Supreme Court Declines to Send Overtime Claim to Arbitration

​In a unanimous opinion, the U.S. Supreme Court on May 23 declined to send an overtime claim against a Taco Bell franchise owned by Sundance Inc. to arbitration when Sundance failed to ask the court to compel arbitration until nearly eight months after the lawsuit's filing. The Supreme Court also rejected the appeals court's determination that the plaintiff must show they were harmed before Sundance waived arbitration.  

Instead, the high court sent the Morgan v. Sundance case back to the appeals court, which had ordered arbitration, to determine whether Sundance knowingly relinquished the right to arbitrate by acting inconsistently with that right. Alternatively, the appeals court may determine that a different procedural framework, such as forfeiture, is appropriate, the Supreme Court ruled.  

Plaintiff's Claim

Despite signing an agreement to use arbitration rather than going to court to resolve any employment dispute, the plaintiff brought a nationwide collective action alleging violations of the Fair Labor Standards Act in federal court against Sundance, one of the largest franchisees of Yum! Brand restaurants.

The plaintiff maintained that Sundance routinely flouted the act—most notably, by recording hours worked in one week as instead being worked in another to prevent employees' weekly totals from exceeding 40 hours. Sundance initially defended itself against the lawsuit as if no arbitration agreement existed. Sundance first moved to dismiss the suit as duplicative of a collective action previously brought by other Taco Bell employees.

The company then asserted 14 defenses, none mentioning the arbitration agreement. Soon afterward, it settled another suit, but not the plaintiff's. Only then did Sundance move to compel arbitration.

The plaintiff argued that Sundance had waived its right to arbitrate by litigating for so long.

The district court found the plaintiff was harmed by the delay, but the 8th Circuit disagreed.

No Special Procedural Rules

Special rules don't apply to deciding whether an arbitration defense has been waived, the Supreme Court determined.

As Justice Elena Kagan wrote, the Federal Arbitration Act's (FAA's) policy favoring arbitration "does not authorize federal courts to invent special, arbitration-preferring procedural rules." She stated that the policy, "as we have explained, is merely an acknowledgment of the FAA's commitment to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts."

The Supreme Court "used the occasion of today's ruling to reiterate that placing arbitration agreements on the same footing as other contracts means that a court should hold a party to its arbitration agreement just as it would to any other kind of contract," said Richard Silberberg, an attorney with Dorsey & Whitney in New York City. "But the FAA's federal policy favoring arbitration does not mean that courts may adopt procedural rules not applicable to other contracts to foster arbitration."

Appellate Court Split Resolved

The high court "decisively answered" a question that had divided the federal appellate courts—whether a party asserting that its adversary has waived a contractual right to arbitrate a dispute must show that it was prejudiced by the conduct allegedly giving rise to the waiver, Silberberg continued. 

"The court has now made it abundantly clear that a party may not rely upon an absence of demonstrable prejudice to the other side to justify deferring a contractual right to arbitrate a dispute by engaging in litigation in court and then switching to arbitration when it deems an arbitral forum to be strategically advantageous," he said.

University of Iowa Law Professor Derek Muller, who studies the Supreme Court, told the Des Moines Register, "The court has repeatedly talked about the Federal Arbitration Act having this strong policy in favor of arbitration. The [lower] courts took that and ran a little bit too far with it."