U.S. Supreme Court Lessens the Burden to Show Waiver of Arbitration Through Court Litigation

On May 23, 2022, the United States Supreme Court issued a unanimous opinion holding that a party opposing arbitration in court based on waiver does not have to show prejudice under the Federal Arbitration Act (“FAA”).

The ruling in Morgan v. Sundance, Inc., No. 21–328, slip. op. (U.S. May 23, 2022) involved a Taco Bell employee who brought a class action in federal court for overtime pay based on the Fair Labor Standards Act. The employee had signed an arbitration agreement. However, instead of immediately moving to compel arbitration, the employer initially moved to dismiss the case in court, and after that motion was denied, answered the complaint and asserted several affirmative defenses. The employer also engaged in a mediation while the case was in court. After that mediation was unsuccessful, the employer finally moved to compel arbitration, and the employee argued that the employer had waived arbitration by defending the case in court.

The District Court initially found that compelling arbitration at such a late stage would be prejudicial to the employee and denied the motion to compel arbitration, but the Court of Appeals for the Eighth Circuit reversed. The Eighth Circuit held that the employee had not shown that she would be prejudiced by being required to arbitrate where no discovery had occurred and no rulings on the merits had been issued. The Federal Appellate Courts had previously been split on the issue of whether prejudice was required – the Eighth and Ninth Circuit both required a showing of prejudice to find waiver; while some circuits, including the Seventh and D.C. Circuit, did not.

SCOTUS reversed the Eighth Circuit and held that there is no requirement of prejudice under the FAA to support a waiver. Although the Court recognized the well-known federal policy favoring arbitration, the Court also held that lower courts were not allowed to impose arbitration-specific rules “in favor of (or against) arbitration” that are not reflected in the FAA. Id. at *7. Instead, when considering whether a waiver occurred, the Court should focus not on the conduct of the party opposing arbitration, but rather on the party seeking to compel arbitration. Ultimately, the Court remanded for further consideration of whether the employer had waived arbitration; however, the SCOTUS opinion certainly makes a finding of waiver more likely on remand.

So, what does this mean for litigants in Illinois? First, it represents a significant shift away from the prejudice inquiry under the FAA in most jurisdictions. Notably, while the Seventh Circuit has long held that prejudice is not a per se “requirement” to find a waiver of arbitration, the Seventh Circuit does hold that prejudice is a relevant factor to consider, St. Mary's Medical Center, Inc. v. Disco Aluminum Products Co., 969 F.2d 585, 590 (7th Cir. 1992), and many decisions primarily turn on the issue of prejudice to the party opposing arbitration. Morgan arguably eliminates prejudice as a relevant inquiry altogether, and instead suggests that courts should focus on the conduct of the party seeking to compel arbitration rather than the party opposing it. Morgan also suggests that state law regarding contractual waivers should ultimately be used to determine whether a waiver has occurred, placing importance on choice-of-law issues.

Second, keeping in mind that many arbitration clauses at issue in state court are subject to the FAA, the opinion is binding on state courts considering such clauses and may change the outcome of similar cases in both federal and state court.

Third, when construing contracts subject to the Illinois Uniform Arbitration Act (“Illinois UAA”), most Illinois appellate courts have required a showing of prejudice. However, the Illinois UAA contains no express requirement of prejudice, just like the federal statute. While Morgan may not be binding on courts considering the Illinois UAA and other state arbitration acts, those courts may be inclined to consider the unanimous opinion in Morgan as persuasive on this issue. Importantly, the Illinois Supreme Court has not expressly ruled on whether prejudice is required under the UAA. Until an Illinois appellate court addresses this issue, Illinois Circuit Courts are still likely to require a showing of prejudice, but in light of Morgan, may be inclined to give prejudice less weight. Given that orders compelling or denying arbitration are immediately appealable under Illinois Supreme Court Rule 307, this issue may reach the Illinois appellate court sooner rather than later, and Morgan may be reason for the Illinois appellate court to revisit the prejudice issue.

Ultimately, whether a party seeks to litigate in court or arbitration is a substantial strategic consideration. Many defendants believe that arbitration is preferable, but often find themselves without many of the procedural devices and discovery that defendants typically use to dispose of litigation prior to an expensive trial. On the other hand, litigation in court can expose defendants to public scrutiny, jury risk, and ultimately, can take much longer to resolve than arbitration. Litigants should immediately bring any arbitration agreement to their lawyer’s attention, and lawyers should remember to discuss arbitration with clients before filing a responsive pleading in Court.

If you have questions about arbitration or a lawsuit filed against your company that may be subject to arbitration, contact Burke Warren attorneys Eric P. VanderPloeg (evanderploeg@burkelaw.com) or Morgan M. Hess (mhess@burkelaw.com).