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The Supreme Court has unanimously held that the broad policy favoring arbitration does not authorize federal courts to create a special rule necessitating a showing of prejudice in order to demonstrate the right to arbitration has been waived.

Morgan v. Sundance, Inc. involves alleged violations of the Fair Labor Standards Act for overtime pay. Although Morgan signed an agreement to resolve any employment-related dispute in arbitration, she nevertheless brought a nationwide collective action against her employer in federal district court in Iowa. Morgan’s employer initially defended itself in court, as if the arbitration agreement did not exist, by filing a motion to dismiss suggesting that Morgan could join a related lawsuit or re-file her claims in court in her individual capacity. After its motion was denied, the employer answered the complaint and asserted several affirmative defenses without mentioning the arbitration agreement. Almost 8 months into the case, the employer then decided to move to stay the litigation and compel arbitration under the Federal Arbitration Act (FAA). Morgan argued the employer waived its right to arbitration. Under the governing Eighth Circuit precedent, the district court analyzed whether Morgan was prejudiced by the employer acting inconsistent with its contractual right to arbitration. It found Morgan was prejudiced, but a divided Eighth Circuit panel disagreed and sent her case to arbitration. Nine Federal Circuits invoke “the strong federal policy favoring arbitration” to support an arbitration-specific waiver rule demanding a showing of prejudice, while another two Circuits reject that rule; the Supreme Court agreed to hear the case to address the circuit split.

In a succinct opinion for the unanimous Court, Justice Kagan quickly found that the FAA’s policy favoring arbitration does not authorize federal courts to invent bespoke, “arbitration-preferring procedural rules.” Instead, the high Court reasoned that the FAA’s policy in favor of arbitration was only intended to place arbitration agreements on equal footing with any other contract, not to make them more enforceable than others. The Supreme Court even noted that the text of the FAA, in Section 6, is clear that district courts cannot create arbitration-specific procedural rules because motions to stay litigation or compel arbitration must be made and heard “in the manner provided by law.” This means the usual federal procedural rules apply—not custom-made rules that include a requirement to demonstrate prejudice.

Vacating the judgment of the Eighth Circuit, and rejecting the rule imposed by the other Circuits, the Supreme Court reasoned that the lower courts were bound to focus on the employer’s conduct and whether it knowingly relinquished its right to arbitrate by acting inconsistently with that right. 

This significant decision ensures uniformity across the country in the enforcement of arbitration agreements, and it will likely enable parties to more easily enforce their agreements to resolve disputes in arbitration without having an additional burden to satisfy.