The U.S. Supreme Court Rejects the Requirement of Prejudice For Waiver of Arbitration Under the FAA

In Morgan v. Sundance, Inc., No. 21-328, 2022 WL 1611788 (U.S. May 23, 2022), the U.S. Supreme Court ruled that federal courts, in analyzing a claim that a party has waived the right to arbitrate a dispute under the Federal Arbitration Act (“FAA”), should not impose a requirement of prejudice. All but two of the federal circuits had imposed such a requirement.

Justice Elena Kagan, in her majority opinion, reversed a decision of the Eighth Circuit ordering a case to arbitration because the opposing party had not established prejudice. The Supreme Court observed that federal courts have generally resolved the issue of failure to assert the right to arbitration under a federal waiver standard. Waiver, the opinion stated, “is the intentional relinquishment or abandonment of a known right.” Outside the arbitration context, to decide whether a waiver has occurred, the federal courts focus on the actions of the person who held the right, and “the court[s] seldom considers the effects of those actions on the opposing party.”

However, as the Supreme Court noted, when it comes to arbitration, most federal circuits also imposed a requirement that the party arguing for waiver show prejudice, a requirement which purportedly served the FAA’s “policy favoring arbitration.” Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). For example, in a recent decision in the U.S. District Court for the Southern District of New York, the court would only find waiver “when a party who otherwise has the right to arbitration nonetheless participates in litigation to its adversary’s prejudice, such as by engaging in extensive pre-trial discovery and motion practice, engaging in discovery procedures not available in litigation or delaying the invocation of arbitration rights by filing multiple appeals.” Cornelius v. Wells Fargo Bank, N.A., No. 19 CIV. 11043 (LJL), 2020 WL 1809324, at *6 (S.D.N.Y. Apr. 8, 2020).

In Morgan, using a textual analysis, the Supreme Court rejected this approach, finding that a court may not devise “novel” rules to favor arbitration over litigation, citing Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218–221 (1985). The Supreme Court then sent the case back to the Eighth Circuit to address what standard would govern – whether the federal courts should adopt a waiver standard without the prejudice requirement or adopt some other standard.

Based on the federal judiciary’s longstanding use of the waiver standard, it would appear likely that the Eighth Circuit, and other federal circuits addressing this issue, will simply modify the use of this standard, requiring only a knowing waiver, rather than prejudicial conduct. Thus, the “knowing” aspect of the waiver will likely move to the forefront. When a dispute arises, practitioners should counsel their clients to immediately locate any pertinent arbitration agreements and make an early determination on whether to seek their enforcement. Otherwise, waiver might be found very early in a case.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Attorney Mark Moore who counsels clients on employment disputes, disputes in a university setting, securities matters, intellectual property issues, and other commercial matters. Mr. Moore is admitted to practice law in New York, the United States Courts of Appeal for the Second and Third Circuits and the United States District Courts for the Southern and Eastern Districts of New York.