Transporation Law Update: United States Supreme Court Grants Certiorari for Arbitration Case
Recently the United States Supreme Court granted certiorari to hear an arbitration case arising from a decision of the United States Court of Appeals for the Eighth Circuit. Morgan v. Sundance, Inc., No. 19-2435. The decision of the Eighth Circuit is reported at 992 F.3d 711. It appears that certiorari was granted to resolve a split among the federal circuit courts as to the level of prejudice required to demonstrate waiver of the right to arbitrate. Given the import of arbitration to the transportation industry, the case is worthy of examination. However, the case has not yet been set for oral argument.
Procedural History and Arguments
The case arose from a dispute in the United States District Court for the Southern District of Iowa. Morgan sued Sundance in a collective action claiming Sundance willfully violated the Fair Labor Standards Act (FLSA). Sundance moved to dismiss her complaint in keeping with the “first-to-file” rule, arguing that her action was duplicative of a previous action in which the complainant had to break up its collective action to only include hourly employees. Sundance argued that Morgan could “refile her claim on an individual basis before this court.” The district court denied Sundance’s motion. Sundance filed an answer with fourteen affirmative defenses, which did not include the arbitration agreement. Morgan met with Sundance representatives for mediation on April 15, 2019, but did not settle. Sundance moved to compel individual arbitration for Morgan’s claims roughly two weeks later. The district court agreed with Morgan while the Eighth Circuit agreed with Sundance.
Question of Prejudice Requirement
The Eight Circuit, along with eight other federal appeals courts and the majority of state supreme courts, requires the party asserting waiver to show the waiving party’s acts caused prejudice when the contract at issue happens to involve arbitration. In this case, the district court used the tripartite test from Lewallen v. Green Tree Servicing, LLC, to determine if Sundance had waived its right to arbitration. 487 F.3d 1085 (8th Cir. 2007). Pursuant to Lewallen, parties could waive their rights to arbitration if they “(1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts.” Id. at 1090. (quoting Ritzel Commun., Inc. v. Mid-Am. Cellular Tel. Co., 989 F.2d 966, 969 (8th Cir. 1993)). The district court concluded that Sundance knew of the existing arbitration right, acted inconsistent with that right, and prejudiced Morgan in their actions. The Eighth Circuit reversed due to the “absence of a showing of prejudice to Morgan.” Morgan v. Sundance, Inc., 992 F.3d 711, 715 (8th Cir. 2021), cert. granted, 142 S. Ct. 482 (2021).
Concerning Other Circuits that Allow for the Prejudice Requirement/Factor
Circuit courts that require prejudice for the waiver analysis differ on the degree required. For the First Circuit, “Prejudice is essential for a waiver – but the required showing is ‘tame at best.’” Joca-Roca Real Estate, LLC v. Brennan, 772 F.3d 945, 949 (1st Cir. 2014). Prejudice can be inferred from the “protracted delay in the assertion of arbitral rights when that delay is accompanied by sufficient litigation activity.” Id. The Second Circuit does not extend prejudice to “pretrial expense and delay…without [anything] more.” Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 26 (2d Cir. 1995). The Third Circuit uses six factors to determine prejudice for a finding of waiver which are: “timeliness or lack thereof of a motion to arbitrate…the degree to which the party seeking to compel arbitration has contested the merits of its opponent's claims, whether that party has informed its adversary of the intention to seek arbitration even if it has not yet filed a motion to stay the district court proceedings, the extent of its non-merits motion practice, its assent to the district court's pretrial orders, and the extent to which both parties have engaged in discovery.” Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912, 926-27 (3d Cir. 1992).
Concerning Discovery
Some of the sister circuits give discovery more weight in their analysis, but to varying degrees. The Ninth Circuit looks at whether discovery was directed to arbitrable or non-arbitrable claims. See Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 697 (9th Cir. 1986). (The fact that the Fishers also engaged in discovery concerning the non-arbitrable claims does not constitute sufficient prejudice to establish waiver). The Fourth Circuit looks at whether information was revealed through discovery that would not have been in arbitration and thus gives a party an advantage. See Patten Grading & Paving, Inc. v. Skanska USA Building, Inc., 380 F.3d 200, 207 (4th Cir. 2004). (“The minimal nature of the discovery conducted in this case falls well within the scope of discovery we have previously found insufficient to establish prejudice. Further, Patten fails to demonstrate that Skanska availed itself of discovery procedures unavailable in arbitration, or gained a strategic advantage through its discovery requests”).
Prejudice Being Optional for Waiver Analysis
Some circuits consider prejudice to be a relevant factor in a waiver analysis, but they do not always require it. The D.C. Circuit does not consider prejudice to be an independent and necessary element to prove waiver of the right to arbitration. Nat’l Found. for Cancer Rsch. v. A.G. Edwards & Sons, Inc., 821 F.2d 772, (D.C. Cir. 1987). The Tenth Circuit considers prejudice in a six-factor test. Peterson v. Shearson/American Exp., Inc., 849 F.2d 464, 467-68 (10th Cir. 1988). There were a few cases after Peterson where the Tenth Circuit applied the factors without finding prejudice. See Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1490 (10th Cir. 1994) (finding waiver based on “the totality of [the defendant’s] conduct”). There is at least one case where the court declined to find because the party did not demonstrate that they suffered substantial prejudice. Adams v. Merrill Lynch, Pierce, Fenner & Smith, 888 F.2d 696, 702 (10th Cir. 1989). The Seventh Circuit does not consider prejudice to be an essential element finding waiver. St. Mary's Med. Ctr. of Evansville, Inc. v. Disco Aluminum Products Co., Inc., 969 F.2d 585, (7th Cir. 1992).
Conclusion
As the parties continue to brief the case, readers should continue to monitor this website for further developments.
Contact John F. Fatino for more information about trucking and transportation matters 515-288-6041 or fatino@whitfieldlaw.com. Nathan R. Britton, J.D. candidate, Drake University College of Law, assisted in the preparation of these materials.