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Employers May Lose Their Right to Compel Arbitration if They Delay​

May 23, 2022

On May 23, 2022, the U.S. Supreme Court held in Morgan v. Sundance that federal courts may not devise novel rules to favor arbitration over litigation and rejected a three-element test used by certain federal circuits courts for determining waiver of arbitration.

In Morgan v. Sundance, the plaintiff, on behalf of herself and other employees, brought a suit against her employer in a federal district court for alleged failure to pay overtime wages. At the time of hiring, the plaintiff and other employees agreed to arbitration for all employment-related disputes. Nevertheless, the employer failed to invoke its right to compel arbitration until nearly eight months’ litigating in court. The plaintiff opposed arbitration, claiming that the employer had effectively waived the right to compel arbitration.

The district court applied a three-prong test to determine if the employer had waived the right to compel arbitration: (i) whether the employer knew its right to arbitrate, (ii) whether the employer acted inconsistently with that right to arbitration, and (iii) whether the plaintiff had experienced prejudice by the inconsistent act. It concluded that the employer had waived its right to arbitration. The appellate court, applying the same test but finding that the plaintiff had not been prejudiced, reversed the district court's decision.

The Supreme Court rejected the third element of the three-prong test, finding that the requirement of showing prejudice was a judicial creation premised upon the federal policy favoring arbitration, not a general feature of federal waiver law The Supreme Court held that federal courts may not devise novel rules to favor arbitration over litigation and must treat arbitration contracts like all others.

By removing the third prong of the test, the Supreme Court has made it easier for establishing waiver of right to compel arbitration in the context of an employment dispute. For an employer weighing the pros and cons of litigating in court versus arbitrating a claim pursuant to the arbitration clause in its employment contract, it should be aware that pursuing litigating in court instead of submitting the claim to arbitration may jeopardize its contract-based right to arbitration.

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