Why Employers Should Not Wait to Demand Arbitration


The Supreme Court has shown a willingness to give effect to an arbitration agreement in its rulings over the years. However, the Court’s rulings are based on its interpretations of the Federal Arbitration Act as opposed to a general preference for arbitration over litigation. The Court recently showed that it would strike down court-made rules that may evoke a preference for arbitration when these doctrines are not found in the text of the FAA.

The Court’s ruling suggests that employers that wait to demand arbitration in a legal dispute might end up waiving their right to enforce the agreement that required the dispute to be arbitrated.

In the case of Morgan v. Sundance, a Taco Bell employee filed a wage and labor action against their employer for the alleged failure to pay overtime as required by the Fair Labor Standards Act. Morgan did not involve any findings on the merits of the case. Instead, the case involved whether the employee could file a lawsuit at all.

After the employee filed a lawsuit, the two parties proceeded as if they were going to litigation; however, the employer had an agreement requiring arbitration that would have otherwise been enforceable. The two parties began litigating the case over a span of eight months. The employer had filed an answer, a motion to dismiss, and even engaged in mediation. At that point, the employer moved to enforce the agreement and compel arbitration.

The federal trial court ruled in favor of the plaintiff and held that the case could not be moved to arbitration because Morgan was prejudiced by the eight-month delay in the case. On appeal, the federal appeals court reversed the trial court. The appeals court held that because the parties had not yet begun discovery, the plaintiff was not prejudiced by the delay, and the arbitration agreement was still enforceable.

The Supreme Court Seems Open to Arbitration Waivers

Writing for a unanimous Court, Justice Kagan explained that it is possible for the defendant to make an arbitration request too late. Just because the FAA creates a policy favoring arbitration does not mean a court has to create its own arbitration-specific rule to favor arbitration at the expense of litigation. The fact that the FAA expresses a preference for arbitration does not support judicially-created rules that elevate arbitration over litigation.

Had the employer filed for a litigation stay at the outset of the case, the arbitration agreement would have likely been enforced. However, the issue here is related to principles of contract law, as opposed to arbitration preferences and procedures. In contract law, there is a doctrine of waiver which holds that a party can give up their contractual rights through either their words or actions. Here, the defendant in the case could have waived their rights by litigating the case for eight months before moving to compel arbitration.

According to Justice Kagan, a normal case involving waiver does not ask whether a party was prejudiced by the other party’s actions. The Court held that the arbitration context did not warrant its own special rule that factored in prejudice.

The Court remanded the case to the lower court to consider whether the defendant waived their right to arbitration. To some observers, this holding was surprising, given that the Court has repeatedly ruled in favor of enforcing arbitration agreements.

Employers Should Move Quickly to Stay Litigation and Compel Arbitration

The takeaway from this case is that, while employers have a broad right to enforce an arbitration agreement, this right is not unlimited. If the employer does not promptly move to enforce the arbitration agreement, it may lose the right, especially when it has taken actions that could be construed as a waiver of the right. Any preference for arbitration is not absolute because a court may still apply contract law principles to interpret an arbitration agreement; however, what constitutes waiver would be decided by an individual court. The Supreme Court did not expressly hold that the eight-month delay was a waiver. It only remanded the matter for the lower court to consider the issue.

The Court’s decisions upholding arbitration agreements are an exercise in contractual and statutory interpretation, and they are not an expression of the Court’s policy that arbitration is a preferred mechanism to resolve disputes. While the Court has discussed the federal preference for arbitration, it comes from the language of the FAA, and it is not an artificial judicial doctrine. To the extent that an artificial court rule expressed a judicial preference for arbitration, the Court declined to enforce it and remanded the case back to the lower court to consider the lawsuit within the context of the FAA itself.

The Court had been perceived as “pro arbitration and anti-litigation.” Morgan seems to show that the Court is merely interested in enforcing its “Equal Footing” doctrine that puts arbitration agreements on the same footing as other types of agreements. Invariably, this doctrine often results in the Court enforcing an arbitration agreement. However, the Court will not build a bridge too far if it is not supported by an arbitration agreement itself and the language of the FAA. The Equal Footing doctrine can cut both ways when the Court thinks that a lower court is bending over backward to erect an artificial rule that puts arbitration on an unequal and elevated footing.

The holding in Morgan clearly shows employers should promptly file a demand for arbitration when they have an agreement allowing them to do so. If they delay or take any steps that are inconsistent with their rights, they may end up waiving the ability to arbitrate. If you have an arbitration agreement, as an employer you should not take a wait-and-see approach because it could end up costing you in the end. You should not take any chances. If you have an arbitration agreement, you should move to enforce it at the beginning of a case with no hesitation.