image of US Supreme Court building in Washington DCThe United States Supreme Court recently held that waiver of the right to arbitrate is not conditioned on a showing of prejudice. The Supreme Court’s unanimous decision in Morgan v. Sundance, Inc. (May 23, 2022) has important implications for investors who are considering claims against financial advisers or brokers. Many investor agreements include language that purports to require disputes to be brought in arbitration. In many cases, the agreement identifies the arbitration forum, such as FINRA. Arbitration clauses seek to limit an investor’s right to sue in court and have a judge and jury decide the case. In Morgan, the Supreme Court explained that federal courts may not create arbitration-specific variants of federal procedural rules. In other words, there is nothing special about arbitration contracts compared with any other contracts.

The petitioner in Morgan, Robyn Morgan, worked as an hourly employee at a Taco Bell restaurant owned by Sundance, the respondent. As part of applying for her job at Taco Bell, Morgan signed an agreement to “use confidential binding arbitration, instead of going to court,” to resolve any employment dispute. Morgan, however, sued Sundance in federal court in a nationwide collective action, bringing claims for violations of the Fair Labor Standards Act. Morgan alleged that Sundance cheated its employees out of their right to overtime for work in excess of 40 hours in a week.

Sundance initially responded to the lawsuit “as if no arbitration agreement existed.” Sundance moved to dismiss Morgan’s case and later answered Morgan’s complaint. The parties attempted unsuccessfully to resolve the dispute through mediation. Eight months after Morgan filed the case, Sundance moved for a stay and to compel arbitration under Sections 3 and 4 of the Federal Arbitration Act (FAA). In opposing Sundance’s motion, Morgan argued that Sundance waived its right to arbitrate “by litigating for so long.”

Before Morgan, many courts required that a party who asserted that an arbitration requirement was waived through participation in litigation prove that the party arguing waiver was “prejudiced” by the other party having acted inconsistently with its right to arbitrate. Courts have historically justified departing from the ordinary application of federal procedural rules in disputes about enforcement of an arbitration provision based on the FAA’s “policy favoring arbitration” discussed in Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S. Ct. 927 (1983), and other cases. 

The Eighth Circuit Court of Appeals and other courts had adopted the prejudice requirement in Morgan’s case and others because of this “federal policy favoring arbitration.” The Supreme Court, however, noted that there is no prejudice requirement in federal waiver law generally. The Supreme Court rejected the Eighth Circuit’s approach because the FAA cannot be used to “tilt the playing field in favor of (or against) arbitration.” Writing for the Supreme Court, Justice Elena Kagan explained that “the Eighth Circuit applies a rule found nowhere else—consider it a bespoke rule of waiver for arbitration.”

Justice Kagan went on to explain in the Morgan opinion that arbitration provisions do not get special treatment, and a court may not create rules to favor arbitration over litigation. The “policy favoring arbitration” means that arbitration contracts should be treated like any other contracts. Taken as a whole, Morgan is a significant departure from years of cases in which courts have gone to great lengths to enforce an arbitration clause because of the “policy favoring arbitration.” 

conference room table with pen and paperForced arbitration is common in investor cases. If an investor has a dispute with a member of FINRA, such as a broker or brokerage firm, and the dispute involves the investment business of the broker or brokerage firm, the investor very likely is required by contract to arbitrate before FINRA. Many financial advisers and other professionals in the investment industry are not brokers and are not regulated by FINRA. Instead, they are investment adviser representatives (IARs) of registered investment advisers (RIAs) regulated by the SEC or one or more states. Many investor agreements with RIAs also force investors to litigate claims in arbitration. For example, many RIA customer agreements require arbitration before the American Arbitration Association

Because of the Federal Arbitration Act and other laws, investors rarely have much if any say about whether to seek relief in court or arbitration. Instead, if the investor’s account agreement says the investor must arbitrate, that requirement more often than not is enforced.

A Georgia judge recently called out misconduct by Wells Fargo and FINRA in an order vacating a FINRA arbitration award in favor of Wells Fargo and against an investor. According to the Honorable Belinda E. Edwards of the Superior Court of Fulton County, “Wells Fargo and its counsel manipulated the FINRA arbitrator selection process” by removing names of potential arbitrators from what was supposed to be a randomly generated list. Judge Edwards wrote, “Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.” 

Judge Edwards went on to discuss problematic decisions by the arbitrators during the arbitration. In one example, a broker testified about text messages that did not go through Wells Fargo’s compliance process. The broker testified that he knew this was a “no-no,” “a bad thing,” and a violation of supervisory procedures, but the broker testified he “did it anyway.” This testimony was interrupted by a “medical emergency.” The FINRA arbitrators, for unknown reasons, did not sequester the broker. When the broker’s testimony resumed more than 6 months later, he claimed to not recall the damaging testimony, and his testimony changed in favor of Wells Fargo.

Judge Edwards’ opinion has received national attention.  In a letter to FINRA’s president and CEO, Senator Elizabeth Warren and Representative Katie Porter described Wells Fargo’s manipulation of the arbitrator selection process as “highly disturbing.” Senator Warren and Representative Porter wrote, “we have long had concerns about FINRA’s ability to effectively enforce rules against fraudulent and abusive behavior by brokers and dealers. And we have for years attempted to address the problems for consumers and workers caused by forced arbitration processes that limit their rights. This latest report brings all three problems into focus: it reveals troubling new allegations about the atrocious behavior of Wells Fargo, the inability of FINRA to effectively police the financial system, and the unfairness of the arbitration process.”

graphic cartoon of a blank contractThe United States House Financial Services Committee recently passed the Investor Choice Act, H.R. 2620. The Investor Choice Act, introduced by Representative Bill Foster, would prohibit broker-dealers, investment advisers, and others from including mandatory arbitration clauses in their customer agreements. H.R. 2620 would also prohibit bans on class action suits in these customer agreements. The bill includes language making it retroactive, meaning if the bill becomes law, any customer agreement in effect before then that violates these prohibitions would be void. The full text of the bill is available here:  Text – H.R.2620 – 117th Congress (2021-2022): Investor Choice Act of 2021 | Congress.gov | Library of Congress

Findings in Section 2 of H.R. 2620 include, “Issuers, brokers, dealers, and investment advisers hold powerful advantages over investors, and mandatory arbitration clauses, including contracts that force investors to submit claims to arbitration or to waive the right of investors to participate in a class action lawsuit, leverage those advantages to severely restrict the ability of defrauded investors to seek redress,” and “Investors should be free too—(A) choose arbitration to resolve disputes if they judge that arbitration truly offers them the best opportunity to efficiently and fairly settle disputes; and (B) pursue remedies in court should they view that option as superior to arbitration.”  No Republicans joined the seven Democrats who cosponsored the bill. 

Amazon.com Inc. recently and quietly dropped the arbitration requirement in their terms of service. The change was made after more than 75,000 individual arbitration demands were made on Amazon. The individual demands were made on behalf of Amazon’s Echo users. Because of the individual arbitration demands, the costs for the filing fees were in the tens of millions of dollars. These fees, under Amazon’s own policies, were payable by Amazon.

The change to the terms of service now allows customers to file lawsuits, including potential class actions. However, users will need to agree to adjudicate in the state or federal courts in King County, Washington.

Amazon is currently involved in several class actions, including one on its Echo devices.


This blog is intended to provide information to the general public and to practitioners about developments that may impact Oregon class actions.

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check mark image with workersOregon Senator Jeff Merkley and U.S. Representative Bill Foster of Illinois introduced the Investor Choice Act earlier this month. The bill would prohibit broker dealers and investment advisors from forcing investors to agree to mandatory arbitration. The bill also prevents brokers dealers and investment advisors from forcing investors to waive the right to bring a class action lawsuit. The Senate’s version of the bill is available here

The North American Securities Administrators Association (NASAA) and Public Investors Advocate Bar Association (PIABA) endorsed the legislation. SEC Commission Chairman Gary Gensler said during his confirmation hearing that investors should be able to chose to go to court to resolve disputes.

Most agreements with individual investors in the financial services industry force customers into arbitration. Many investor advocates want investors to have the option of pursuing claims in court. Arbitration lacks the transparency of court and is sometimes cost prohibitive.

U.S. District Judge James Donato sanctioned Fitbit Inc. and its Morrison & Foerster LLP attorneys for acting in bad faith, saying they owe attorneys’ fees after getting a proposed consumer class action removed to arbitration only to reveal they had no intention of arbitrating the claims. Continue reading “Judge Sanctions Fitbit and Its Attorneys For Bad Faith Transfer to Arbitration”

The Economic Policy Institute just released a fact sheet debunking industry claims that consumers recover more money in arbitration than class actions.

Continue reading “Economic Policy Institute issues report saying average consumer does better in a class action than in arbitration”

On July 20, 2017, Congressional Republicans began a process to attempt to eliminate a Consumer Financial Protection Bureau rule that stops companies from putting class action bans in their arbitration clauses and makes it easier for consumers to sue banks, credit card firms, payday lenders and other service providers in court.

Continue reading “Republicans move to invalidate new CFPB rule banning forced arbitration”