Supreme Court has ruled in Morgan v. Sundance. While the Court has generally upheld arbitration agreements as enforceable under the Federal Arbitration Act (FAA), this decision shows employers' rights are not unlimited.

The case involved an hourly employee at a Taco Bell franchise in Iowa who signed an agreement to arbitrate any employment dispute upon applying for the job. The employee, Robyn Morgan, filed a nationwide collective action claiming the company violated the Fair Labor Standards Act regarding overtime payment.

The franchise parent company Sundance initially defended against the lawsuit as if no arbitration agreement existed, filing a motion to dismiss which a lower court denied. It was not until nearly eight months after Morgan filed the lawsuit that Sundance moved to compel arbitration under the FAA.

The 8th Circuit Court of Appeals ruled that Morgan needed to show she had been prejudiced or harmed by the delay for the company to have waived its right to compel arbitration. But the Supreme Court disagreed and rejected that finding.

"The FAA makes clear that courts are not to create arbitration-specific procedural rules like the one here," Justice Elena Kagan wrote for the Court. Courts need not necessarily find that someone was prejudiced to find that a party waived its right to compel arbitration under the FAA, she added.

The Court's ruling does not mean Morgan's collective action overtime case is automatically headed for the courtroom. Instead, it sends the case back to the 8th Circuit to resolve the following question:

  • Did the employer knowingly relinquish its right to arbitrate by acting inconsistently with that right?

The Supreme Court noted that the federal appellate court may resolve that question or decide that a different procedural framework (such as forfeiture) is appropriate. This holding is limited to stopping courts from making up a new procedural rule based solely on the FAA's "policy favoring arbitration."