A Victory for Workers Who Sue Their Employers: U.S. Supreme Court Unanimously Decides That Courts May Not “Make Up” New Rules to Favor Arbitration

A Victory for Workers Who Sue Their Employers: U.S. Supreme Court Unanimously Decides That Courts May Not “Make Up” New Rules to Favor Arbitration

In Morgan v. Sundance, Inc., a momentous 9-0 decision issued on May 23, 2022, the U.S. Supreme Court ruled that courts may not adopt an arbitration-specific rule conditioning a waiver of the right to arbitrate on a showing of prejudice. Permitting the adoption of such a rule would have further stacked the deck against workers who sue their employers by imposing a prejudice requirement to establish an arbitration waiver even though prejudice does not need to be shown to establish waiver of other contractual rights.

The case began when Robyn Morgan, an hourly employee for a Taco Bell franchise in Iowa, filed a collective action under the Fair Labor Standards Act after discovering that she and her co-workers were being denied overtime pay. Her employer litigated the case for nearly eight months before it suddenly decided that it was going to force Morgan to arbitrate her claim individually under an arbitration provision it had included in her job application.

Typically, a party to a lawsuit waives its right to making certain legal arguments if that party waits too long to do it. Accordingly, Morgan argued that by delaying enforcing arbitration, her employer had waived its right to arbitrate the case. While the federal district court agreed with Morgan, the Eighth Circuit Court of Appeals reversed on the grounds that Morgan couldn’t prove that her employer’s midstream change in strategy caused her prejudice. The Supreme Court then took Morgan’s case to determine whether the Eighth Circuit, as well as numerous other federal courts and state courts, erred in including a prejudice requirement in the test for arbitration waiver even though prejudice does not have to be shown to establish waiver of other contract rights.

In an unanimous opinion written by Justice Elena Kagan, the Supreme Court agreed with Morgan and determined the Eighth Circuit erred, holding that consistent with the Supreme Court’s equal-treatment principle, arbitration agreements must be treated like all other contracts: “But the [Federal Arbitration Act]’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration preferring procedural rules. . . . The federal policy is about treating arbitration contracts like all others, not fostering arbitration.” In a drastic departure from prior long-standing court decisions expanding mandatory arbitration, all nine Justices of the Supreme Court made clear that the equal-treatment principle prohibits favoritism of arbitration just the same as it disallows hostility to arbitration.

Morgan v. Sundance, Inc. changes the playing field for workers who sue their employers, given that prejudice has been part of the arbitration waiver test in numerous federal courts and state courts for decades. From now on, employers that include arbitration provisions in agreements with their employees will have to determine at the beginning of the case if they want to invoke those provisions and risk an adverse opinion in arbitration with little opportunity for appellate review or take their chances in defending a lawsuit in court instead. What employers will no longer be able to do is take a second bite at the apple in arbitration when litigation isn’t going in their favor.

If you want to challenge unlawful treatment by your employer, either in court or arbitration, please contact Bryan Schwartz Law, P.C..