On May 23, 2022, the Supreme Court in Morgan v. Sundance, Inc., 2022 WL 1611788 (U.S. May 23, 2022) breathes new life into an important ground to resist an arbitration requirement. The Court held 9-0 that federal courts must treat waiver of an arbitration provision the same way they’d treat waiver of any other contractual right: by focusing on the actions of the waiving party without requiring a showing of prejudice. This overrules nine of the eleven U.S circuit courts that had required prejudice to the plaintiff as an element of the waiver defense to the arbitration requirement.
Equally, if not more, important, the decision limits the often-repeated claim that the Federal Arbitration Act (FAA) displays a policy favoring arbitration. Justice Kagan’s opinion explains that the much-vaunted federal policy favoring arbitration is just a commitment to end the early 20th century hostility towards arbitration that led to the FAA’s enactment in the first place, and to make arbitration agreements as enforceable as other contracts “but not more so.”
At times the opinion uses narrow language, saying it stands for the proposition that “federal courts” can’t use the FAA’s pro-arbitration policy to craft “arbitration-specific procedural rules.” But the opinion also makes some broad pronouncements that can be used in state as well as federal court to argue that ordinary contract law principles apply in arbitration cases, without any pro-arbitration thumb on the scale.
Overview of This Article
This article examines the Supreme Court decision in Morgan v. Sundance and lists examples of a defendant’s litigation delay that should waive the arbitration requirement. The article then turns to a different important form of waiver of the arbitration requirement—the defendant refusing to pay arbitration filing fees or otherwise refusing to participate in the plaintiff’s arbitration proceeding. The article also considers a related topic where the arbitration provider is unable or unwilling to conduct the arbitration (the defendant’s failure to pay arbitration fees is only one such reason).
The article then considers a third form of waiver, where a creditor initiates a collection action in court and the consumer later sues the creditor in a related action. Does the creditor’s use of the courts waive its right to later demand arbitration when sued by the consumer on a related matter?
The article’s final but certainly not least important topic examines the possible implications of the Court’s general holding that legal defenses to arbitration agreements should be treated no differently than legal defenses to any other contract, that there is no special protection for arbitration clauses. This Supreme Court holding should be raised in many different types of arguments concerning the unenforceability of an arbitration requirement.
Undue Delay in Raising Arbitration Defense Waives Arbitration Requirement, Even Absent Prejudice to the Plaintiff
An important ground to resist an arbitration requirement is the claim that the defendant waited too long to raise the arbitration agreement in the plaintiff’s court litigation, or substantially invoked the litigation machinery by filing motions or participating in discovery. The excessive delay and/or inconsistent actions in court mean that a defendant has waived its right to demand arbitration of the dispute and that the court litigation can continue. See NCLC's Consumer Arbitration Agreements § 6.3.
Prior to Morgan v. Sundance, Inc., nine U.S. circuit courts had added an additional requirement that a plaintiff had to prove in arguing that the defendant had waived the arbitration requirement. A plaintiff had to show that the plaintiff had suffered prejudice or harm from the defendant’s delay in raising the arbitration requirement. The plaintiff had to prove some manner of harm to the plaintiff because litigation started in court would then be moved to arbitration. Only the D.C and Seventh Circuits had found the defendant’s waiver by undue delay or inconsistent action in court was a defense to arbitration even without proof of prejudice to the plaintiff.
Morgan v. Sundance now definitively resolves this split in the circuits. It holds that prejudice to the plaintiff is not an element of a defendant’s waiver of the arbitration requirement.
Court, Not Arbitrator, Determines Waiver Despite Any Arbitration Clause Language to the Contrary
When a litigation begins in court, and the defendant than seeks to move the matter to arbitration, it is for the court, and not an arbitrator to determine whether the matter stays in court because of the defendant’s undue delay in raising the arbitration requirement. See NCLC's Consumer Arbitration Agreements § 6.3.1.
This is so even when the arbitration agreement includes a clause that clearly and unmistakably delegates to the arbitrator the question whether the defendant has waived the arbitration requirement. When there is such a delegation clause, the plaintiff must first ask the court to decide that the delegation clause itself is invalid because the plaintiff’s delay in raising the issue has waived the delegation clause (not the arbitration agreement as a whole). Once the court finds the delegation clause invalid, the court and not an arbitrator can then decide the waiver issue. See NCLC's Consumer Arbitration Agreements § 6.3.1.
Courts also consistently find that anti-waiver language in an arbitration agreement itself cannot prevent the defendant’s conduct from waiving the arbitration requirement. See NCLC’s Consumer Arbitration Agreements § 6.5.
Types of Undue Delay in Raising the Arbitration Requirement
While much will depend on the specific nature of the defendant’s litigation conduct, here are five examples of a defendant’s conduct in a court litigation that can be viewed as the defendant waiving the right to enforce an arbitration agreement:
- The defendant submitting a motion to dismiss (other than one based on the arbitration requirement), a summary judgment motion, other extensive motions, or otherwise asking the court to address the merits of a case. See NCLC’s Consumer Arbitration Agreements § 184.108.40.206.
- Extensive discovery through the judicial process. See NCLC’s Consumer Arbitration Agreements § 220.127.116.11.
- Extensive passage of time before raising the arbitration requirement while engaged in the court litigation. See NCLC’s Consumer Arbitration Agreements § 18.104.22.168.
- Waiting for class certification to require arbitration. See NCLC’s Consumer Arbitration Agreements § 22.214.171.124.
- Settling the court case and then, when the settlement is withdrawn, seeking arbitration. See NCLC’s Consumer Arbitration Agreements § 126.96.36.199.
Defendant’s Failure to Participate in Arbitration Waives the Arbitration Requirement
Under the consumer rules of the two major arbitration providers—the American Arbitration Association (AAA) and JAMS—businesses must pay almost all the hefty cost of arbitration. The business often must pay $5,000 or more while the consumer only pays a $200 or $250 filing fee. Many companies, learning of this, refuse to pay even the initial filing fees. Others are unwilling to pay ongoing costs in the arbitration, particularly once an arbitrator starts ruling against them on preliminary issues like the scope of discovery. This refusal to pay becomes even more common when the business is faced with a large number of similar individual arbitration claims, each requiring the business to pay $5,000 or more in fees and costs.
A defendant waives its right to force arbitration where the consumer initiates arbitration, but then the defendant refuses to participate in the arbitration, by failing to make all required payments to the arbitration provider or through other conduct. Because the defendant has refused to participate in the arbitration proceeding, the consumer should be able then to proceed in court, even on a class basis. See NCLC’s Consumer Arbitration Agreements § 6.4.3.
As an initial matter, it will be up to the arbitrator or arbitration provider to determine whether the defendant has refused to participate in the arbitration proceeding. See NCLC’s Consumer Arbitration Agreements § 6.4.2. A frustrating problem for consumers is where the arbitrator or provider are excessively slow in determining whether the defendant has refused to participate. The consumer may have to press the arbitrator or provider to reach a decision.
Where AAA or Other Arbitration Provider Refuses to Conduct an Arbitration
An arbitration provider may refuse to conduct a proceeding because of the business’s failure to participate—which can be viewed as a waiver of the arbitration requirement. But there are other grounds why an arbitration provider may refuse to arbitrate, which may require a different theory for why the arbitration agreement is unenforceable. See generally NCLC’s Consumer Arbitration Agreements § 188.8.131.52.
For consumer arbitrations, AAA will not conduct an arbitration unless the company has first registered with the AAA and the AAA has approved that its arbitration agreements comply with AAA’s consumer due process protocols. In addition, AAA may refuse to conduct a consumer arbitration involving a company that has refused in the past to pay required arbitration fees to AAA. There may even be a letter from AAA to the business indicating that it will refuse to arbitrate future matters with that company. See generally NCLC’s Consumer Arbitration Agreements § 9.4.
There are other reasons as well why the designated arbitration provider may be unavailable to administer the arbitration. For example, certain arbitration agreements provide that the arbitration will be administered by a specific arbitration provider connected with an American Indian tribe, but the tribal arbitration provider does not exist. See NCLC’s Consumer Arbitration Agreements § 184.108.40.206.
Whatever the reason for the unavailability of a designated arbitration forum, a key question is whether the arbitration agreement designates an alternative provider that can administer the arbitration. If not, a court may find that the sole designated arbitration provider is integral to the agreement, such that the agreement is unenforceable because it is impossible to meet the parties’ intent as set out in the agreement. Alternatively, if designation of a provider is found to be only ancillary to the agreement, the court will have to select either an alternative arbitration provider or select the arbitrator and the rules the arbitrator is to follow.
Although the intent of an arbitration agreement will be determinative, courts often find that the sole designated arbitration provider is integral to the agreement and that the provider’s unavailability makes the arbitration agreement unenforceable. See generally NCLC’s Consumer Arbitration Agreements § 8.7.9.
After a Creditor Files a Collection Lawsuit, Does an Arbitration Requirement Still Apply to the Consumer’s Later Affirmative Litigation?
A creditor or debt buyer using the courts to pursue a collection action may waive its right to insist on arbitration of a separate action the consumer later brings, if that action is based on facts integrally related to the collector’s lawsuit. The creditor has chosen not to use the arbitration process in its collection action and cannot compel the consumer to do so in the consumer’s subsequent related action. An example of such a subsequent related action might be a Fair Debt Collection Practices Act claim concerning the debt buyer’s litigation misconduct in the collection action. See generally NCLC’s Consumer Arbitration Agreements § 220.127.116.11.
Courts are divided as to whether a collection lawsuit waives the right to require arbitration in a consumer’s related affirmative litigation. But cases finding no litigation waiver often fail to recognize that there is a separate claim for contractual waiver—where a party acts inconsistently with a known right—and there is no requirement that such contractual waiver occur within the same proceeding as the subsequent attempt to assert such a right.
In fact, some courts have found waiver even when the creditor or debt buyer had not filed a collection action. For example, the Fifth Circuit found that the creditor had waived the arbitration requirement simply by submitting false bounced check affidavits to the district attorney’s office, since this was viewed as an alternative to the creditor seeking to collect through a civil proceeding. See Vine v. PLS Fin. Services, Inc., 689 Fed. Appx. 800, 804 (5th Cir. 2017).
Important Broader Implication of Morgan v. Sundance
Courts often justify enforcing arbitration agreements using the mantra that the FAA displays a policy favoring arbitration and thus that any doubt must be resolved in favor of arbitration. This mantra should be sharply limited. Morgan v. Sundance specifically rejects this over-general approach:
But the FAA’s “policy favoring arbitration” does not authorize federal courts to invent special, arbitration-preferring procedural rules. Moses H. Cone, 460 U.S., at 24. Our frequent use of that phrase connotes something different. “Th[e] policy,” we have explained, “is merely an acknowledgment 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.” Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2010) (internal quotation marks omitted). Or in another formulation: The policy is to make “arbitration agreements as enforceable as other contracts, but not more so.” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, n. 12 (1967).
Morgan v. Sundance, Inc., 2022 WL 1611788 at *4 (U.S. May 23, 2022).
This statement by the unanimous Court limiting a policy favoring arbitration agreements has important implications for plaintiffs advocating for the unenforceability of an arbitration requirement. Plaintiff attorneys should argue that normal contract principles apply when a court must decide the following contractual or third-party enforcement issues. And if the defendant asks for special treatment because arbitration is involved, plaintiff attorneys should point to this broad statement from Morgan: “A court may not devise novel rules to favor arbitration over litigation.”
- Does the dispute at issue fall within the scope of disputes the agreement requires to be arbitrated, both as to the nature of the dispute and the timing of the dispute? See NCLC’s Consumer Arbitration Agreements § 5.4.
- Does the agreement entitle the party seeking to enforce the arbitration agreement to enforce it? See NCLC’s Consumer Arbitration Agreements §§ 5.5, 5.6.
- Is the party being asked to arbitrate a dispute bound by the arbitration agreement? See NCLC’s Consumer Arbitration Agreements §§ 5.5, 5.6.
- Is the agreement unconscionable? See NCLC’s Consumer Arbitration Agreements Ch. 8.
- Has the arbitration agreement been induced by misrepresentation? See NCLC’s Consumer Arbitration Agreements § 18.104.22.168.
- Is there fraud in the factum in the consummation of the contract containing the arbitration provision? See NCLC’s Consumer Arbitration Agreements § 22.214.171.124.
- Has there been assent to the contract containing the arbitration provision? See NCLC’s Consumer Arbitration Agreements §§ 4.3, 4.4.
- Has the arbitration agreement been sent unilaterally as a modification of an existing contract? See NCLC’s Consumer Arbitration Agreements § 4.5.
- Is the agreement illusory? See NCLC’s Consumer Arbitration Agreements § 4.6.
- Has the agreement containing the arbitration clause been superseded by another agreement not containing an arbitration requirement? See NCLC’s Consumer Arbitration Agreements § 4.10.3.
- Has the whole agreement expired so that the agreement and the arbitration requirement are no longer applicable? See NCLC’s Consumer Arbitration Agreements § 4.10.4.
- After assigning the agreement, can the assignor continue to enforce the agreement? See NCLC’s Consumer Arbitration Agreements § 4.10.5.