The Federal Arbitration Act makes contractual agreements to arbitrate disputes enforceable. But these rights, like any contractual rights, can be waived. It often happens that a party to such a contract will spend months or years litigating before invoking an arbitration provision. A court may conclude that the party has waived its right to arbitrate.
A recent Supreme Court decision, Morgan v. Sundance, Inc. (2022) has made it easier to find a waiver in this situation. Many Courts of Appeal applied a specific test for arbitration clauses, requiring a showing that another party has been harmed or prejudiced before a waiver will be found. In the Morgan case, that lead the Eighth Circuit to find no waiver.
The Supreme Court in Morgan rejected that law, holding that waiver is not determined by arbitration-specific rules, but by the general law of waiver, which does not require a showing of prejudice. It noted that while the FAA does embody a strong federal policy to enforce arbitration agreements, that policy “is to make “arbitration agreements as enforceable as other contracts, but not more so . . . The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” There is thus no requirement to show prejudice.
The Morgan decision did not specify what standard to apply to determine waiver, and lower courts have been divided as to what standard now applies. In 2010, the Second Circuit adopted a three-prong standard to determine waiver, with courts considering: “(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice.” La. Stadium & Exposition Dist. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F.3d 156, 159 (2d Cir. 2010). After Morgan, should courts apply that standard, only omitting the third prejudice prong? Or, should they completely discard it in favor of a more general standard for waiver of rights under a contract, i.e., whether the contractual right was “knowingly, voluntarily and intentionally abandoned?”
In Herrera v. Manna 2nd Avenue LLC (S.D.N.Y. 2022), the court was unsure about this question, but avoided it by holding that under either standard, there was no waiver. One New York court concluded that under Morgan’s reasoning, the general waiver standard applies. Deng v. Frequency Elecs., Inc. (E.D.N.Y. 2022) Another held that the Second Circuit standard, minus the prejudice requirement, should still apply. Carollo v. United Cap. Corp. (N.D.N.Y. 2022). So the precise standard to apply for waiver remains unclear.
What is clear, however, is that now a party that fails to assert a right to arbitrate as early as possible may lose it. As one court observed: “The judicial system was not designed to accommodate a defendant who elects to forego arbitration when it believes that the outcome in litigation will be favorable and then suddenly change course and pursue arbitration. The waiver doctrine exists to prevent parties from invoking the judicial process and thereby defeating the key purpose of arbitration: saving the parties’ time and money.”
A recent Supreme Court decision, Morgan v. Sundance, Inc. (2022) has made it easier to find a waiver in this situation. Many Courts of Appeal applied a specific test for arbitration clauses, requiring a showing that another party has been harmed or prejudiced before a waiver will be found. In the Morgan case, that lead the Eighth Circuit to find no waiver.
The Supreme Court in Morgan rejected that law, holding that waiver is not determined by arbitration-specific rules, but by the general law of waiver, which does not require a showing of prejudice. It noted that while the FAA does embody a strong federal policy to enforce arbitration agreements, that policy “is to make “arbitration agreements as enforceable as other contracts, but not more so . . . The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” There is thus no requirement to show prejudice.
The Morgan decision did not specify what standard to apply to determine waiver, and lower courts have been divided as to what standard now applies. In 2010, the Second Circuit adopted a three-prong standard to determine waiver, with courts considering: “(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice.” La. Stadium & Exposition Dist. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F.3d 156, 159 (2d Cir. 2010). After Morgan, should courts apply that standard, only omitting the third prejudice prong? Or, should they completely discard it in favor of a more general standard for waiver of rights under a contract, i.e., whether the contractual right was “knowingly, voluntarily and intentionally abandoned?”
In Herrera v. Manna 2nd Avenue LLC (S.D.N.Y. 2022), the court was unsure about this question, but avoided it by holding that under either standard, there was no waiver. One New York court concluded that under Morgan’s reasoning, the general waiver standard applies. Deng v. Frequency Elecs., Inc. (E.D.N.Y. 2022) Another held that the Second Circuit standard, minus the prejudice requirement, should still apply. Carollo v. United Cap. Corp. (N.D.N.Y. 2022). So the precise standard to apply for waiver remains unclear.
What is clear, however, is that now a party that fails to assert a right to arbitrate as early as possible may lose it. As one court observed: “The judicial system was not designed to accommodate a defendant who elects to forego arbitration when it believes that the outcome in litigation will be favorable and then suddenly change course and pursue arbitration. The waiver doctrine exists to prevent parties from invoking the judicial process and thereby defeating the key purpose of arbitration: saving the parties’ time and money.”