Those Employer-Employee Disputes - Litigation and Arbitration

 In Morgan v Sundance on May 23, 2022, the US Supreme Court unanimously upheld that arbitration-specific procedural rules are not compatible with the Federal-Arbitration Act (FAA). That is even when those rules purport to further the FAA’s federal policy favoring arbitration.

BACKGROUND, AS DERIVED FROM SCOTUS DOCUMENTS AND PAUL WEISS’ ANALYSIS

Let’s look at how this came to be.

Here is SCOTUS’ Summary of the Certiorari, along with its ruling. And, here is Paul Weiss’ Client Memorandum which presents the points of law and the implications, including unresolved legal matters. I combined the two for this summary.

Robyn Morgan was an hourly employee at a Taco Bell franchise owned by Sundance. As is frequently required, Morgan, when applying for the position, signed an agreement for arbitration of disputes with the employer. Despite that, she went on to file a nationwide collective action alleging that the employer violated federal law pertaining to payment of overtime.

Interestingly, Sundance initially engaged in the litigation, filing a dismissal motion. That failed. The next step it had taken was mediation. That failed. About nine months later it moved to stay the lawsuit. It demanded arbitration under the FAA.

Morgan opposed. She argued that Sundance has waived the arbitration right by engaging in the federal litigation and doing that for too long.

In determining that, the Eighth Circuit applies this arbitration-specific test: There is a requirement that the party asserting waiver show prejudice. That is in addition to the two standard requirements. They are:

• Knowledge of the right
• Engaging in actions inconsistent with that right.

In contrast, the district court in applying that test, had found that Sundance waived its arbitration right. The Eighth Circuit reversed that 2-1. In a dissent Judge Steven M. Colloton referred to prejudice as a “debatable prerequisite” for waiver.

The US Supreme Court took up the issue to resolve that split.

CIRCLING BACK TO SPLIT BETWEEN NINTH AND SEVENTH CIRCUITS ABOUT DERIVATIVE LAWSUITS

Splits do tend to be reviewed by SCOTUS. That is why Paul Weiss’ legal experts speculate the different rulings on derivative lawsuits by the Ninth and the Seventh Circuit courts could be reviewed by SCOTUS. The Ninth made one ruling in Lee v Fisher. Here is the analysis of that and of a different one in a similar case by the Seventh Circuit in the recent Paul Weiss Client Memorandum.

THE QUESTION AT ISSUE IN MORGAN V SUNDANCE

In its Client Memorandum on Morgan v Sundance Paul Weiss points to the question at issue. That is whether courts may invoke arbitration-specific rules when those rules favor arbitration. Paul Weiss legal experts note that the US Supreme Court described the FAA as embodying a federal “policy favoring arbitration.” Moses H. Cone Memorial Hospital v Mercury Construction Corp.

Explicitly Paul Weiss legal experts state:

“Section 2 provides that arbitration agreements ‘shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’ That provision reflects ‘the fundamental principle that arbitration is a matter of contract,’ and that courts must ‘place arbitration agreements on an equal footing with other contracts.’ AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011).

“The Court has invoked Section 2 to ‘overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate,’ which was often based on arbitration-specific rules. Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2010) (internal quotation marks omitted).”

That means it vacated the Eighth Circuit judgment. In addition, Paul Weiss notes that it remanded for a determination whether Sundance had waived its arbitration right or whether a different procedure – e.g. forfeiture, estoppel, laches - is appropriate.

THREE KEY TAKEAWAYS

This decision, observe Paul Weiss lawyers, has three major implications.

• It reaffirms this: Arbitration-specific rules are impermissible under the FAA. That is true regardless of whether the rule is intended to favor arbitration or to disfavor it.

• There is an emphasis that the federal policy in favor of arbitration is a policy of equal footing for arbitration agreements, not a policy intended to put a thumb on the scale in favor of arbitration agreements.

• There remains a lot of uncertainty about what comes next. For example, because the Court explicitly declined to determine if waiver is the right point of view through which to analyze the disputes, this is unclear: If various courts of appeals will treat conduct like Sundance’s as implied waiver, or whether the various courts of appeals will be reviewed under the rules of governing forfeiture, estoppel or laches. They themselves could include a prejudice requirement.

FOR FUTHER CLARIFICATION, INSIGHT OR GUIDANCE

The Client Memorandum includes the names of and the contact information for the Paul Weiss experts on these issues. The law firm chairperson Brad Karp participated in the analysis.

Connect with Editor-in-Chief Jane Genova at janegenova374@gmail.com. Now and then she does freelance assignments for law firms such as Paul Weiss and their vendors.