In Morgan v. Sundance, Inc., No. 21-328 (2022), the Supreme Court of the United States issued a unanimous decision against mandatory arbitration.

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Background

The plaintiff, an hourly employee at a Taco Bell restaurant, had signed an agreement to arbitrate any employment dispute. Despite the arbitration agreement, the plaintiff filed a nationwide collective action asserting that the defendant, Sundance, had violated federal law regarding overtime pay. Sundance initially defended against the lawsuit as if no arbitration agreement existed and engaged in mediation. Almost eight months after the suit had been filed, Sundance moved to stay the litigation and compel arbitration under the Federal Arbitration Act (“FAA”) (at 1,3).

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The Federal policy favoring arbitration

Prior to this case, some circuit courts had held that the right to enforce an arbitration agreement is only waived if the party acted inconsistently with that right and the other party was prejudiced by its inconsistent actions. The Supreme Court held that this holding was wrong and that conditioning a waiver of the right to arbitrate on a showing of prejudice was an error of law (at 4, 6-7).

The Court held that the FAA's so-called "policy favoring arbitration" does not authorize federal courts to invent special, arbitration-preferring, procedural rules such as requiring a showing of prejudice. Rather, the policy makes arbitration agreements as enforceable as other contracts, but not more so. SCOTUS explained that a court may not devise novel rules to favor arbitration over litigation (at 7).

SCOTUS remanded the case to the Court of Appeals and directed the Court to assess the question of whether the defendant knowingly relinquished the right to arbitrate by acting inconsistently with that right, regardless of whether the plaintiff was prejudiced (at 8).