SCOTUS Cuts Burden for Showing Waiver of Arbitration

Morgan v. Sundance, Inc.

United States Supreme Court, No. 21-328 (May 23, 2022)

Unanimous opinion by Justice Kagan, linked here

Based on the widely acknowledged “strong federal policy favoring arbitration” under the FAA, the great majority of federal courts have for many years held that a party impliedly waives its right to compel arbitration by “substantially invok[ing] the judicial process” on matters ostensibly subject to arbitration only if in doing so it “thereby causes ‘detriment or prejudice’ to the other party.” Salas v. GE Oil & Gas, 857 F.3d 278, 281 (5th Cir. 2017) (relying on Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986)). That is no longer the law in federal court. After acknowledging that at least nine federal circuits—including the Fifth—were applying this rule, the Supreme Court in Sundance decreed that these courts were wrong to craft and impose an “arbitration-specific waiver rule demanding a showing of prejudice.” “The FAA’s ‘policy favoring arbitration,’” it said, “does not authorize federal courts to invent special, arbitration-preferring procedural rules.” Instead, “the federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” Consequently, whether a party has waived its right to arbitrate by invoking or participating in the judicial process is to be judged by the same standard applied to all other contractual rights—i.e., whether that conduct amounts to “the intentional relinquishment or abandonment of a known right,” without reference to whether it has caused any prejudice to the other side.

The Supreme Court’s Sundance ruling was directed to federal courts applying the FAA. But its effect will be even more pervasive. Most state courts also now include a “prejudice” component in their tests for determining whether a party has impliedly waived arbitration. In Texas, for example, “[a] party asserting implied waiver as a defense to arbitration has the burden to prove that (1) the other party has ‘substantially invoked the judicial process,’ which is conduct inconsistent with a claimed right to compel arbitration, and (2) the inconsistent conduct has caused it to suffer detriment or prejudice.” G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 511-12 (Tex. 2015).  These state-court precedents will have to be reexamined and many likely will fall, just like the scores of federal decisions directly overruled by Sundance. Because the Court’s rationale rested in part on the absence of any support in the FAA for courts to create this arbitration-specific test, it is reasonable to assume that state courts will follow Sundance when applying the FAA. But even where state arbitration statutes are concerned, Sundance likely will force a reassessment. Again using Texas as an example, the Texas Arbitration Act is based on the Uniform Arbitration Act, as are the arbitration statutes of most other states, and the Texas Supreme Court has stressed “the importance of keeping federal and state arbitration law consistent.” Perry Homes v. Cull, 258 S.W.3d 580, 594 (Tex. 2008). Texas appeals courts have flatly said,  “The standard for determining waiver of the right to arbitration is the same under both the Texas General Arbitration Act and the Federal Arbitration Act.” E.g., Sedillo v. Campbell, 5 S.W.3d 824, 826 (Tex. App.—Houston [14th Dist.] 1999, no pet.). The change wrought by Sundance, therefore, likely will be felt not only in the federal system, but throughout the fifty states.