The use of arbitration clauses and agreements is not infrequent, forcing federal and state courts to address the enforceability of such agreements on numerous grounds. Courts have created variants of federal procedural rules, specific to arbitration. Specifically, over the years, nine of the twelve circuit courts have affirmed an arbitration-specific rule pertaining to waiver in reliance upon the Federal Arbitration Act’s (“FAA”) “policy favoring arbitration.” Recently, in Morgan v. Sundance, Inc., the Supreme Court decided the issue of whether federal courts may create such arbitration specific “variants” of federal procedural rules. This alert provides an overview of the United States Supreme Court’s recent decision and analyzes its potential implications on litigants.
The recent Supreme Court decision arose out of a dispute regarding the waiver of the right to arbitrate. The issue of whether a party has waived its right to arbitrate may arise where a defendant has engaged substantively in the litigation of a matter prior to moving to stay the litigation in favor of binding arbitration. The question then becomes whether the defendant has moved for arbitration too far into the litigation timeline. To answer that question, a majority of the federal circuit courts have created their own arbitration-specific procedural rule – a party may waive its right to arbitrate only when its conduct has prejudiced the other party.
As previously stated, the justification for such arbitration-specific procedural rules is based on the FAA. Indeed, a quick search of case law on the enforceability of arbitration provisions populates thousands of results which directly cite the FAA’s “policy favoring arbitration.”
In 1968, the Second Circuit declared that “there is an overriding federal policy favoring arbitration.” This declaration led to the creation of the prejudice requirement when pertaining to the question of whether a party has waived its right to arbitrate. As Justice Kagan notes in her opinion, following Carcich, “[c]ircuit after circuit (with just a couple of holdouts) justified adopting a prejudice requirement based on the ‘liberal national policy favoring arbitration.’”
In 2010, the Supreme Court tried to clarify that the federal policy in favor of arbitration “is merely an acknowledgement of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” In other words, rather than favoring the enforcement of arbitration agreements over litigation, the federal policy is to ensure that arbitration agreements are “as enforceable as other contracts, but not more so.”
In further support thereof, the Supreme Court cites to Section 6 of the FAA, which provides that any motion, including a motion to stay litigation or compel arbitration, must be made and heard pursuant to the “usual federal procedural rules.” As such, the Court reasoned, “custom-made” rules, such as the requirement of prejudice at issue here, may not be used “to tilt the playing field in favor of (or against) arbitration.”
After discussing its previous decisions regarding the federal policy toward arbitration, as cited above, the Supreme Court held that the FAA does not authorize federal courts to create arbitration-specific procedural rules. To find otherwise would likely place arbitration agreements and provisions on a higher footing than other contracts. Therefore, the Supreme Court remanded the matter to the Eighth Circuit. On remand, the Eighth Circuit will consider, in accordance with the Supreme Court’s holding, whether the moving party “knowingly relinquish[ed]” their right to arbitrate “by acting inconsistently with that right.”
In its decision, the Supreme Court made clear that arbitration is not preferred over litigation and that federal courts are not authorized to create new procedural rules promoting arbitration over litigation. To that end, while timeliness is always an important factor in determining litigation strategy, in light of this decision, parties should not be hesitant in deciding to move to stay litigation and/or compel arbitration. Furthermore, parties should proceed with caution if moving to dismiss claims and, in the alternative, moving to compel arbitration, as this strategy could also raise concerns of timeliness or be viewed as a waiver of the right to arbitrate. Additionally, if the parties have already filed responsive pleadings, engaged in discovery, or, as indicated above, initiated motion practice, the question of timeliness and waiver will likely arise, placing the moving litigant in a difficult position. As previously referenced, the moving party in this matter had engaged in litigation for eight months before moving to stay the litigation and compel arbitration. Therefore, if a party is already engaged in litigation, they should consider how far along in the process they are when moving to dismiss the claims, stay the litigation or compel arbitration.
Finally, it should be noted that the implications of this decision have not yet been fully realized. While some lower federal courts have already issued opinions pertaining to this decision, the Eighth Circuit has not re-considered this issue in accordance with the Supreme Court’s opinion, and it is still unclear how this will play out in the remaining circuits.
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- This is not limited to the circuit Courts of Appeals; many lower federal and state courts have followed suit.
- Morgan v. Sundance, 142 S.Ct. 1708, 1712 (2022).
- The moving party in this matter had litigated for eight months prior to moving to stay the litigation and compel arbitration. Id. at 1710.
- Carcich v. Rederi A/B Nordie, 389 F. 2d 692, 696 (CA2 1968).
- Id. at 1713 (quoting Caroline Throwing Co. v. S & E Novelty Corp., 442 F. 2d 329, 331 (CA4 1971) (per curiam); see, e.g., PaineWebber Inc, v. Faragalli, 61 F. 3d 1063, 1068-1069 (CA3 1995); Shinto Shipping Co. v. Fibrex & Shipping Co., Inc., 572 F. 2d 1328, 1330 (CA9 1978)).
- See id. (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2019)(internal quotation marks admitted)).
- See id. (quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, n. 12 (1967)).
- Id. at 1714.