It’s common for a plaintiff to file a lawsuit despite a contract dictating that the claims are governed by an arbitration clause. And it’s common for a defendant to then file a motion to stay the litigation to kick the dispute to arbitration. But how far can a defendant litigate the case in court before invoking the arbitration clause? Yesterday, the Supreme Court heard oral argument on that question in Morgan v. Sundance, Inc.
The case has important implications for any litigation with the potential to be sent to arbitration. It could determine how early in a proceeding a defendant must assert an arbitration clause before forever losing the ability to arbitrate the dispute. In short, is an arbitration clause “use it or lose it”?
Plaintiff Robyn Morgan was an employee of defendant Sundance, Inc. for three months. When she began her job, she signed an employment application with an arbitration clause—agreeing to “use confidential binding arbitration, instead of going to court, for any claims that arise” between her and Sundance.
Claims then arose. Morgan filed a class action lawsuit in federal court against Sundance. Sundance moved to dismiss, but the motion never mentioned arbitration. After Sundance lost its motion, it filed an answer that once again never mentioned arbitration. After attempts to settle the dispute through mediation failed, Sundance filed a motion to compel arbitration.
The district court denied Sundance’s attempt to compel arbitration on the basis that it had waived its arbitration rights. The Eighth Circuit reversed. It held that for a waiver of an arbitration clause, a plaintiff must demonstrate she would suffer prejudice by submitting to arbitration, which it concluded Morgan did not demonstrate.
The Oral Argument
Most federal courts have required plaintiffs to show that they suffered prejudice in order to demonstrate that the defendant waived its contractual right to arbitrate. But a minority of courts have looked to the relevant test for waiver under state contract law, and state contract law generally does not require prejudice.
The justices heard oral argument on Monday on these state-or-federal-law and prejudice-or-no-prejudice questions. The argument did not provide a clear indication of which way the case will turn out, but it did provide some insight as to the biggest issues the Court is likely to grapple with. Justice Thomas did not participate in the argument due to his recent hospitalization.
Sea Change? One theme that emerged at argument was the concern expressed by some justices that looking to state law would represent a major shift in how courts have approached this issue. Justice Alito asked: “[Y]ou have a strong argument and you might be right, but it would represent a sea change, would it not?” He similarly asked whether the state-law framework would “require all the courts of appeals to approach this question differently from the way they have.” Justice Gorsuch noted that he “also take[s] Justice Alito’s point that’s been echoed here that all the courts of appeals have seemed to treat it as not a question of state law but of federal law.”
State Law Difficulties. The justices also appeared somewhat wary about weighing in on Iowa contractual waiver law. Justice Breyer noted that state law has many similar doctrines such as “laches, in default, forfeiture, waiver, estoppel” and the Court “could get laws in many, many places really mixed up because judges sometimes put the wrong words” in opinions. Justice Gorusch stated: “Lord only knows what Iowa state law defenses are . . . I’m not an expert.”
Line Drawing. Sundance got its own pushback, particularly on how far its arguments would permit litigants to proceed in federal court before invoking the arbitration clause. Justice Roberts stated: “[S]o you wait until, in a case that you lose, to the denial of [a petition to the Supreme Court] and say at that time no, wait a minute, we’re supposed to -- we have the right to arbitrate and we want to go to arbitration.”
Justice Kagan similarly raised whether allowing defendants to proceed too far with litigation would allow them to “test the waters” in federal court before seeking arbitration:
And what that leads to is why wouldn’t anybody test the waters in federal court and see if they can get the -- the case dismissed and only if they can’t say, okay, now I’m going to rely on my arbitration agreement and let’s go to arbitration.
So it’s like two bites at the apple. There’s no incentive for anybody to go to arbitration fast, or there’s no incentive for the defendant. The defendant says, I have, like, this free pass to litigate for a while and then only then go to arbitration.
Sundance proposed drawing the line at when there’s been “substantial discovery.”
Presumption of waiver – Justice Kavanaugh. Justice Kavanaugh proposed his own solution to the line-drawing question, asking both sides about the D.C. Circuit’s approach to the waiver analysis. The D.C. Circuit held that there is a presumption of waiver if a defendant does not raise arbitration in its first responsive pleading. This approach would rely on federal law (following Sundance’s argument), but ultimately would be of no help to Sundance in this case because the presumption would apply against it. No other justices asked questions indicating they were inclined to follow this presumption-of-waiver path.
Estoppel Not Waiver – Justice Barrett. Justice Barrett asked whether if courts should look to state law, the relevant contract law should be estoppel rather than waiver. This in many ways represents the mirror image of Justice Kavanaugh’s question. This approach would rely on state law (following Morgan’s argument), but ultimately would be of no help to Morgan, who admitted she could not satisfy the requirements for estoppel. And like Justice Kavanaugh’s question, no other justice picked up on this line of questioning.
This case continues the Court’s focus on arbitration questions this Term—a trend which has occurred somewhat under the radar amid higher profile cases garnering more media attention. The Court already heard argument in Badgerow v. Walters on when federal courts have jurisdiction to confirm or vacate an arbitration award under the Federal Arbitration Act. And the Court has two more arguments related to arbitration coming up this month: Southwest Airlines Co. v. Saxon and Viking River Cruises v. Moriana. A third (Servotronics Inc. v. Rolls-Royce PLC) was dismissed by joint stipulation.