On Monday, the Supreme Court issued a unanimous decision upending a key part of arbitration jurisprudence in nine Circuits. Today’s Highlights focuses on that case. But, there are some other things happening, as well.
SCOTUS: Prejudice as an element of waiver
It does not take a long opinion to change a major doctrine. In holding that the Eighth Circuit erred in ruling that a party asserting litigation waiver must prove prejudice, SCOTUS overruled, in six pages, the law in nine Circuits.
In Morgan v. Sundance, Inc., 2022 U.S. LEXIS 2514 (May 23, 2022), SCOTUS reverses Morgan v. Sundance, Inc., 992 F. 3d 711 (8th Cir. 2021). The Court of Appeals had held that, because the plaintiff had failed to demonstrate that Sundance’s delay in asserting a right to arbitrate the parties’ Fair Labor Standards dispute prejudiced her, she could not prevail on a claim of litigation waiver. The Supreme Court, in a unanimous opinion written by Justice Kagan, reverses. The Court’s reasoning centers on Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), which it interprets as holding that “the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules.” The existence of that “policy” “is merely an acknowledgement of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to put such agreements on the same footing as other contracts,” quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2010). “If an ordinary procedural rule – whether of waiver or forfeiture or what-have-you – would counsel against enforcement of an arbitration contract, then so be it. The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”
In addition to Moses Cone, the opinion invokes the Federal Arbitration Act. Section 6 thereof provides that any application to compel arbitration “shall be made and heard in the manner provided by law for the making and hearing of motions.” “[T]he usual federal rule of waiver,” the Court opines, “does not include a prejudice requirement. So, Section 6 instructs that prejudice is not a precondition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.”
In summary, the court holds that “[t]o decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party.” SCOTUS reverses and remands. In doing so, it also holds that the First, Second, Third, Fourth, Fifth, Sixth, Ninth, and Eleventh Circuits, which impose a prejudice requirement, have gotten it wrong. Only the Seventh and D.C. Circuits are on the right side of the question. (Footnotes 1 and 2 of the Court’s opinion lay out the relevant citations).
While the Court’s holding is clear, the opinion presents interesting questions for the lower courts. First, what law applies to determining the relevant elements of waiver? Courts of Appeals have “generally resolved” this question as one of federal law. However, the Supreme Court’s opinion only ”assumes without deciding that they are right to do so.” (Emphasis added). This simple sentence presages the next battleground. Is waiver a matter of state or federal law? If a state court where the District Court is sitting would require a showing of prejudice must the federal court also do so? Justice Kagan leaves that question for another day.
Likewise, the opinion hints at whether the conduct of a party in delaying its motion to compel is really a question of waiver – or might it be “forfeiture, estoppel, laches, or procedural timeliness?” Again, the Court does not address the issue and “assumes without deciding” that the Eighth Circuit correctly viewed the issue as waiver. However, to what extent are the elements of those various defenses different? Estoppel, at least, requires a demonstration of prejudice. Can a delaying party who still seeks to compel arbitration find a way to recast their opponent’s delay objection from one of waiver to one of estoppel?
Finally, is the Morgan holding retroactive? How does it apply to the myriad cases in nine Circuits in which an application to compel arbitration was denied because of an absence of prejudice? Is it time for plaintiff’s lawyers to crank up the motions to reargue?
Periodically an opinion comes out that screams, “Hey, Law Student. Here’s your Law Review Note.” This is one of them.
Delegation of Preemption
Unite Here Local 30 v. Sycuan Band of the Kumeyaay Nation, 2002 U.S. App. LEXIS 13672 (9th Cir. May 20, 2022)(Smith, J. writing for himself and Judges Tashima and Watford), focuses on the Indian Gaming Act and the Tribe’s compact thereunder and on the degree to which the provisions thereof preempt a tribe’s labor agreement. For arbitration practitioners, the relevance of the case is not whether the contract is preempted, but who makes that decision. The court holds that the issue of preemption is one for the arbitrator under a clause which refers “all issues” to arbitration. “Preemption is not excluded from the arbitration agreement. The arbitration agreement does not, and need not, cover only specifically identified disputes. . . .” Further, since the Tribe challenged the contract as a whole, not just the arbitration clause, Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010), requires that issues related to enforceability go to arbitration.
Incorporation of other agreements
I have included Ohring v. Unisea, Inc., 2022 U.S. App. LEXIS 13765 (9th Cir. May 20, 2022)(Judges Boggs and Forrest; Judge Hawkins, dissenting) simply as a heads up to anyone in the Ninth Circuit dealing with the issue of whether one agreement incorporates the terms of another. The majority holds that the parties’ Employment Agreement incorporated an arbitration clause contained in a subsequently executed Dispute Resolution Agreement (DRA). In dissent, Judge Hawkins holds that the terms of the DRA are procedurally and substantively unconscionable. However, both opinions are very short and neither lays out any relevant facts. This is surprising in light of the existence of a dissent on the panel and the reversal of the District Court. However, as a result, anyone wanting to understand the opinion needs to go to the District Court’s decision at Ohring v. Unisea, Inc, 2021 U.S. Dist. LEXIS 130528 (W.D. Wash. July 13, 2021). I will leave that task to the case’s limited audience.
A Primer on Arbitration Law
Malamatis v. ATI Holdings, LLC., 2022 U.S. Dist. LEXIS, 90276 (D. Md. May 19, 2022), grants a motion to compel arbitration and dismisses the complaint. In doing so, it addresses the delegation of issues to an arbitrator, illusory contracts, dismissal v. stay, contract formation, and a number of other principles. Judge Hollander’s opinion runs sixty-six pages and explores in detail, with copious citations, almost every issue involved in analyzing whether a matter should be arbitrated. If you have an associate who needs to get a foundation in arbitration law, simply give him or her this case.
Enjoy the rest of your week. The Court has two more sets of decisions to issue on arbitration cases that were argued in March. Perhaps, we will have more SCOTUS news on Friday.
David A. Reif, FCIArb