The 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.”