Arbitration waiver doesn't hinge on prejudice, U.S. Supreme Court says

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People visit the U.S. Supreme Court building in Washington, U.S. March 15, 2022. REUTERS/Emily Elconin

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  • Delays alone can nix power to compel arbitration
  • Ruling settles an 8-3 split among appeals courts
  • Taco Bell worker wins chance to keep overtime pay case in court

(Reuters) - The U.S. Supreme Court on Monday ruled that parties can waive their ability to force lawsuits into arbitration regardless of whether their conduct prejudices their adversaries, potentially allowing more class actions against companies to remain in court.

Justice Elena Kagan wrote for the unanimous court that the 8th U.S. Circuit Court of Appeals should not have required a former employee of Sundance Inc, an Iowa Taco Bell franchisee, to show that the company prejudiced her overtime-pay lawsuit by waiting eight months to move to compel arbitration.

Kagan said requiring a showing of prejudice is the type of arbitration-specific rule that is prohibited by the Federal Arbitration Act.

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Eight appeals courts had imposed a prejudice requirement when determining whether a party has waived the ability to compel arbitration, while three others have said prejudice is only one factor to be considered.

While the issue is technical, Monday's ruling could have significant ramifications for the many businesses that require employees and customers to sign agreements to arbitrate legal disputes. By lowering the bar to show that companies waived the ability to compel arbitration, the decision may make it easier for some plaintiffs to keep class action claims in court and out of private individual proceedings.

The U.S. Chamber of Commerce in a February amicus brief had told the Supreme Court that eliminating the prejudice requirement would invite more protracted litigation over whether companies waived the ability to compel arbitration based on inconsequential delays.

Sundance's lawyer, former U.S. Solicitor General Paul Clement of Kirkland & Ellis, did not immediately respond to a request for comment.

Karla Gilbride of nonprofit Public Justice, who represents plaintiff Robyn Morgan, said she was pleased with the court's finding that "judge-made procedural rules favoring arbitration" are invalid under the FAA.

"We are hopeful that today’s decision ... will send a message to all corporations who include arbitration provisions in their contracts with workers and consumers that those arbitration provisions will be treated just like any other term in their contract," Gilbride said in an email.

The Supreme Court sent Sundance's case back to the 8th Circuit to reconsider whether the company waived the ability to compel arbitration by first moving to dismiss the case on a technicality and engaging in mediation.

The appeals court last year had said Morgan could not show that Sundance's delay caused her prejudice. No initial scheduling conference had taken place, no discovery had been initiated, and no merits-based motions had been filed when Sundance moved to compel arbitration, the court found.

The case is Morgan v. Sundance Inc, U.S. Supreme Court, No. 21-328.

For Morgan: Karla Gilbride of Public Justice

For Sundance: Paul Clement of Kirkland & Ellis

Read more:

Morgan v Sundance: how Taco Bell could impact waiving arbitration

SCOTUS to address arbitration waiver split in Taco Bell franchisee case

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Dan Wiessner (@danwiessner) reports on labor and employment and immigration law, including litigation and policy making. He can be reached at daniel.wiessner@thomsonreuters.com.