What should be required to show that a party waived its right to arbitrate?

This post concerns a recurring topic in class-action practice: how a party—through its own litigation conduct—can waive its right to arbitrate.

The topic warrants attention, or at least came to our attention, because of a recent decision from a federal appellate court. The case, called Morgan v. Sundance, Inc., is a putative nationwide collective action filed under the Fair Labor Standards Act.

The defendant (Sundance) owns Taco Bell franchises in multiple states. The plaintiff (Robyn Morgan) worked at a Sundance restaurant in Iowa. She has accused Sundance of not paying her for her time worked or for overtime wages.

Ms. Morgan alleges she had an employment agreement with Sundance. That agreement had an arbitration provision. Ms. Morgan’s lawsuit falls within the terms of that provision.

Sundance, then, would seem to have a strong case for arbitration. But that assessment ignores how Sundance conducted itself after Ms. Morgan filed suit in federal court in Iowa.

In particular, Sundance did not initially move to compel arbitration. Sundance instead moved to dismiss the case because of a similar collective action in federal court in Michigan. The motion to dismiss did not refer to the arbitration provision.

Sundance lost the dismissal motion, with the federal court in Iowa reasoning that the Iowa and Michigan cases are different enough to proceed independently. So Sundance filed its answer and affirmative defenses.

This time, one might assume, Sundance would raise the arbitration agreement as a defense. But Sundance’s answer said nothing about arbitration.

The Iowa case moved to a scheduling conference and, after that, a class-wide private mediation in Chicago. The mediation encompassed the Iowa and Michigan cases. Before the mediation, the parties exchanged information, including Sundance’s payroll data for nearly twelve-thousand members of the putative collective. Ms. Morgan hired an expert to study that data.

The Michigan case settled, but the Iowa case did not. A few weeks later, Sundance (finally) moved to compel arbitration. That motion came eight months into the case.

Not surprisingly, Ms. Morgan argued that Sundance waived its right to arbitrate by litigating the case for eight months while not uttering a word about arbitration. The federal court in Iowa sided with Ms. Morgan. It concluded that (1) Sundance acted inconsistently with its right to arbitrate and (2) Ms. Morgan suffered prejudice from the inconsistent acts.

Sundance appealed to the U.S. Court of Appeals for the Eighth Circuit. The appellate briefing focused on whether the district court faithfully applied the Eighth Circuit’s test for arbitration waiver.

The Eighth Circuit reversed. Its opinion, however, focused less on whether Sundance acted inconsistently with its right to arbitrate, and more on an issue that received less attention in the parties’ briefs: whether Sundance’s conduct caused any prejudice to Ms. Morgan.

On that issue, the Eighth Circuit noted four points:

1. Ms. Morgan was not forced to respond to discovery.
2. The issue raised in Sundance’s motion to dismiss would not be duplicated in arbitration.
3. Sundance had not litigated the merits of the case.
4. The parties did nothing while they waited for four months for a ruling on the motion to dismiss.

Based on these points, the Eighth Circuit concluded that Ms. Morgan did not suffer any prejudice.

That conclusion, however, was not unanimous. Judge Steven Colloton dissented, reasoning that Ms. Morgan showed enough prejudice to support waiver, and also that “[p]rejudice is a debatable prerequisite” in the first place.

That reasoning finds support from two other U.S. circuit courts. In particular, a Seventh Circuit decision by Judge Richard Posner explains that, in ordinary contract law, a waiver usually is effective without proof of detrimental reliance or consideration. Judge Posner framed the issue of arbitration waiver as a question of forum selection. Once a party chooses a non-arbitral forum, he explained, the party has simply waived a contract right. Judge Colloton cited Judge Posner’s decision and relied on its reasoning.

Interestingly, the U.S. Supreme Court granted certiorari about ten years ago to decide this question. But the parties settled the case before oral argument, and the Court has not revisited the issue.

What, then, are the main takeaways from the Morgan colloquy?

If you’re arguing against waiver, the most important showing might be that your client’s conduct does not clash with its right to arbitration.

If you’re arguing for waiver, Morgan points to thoughtful authority to support the view that the prejudice requirement for waiver should not be especially demanding.

Finally, when it comes to arbitration, playing the long game has real currency. If your client wants to arbitrate, waiting to assert that right can jeopardize your right to do so. It worked out in the end for Sundance, but not until it first experienced an unwelcome run to the arbitration-waiver border.

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