"Heads I win, tails you lose": The End of Employers' Exploitation of the Federal Arbitration Waiver Prejudice Requirement.

AuthorSundance, Morgan V.
  1. INTRODUCTION

    On its face, an arbitration agreement suggests a straightforward process: should a dispute between the parties subject to the agreement arise, the dispute will be resolved through arbitration rather than litigation. (1) But sometimes the parties do not follow this seemingly predetermined path. For example, many employers include mandatory, boilerplate arbitration agreements as conditions of employment. As is often the case, what happens when an employee sues her employer without knowledge of the contract's arbitration clause? What if the employer allows the lawsuit to proceed for several months before it decides that it would fare better before an arbitrator? Must a court compel arbitration even if the plaintiff employee has spent considerable resources to pursue her claim in court? The Supreme Court of the United States addressed this question in Morgan v. Sundance. (2) Plaintiff Robyn Morgan, an hourly Taco Bell employee, sued her employer's parent corporation for withholding wages at her already low-wage job. (3) After months of substantial litigation activity and to Ms. Morgan's detriment, Sundance pulled out the pre-dispute arbitration agreement that Ms. Morgan was required to sign when hired. (4)

    As with all other types of contracts, parties may elect to waive arbitration and resolve the dispute by litigation. Employers such as Sundance have been allowed to "test the waters" in court before deciding they will achieve more favorable results by turning to arbitration. (5) Prior to Morgan v. Sundance, American courts were split about what exactly constitutes waiver of an arbitration agreement. (6) For most state and federal courts, so long as one party had not substantially prejudiced the other while vacillating on whether to waive arbitration, this sort of behavior was perfectly fine. (7) But allowing employers to test the waters wastes the court's and opposing party's time and resources. For employees who are already at a disadvantage due to a pre-dispute mandatory arbitration agreement, this provides yet another way for large employers to get ahead. In response to some of these concerns, the Supreme Court held in Morgan v. Sundance that arbitration waiver analyses must not include a prejudice requirement. (8)

    This Note highlights the disadvantages for employees that existed under the federal and state majority approach to arbitration waiver analysis. Part II summarizes the underlying facts and holding of Morgan v. Sundance, a case in which an Iowa district court, the Eighth Circuit, and the Supreme Court of the United States considered arbitration waiver requirements. Part III discusses the history of employment arbitration and the prior circuit and state split regarding arbitration waiver analysis. Part IV dissects the rationale of the Supreme Court's unanimous opinion. Lastly, Part V examines the implications of Morgan for courts, employees, and employers alike in light of the Court's failure to provide a clear and consistent framework for arbitration waiver analysis.

  2. FACTS AND HOLDING

    Robyn Morgan was an hourly employee at a Taco Bell in Iowa, one of the more than 150 Taco Bell locations owned by Sundance, Inc. (9) During Morgan's employment, she claimed that Sundance would "shift" employees' hours to the next week to cap their paychecks at eighty hours for each two-week pay period--and thus avoid paying overtime to any employee. (10) The Fair Labor Standards Act sets minimum wage requirements and guarantees increased pay for overtime work. (11) On September 25, 2018, Morgan filed suit against Sundance in the U.S. Southern District of Iowa on behalf of herself and a proposed putative class for these alleged violations of the Fair Labor Standards Act. (12)

    When Morgan filed her lawsuit, a nearly identical lawsuit, Wood v. Sundance, Inc., (13) had already been pending for years in Michigan. (14) On November 8, 2018, Sundance filed a Federal Rule of Civil Procedure 12(b)(3) motion to dismiss or alternatively stay Morgan's claims because of this other, seemingly duplicative suit. (15) Sundance's motion made no mention of an arbitration agreement. (16) Four months later, in March, the Iowa district court denied Sundance's motion because the two lawsuits had sufficiently distinct classes of plaintiffs--the Michigan suit's class was limited to the state while Morgan's suit sought nationwide class certification. (17) Sundance then filed its Answers and Affirmative Defenses, which again made no mention of its arbitration agreement with Morgan. (18) On April 15, 2019, Morgan voluntarily attended a class-wide mediation that included the Michigan plaintiffs in an attempt to resolve all claims against Sundance. (19) To prepare for the mediation, Morgan claimed that she had already retained an expert, and Sundance had already produced thousands of documents. (20) Sundance disputed the characterization of this activity as "discovery." (21) The parties did not resolve Morgan's claims at this mediation. (22)

    On May 3, 2019, nearly eight months after Morgan filed her lawsuit, Sundance filed a Motion to Compel Individual Arbitration and Dismiss Plaintiff's Complaint. (23) Sundance asserted that Morgan's employment application included an arbitration clause just above the signature line. (24) Morgan claimed that Sundance did not notify her counsel of the existence of an arbitration agreement until May 1, 2019. (25) Sundance did not deny Morgan's claim. (26)

    The issue before the court was whether Sundance waived its right to compel arbitration. (27) On June 28, 2019, the court denied Sundance's motion to compel, finding that Sundance had waived its right to arbitration. (28) To reach its decision, the court applied the Eighth Circuit's Lewallen test, which provides that a party waives its right to arbitration if it: "(1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts." (29) The court determined that all three prongs of the Lewallen test were met; thus, Sundance had waived its right to arbitrate the dispute with Morgan and the court could not compel arbitration.

    A three-judge panel on the Eighth Circuit Court of Appeals reversed the district court's order denying its motion to compel arbitration of Morgan's claims. (30) The court applied the same Lewallen test that the district court utilized but reached a different conclusion. (31) In applying this test, the court concluded that the district court erred in determining that Sundance waived its right to arbitrate because Sundance's conduct, even if inconsistent with its right to arbitration, did not materially prejudice Morgan. (32) The court agreed that the first element, as to Sundance's knowledge of the arbitration agreement, was undisputed. (33) As to the second element, the court raised additional issues: specifically, the court noted that the time during which Sundance's motion to dismiss was under advisement constituted half of the delay that the district court attributed to Sundance. (34) Additionally, the court characterized mediation as an effort to avoid invoking the litigation machinery, which weighed in Sundance's favor. (35) However, Sundance's delay to assert its right to arbitration until after filing a motion to dismiss and answer "demonstrates an active participation in the litigation process and seemingly an invocation of the litigation machinery." (36) Significantly, however, the motion to dismiss was not on the merits. (37) Thus, despite the delay, the parties spent very little time actively litigating and no time on the merits of the case, so shifting to arbitration would not duplicate the parties' efforts. (38)

    As to the third element, the Eighth Circuit held that Morgan was not prejudiced by Sundance's litigation strategy. (39) Sundance did not cause four months of the delay, but rather spent that time waiting for the disposition of Sundance's motion to dismiss. (40) Neither party conducted discovery, the record lacked any evidence that Morgan would have to duplicate her efforts during arbitration, and most of Morgan's work focused on the "quasi-jurisdictional issue, not the merits of the case." (41)

    Morgan subsequently petitioned for a writ of certiorari to the Supreme Court of the United States. (42) The Court granted certiorari to address the circuit split regarding a prejudice requirement. (43) It held that courts cannot include a prejudice requirement in an arbitration waiver analysis. (44) In deciding this, the Court reexamined the text of the Federal Arbitration Act ("FAA") and what it means to have a "federal policy favoring arbitration." (45) It concluded that the FAA and its policy favoring arbitration was intended to put arbitration agreements on equal footing as other contracts rather than encourage courts to devise rules favoring arbitration over litigation. (46) Thus, the Court concluded that the Eighth Circuit must eliminate the prejudice requirement from its arbitration waiver analysis and reevaluate Sundance's conduct under a revised or new procedural framework. (47)

  3. LEGAL BACKGROUND

    Over the past century, arbitration has emerged as a hugely popular form of alternative dispute resolution, first in the realm of labor and commercial law, and subsequently expanding to areas such as employment law. (48) Not only is arbitration popular with employers, but it is popular with the courts as well. (49) The Supreme Court of the United States has repeatedly interpreted the FAA expansively to favor arbitration rights. (50) The heart of the FAA, Section 2, makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (51) The Court has described Section 2 as "a congressional declaration of a liberal federal policy favoring arbitration agreements," (52) and it has stated that "any doubts concerning the scope of arbitrable...

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