By: Donald L Swanson
Contracts can provide for the arbitration of disputes. And those arbitration rights are enforced by the Federal Arbitration Act.
But contractual arbitration rights can be waived. And the question is this:
- Is it easy . . . or hard . . . to waive those rights?
It appears that the answer is this: it is now easy to waive those rights—especially in the Eighth Circuit Court of Appeals.
I’ll try to explain.
Before May 23, 2022
Before May 23, 2022, a majority of the U.S. courts of appeals (including the Eighth Circuit) held that it is hard to waive contractual arbitration rights. That’s because, they said, such a waiver requires something more than is required for waivers of other types of contract rights.
Waivers of contract rights in other contexts require proof of two things:
- knowledge of the contract right; and
- actions inconsistent with that right.
The requirement that the majority of circuits added for an arbitration waiver was proof that:
- the opposing party was prejudiced by the inconsistent acts.
The basis for such an arbitration-specific addition, those federal courts of appeals said, was the Federal Arbitration Act’s “policy favoring arbitration.”
Supreme Court Rejection
On May 23, 2022, in Morgan v. Sundance, Inc., 596 U.S. 411 (2022), the U.S. Supreme Court rejected, emphatically and unanimously, the Eighth Circuit’s arbitration-specific addition of “prejudice” for waivers of arbitration rights. Here is how:
- “We granted certiorari to decide whether the FAA authorizes federal courts to create such an arbitration-specific procedural rule”; and
- “We hold it does not.”
Here is a summary of the Supreme Court’s rationale
–An Outlier
The Eighth Circuit (and the concurring circuits) erred in conditioning a waiver of the right to arbitrate on a showing of prejudice:
- outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice; and
- a waiver is the intentional relinquishment or abandonment of a known right and is effective without proof of detrimental reliance.
Detrimental reliance, as a requirement for waiver of a contractual right, is an outlier—it’s found nowhere else.
–An Erroneous Policy
The arbitration-specific rule derives from a decades-old Second Circuit decision that erroneously declares:
- “There is an overriding federal policy favoring arbitration”;
- waiver of the right to arbitrate is, therefore, “not to be lightly inferred”; and
- “Mere delay” in seeking a stay of litigation, without some resultant prejudice to the opposing party, “cannot carry the day.”
Over the years, that erroneous rule and its reasoning spread. Circuit after circuit (with two holdouts) justified adopting a prejudice requirement based on the “liberal national policy favoring arbitration.”
But the Federal Arbitration Act does not authorize federal courts to invent special, arbitration-preferring procedural rules:
- the Federal Arbitration Act exists to make arbitration agreements as enforceable as other contracts, but not more so; and
- a court must hold a party to its arbitration contract, just as it would to any other kind.
A court may not devise novel rules to favor arbitration over litigation. The federal policy is about treating arbitration contracts like all other contracts, not about fostering arbitration.
Eighth Circuit’s Response
On July 11, 2024, the Eighth Circuit Court of Appeals issues its first post-Morgan v. Sundance opinion on arbitration waivers. The opinion is:
- Thomas v. Pawn American (In re Pawn American Consumer Data Breach Litigation), Case No. 23-2292, Eighth Circuit Court of Appeals (07/11/2024).
–Revisiting Waiver Standards
The Eighth Circuit’s Pawn American opinion offers the following observations.
We previously addressed arbitration waivers, but the Supreme Court required a revision in our thinking by its Morgan v. Sundance opinion.
So, we must revisit our prior three-part test for waiving contractual arbitration rights. That test requires proof that the waiving party:
- knew of the arbitration right;
- acted inconsistently with that right; and
- prejudiced the other party with its inconsistent acts.
Morgan v. Sundance makes clear that we can no longer consider prejudice. The focus of waiver, after all, is on “the actions of the person who held the right,” not “the effects of those actions on the opposing party.”
So, the question boils down to whether a party has intentionally relinquished or abandoned a known right:
- stripped of its prejudice requirement, the remainder of our existing test answers that question;
- there is no reason to strip our test down to the studs and start over; and
- framing our test this way does not violate the Supreme Court’s prohibition on “arbitration-specific procedural rules.”
Morgan v. Sundance requires us to treat arbitration contracts like all others. We must focus on the most relevant waiver conduct without tilting the playing field in favor of (or against) arbitration.
–Facts
The Pawn American facts are a long and consistent pattern of conduct inconsistent with arbitration rights. For example:
- the companies “all but admit to having knowledge of their contractual right to arbitrate long before they formally raised it”; and
- arbitration came up during the pretrial conference, but the companies “took no further action until months later, after the hearing on the motion to dismiss.”
In other words, the Pan American facts are extreme. They create a slam-dunk basis for finding a waiver of contractual arbitration rights.
But how hard . . . or easy . . . is it to waive such rights under Morgan v. Sundance?
Arbitration is Easily Waived?
The Eighth Circuit’s Pawn American opinion suggests, in its Footnote 2, that contractual arbitration rights are easily waived.
Such Footnote 2 contains these comments:
- “an actual-knowledge requirement . . . is rarely (if ever) a condition of waiver”; and
- “when a party fails to raise an argument in an opening brief . . . there has been a waiver regardless of what the party knew at the time.”
Such comments look like arbitration waiver can happen quickly and easily—i.e., when a party fails to raise the issue at the first opportunity.
Conclusion
It used to be, in a majority of federal circuits, that contractual arbitration rights were hard to waive. That’s because:
- those nine circuits required a finding that the opposing party was prejudiced by acts inconsistent with arbitration rights; and
- such prejudice requirement was based on an erroneous idea that the Federal Arbitration Act favors arbitration over litigation.
Now that the Supreme Court has spoken and the Eighth Circuit has responded, it appears that contractual arbitration rights are easily waived: i.e., when a party fails to raise and assert arbitration rights at the earliest opportunity.
And that is a major change!
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