Supreme Court makes it harder for employers who litigate arbitrable claims to change their minds

In a unanimous decision, the Supreme Court ruled yesterday that federal courts may not adopt an arbitration-specific waiver rule demanding a showing of prejudice.

Huh?

Before translating legalese into plain English, I want to apologize to those expecting the follow-up to yesterday’s post about what Major League Baseball should do about a white baseball player calling a black player ‘Jackie’ [Robinson]?

Many of you wrote to me, quite passionately, about this issue. And in the interim, Major League Baseball did act. So, I want to cover both the league’s response and your feedback, which I will do tomorrow.

But today, I want to revisit another blog post from last November.

That November post was about a restaurant employee who filed a nationwide class action against her employer alleging wage and hour violations. Although the employee had signed an arbitration agreement, the company defended against the lawsuit as if no arbitration agreement existed. First, it moved to dismiss the complaint. After the court denied the motion, the company went to mediation. However, the case did not settle. Then, it moved to compel arbitration eight months after the lawsuit began.

The employee opposed the motion, arguing that the employer had waived its right to arbitrate by litigating for so long.

The lower court agreed. The Eighth Circuit Court of Appeals did not, concluding that although the company had waited eight months to compel arbitration, the plaintiff(s) had suffered no prejudice. Indeed, nothing substantive had happened yet (e.g., no discovery), and the parties would not be duplicating any efforts if the case shifted from litigation to arbitration.

The Eighth Circuit’s prejudice analysis furthered a circuit split on this “prejudice” issue. Nine circuits, including the Eighth, invoked “the strong federal policy favoring arbitration” in support of an arbitration-specific waiver rule demanding a showing of prejudice. Two circuits have rejected that rule.

And so did the Supreme Court. Here’s why:

And indeed, the text of the FAA [Federal Arbitration Act] makes clear that courts are not to create arbitration-specific procedural rules like the one we address here…[I]t is a bar on using custom-made rules, to tilt the playing field in favor of (or against) arbitration…[T]he usual federal rule of waiver does not include a prejudice requirement. So [the FAA] instructs that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA. 

Does this mean that all employers who delay arbitration for litigation are stuck in court? Not necessarily. Each Circuit may have its own test that does not otherwise account for prejudice on the plaintiff.

In other words, your mileage may vary.

The only sure way to compel arbitration is to: (1) have an enforceable arbitration agreement (which can be easier said than done); and (2) move to stay the litigation and seek arbitration as early as possible.