Does Litigation Bar Later Arbitration?

The U.S. Supreme Court said that it will hear an hourly worker’s request to decide whether a Taco Bell franchisee waived its right to have a wage and hour case heard out of court after already participating in the litigation for several months.

This announcement tees up a high court ruling that could condone a litigant trying its hand in court before opting to switch to arbitration. The justices did not explain their decision, as is customary.

The case dates back to September 2018, when Robyn Morgan, a former Sundance Inc. employee, filed a Fair Labor Standards Act suit against the Taco Bell franchisee in Iowa federal court. She contended that Sundance avoided paying overtime by recording her work time across multiple weeks in order to keep her hours in any single week below 40.

The judge denied Sundance’s motion to compel arbitration in June 2019, concluding that the company’s decision to litigate for eight months was a waiver of its right to arbitrate.

The divided Eight Circuit panel reversed the lower court’s decision in March. The judges acknowledged that Sundance fielded Morgan’s suit in court for eight months before it ever mentioned arbitration, but they found that it hadn’t waived its right to arbitrate because its silence on that point did not hinder Morgan’s ability to press her case. The company’s participation was limited to trying to get the case paused, considering it appeared to duplicate an earlier-field suit from another worker.

Morgan said in her August 2021 petition for certiorari that her case illustrates how nine federal circuit courts have adopted an arbitration procedure that contradicts the high court’s 2011 precedent on arbitration. In AT&T Mobility LLC v. Concepcion, it said lower courts should evaluate arbitration agreements “on an equal footing with other contracts.”

Those circuit courts, including the Eighth Circuit, where Morgan’s case arose, evaluate whether the opposing party’s case was prejudiced by the alleged waiver. When they consider prejudice, they add a step to their arbitration analysis that they don’t use in other contract cases, she said.

A court’s finding of no prejudice often accompanies a conclusion that a party did not waive its right to arbitrate.

Muddying the legal landscape further, high courts in four states located within those circuits have concluded that prejudice is irrelevant, Morgan said. Parties are forced to litigate under different legal standards in the same state, depending on whether they are in state or federal court, she said.

A party that acts in a manner inconsistent with one of its contractual rights is ordinarily considered to have waived that right, Morgan said. When the high court specified that arbitration agreements are equal to other contracts, it signaled that a party that proceeds with a case in court, even though it has right to invoke arbitration, should be considered to have waived the out-of-court process, she said.

Analyzing whether a party has waived a contractual right requires probing only its conduct, Morgan said. There is no basis for adding a step that evaluates how the actions of a party that allegedly waived its right to arbitration affected its opposing party, she said.

"In short, outside of the arbitration context, contractual waiver simply does not require prejudice — only the waiving party's actions are relevant," she said.

Sundance, on the other hand, did not address the high court's AT&T Mobility ruling in its brief opposing certiorari.

Sundance said the justices should deny certiorari because there is no split among lower courts on whether to consider prejudice in their arbitration analysis. All courts agree that prejudice matters to some extent, whether it's a paramount concern or one of several factors, it said.

"At bottom, all courts are looking at the totality of circumstances in assessing waiver," Sundance said in its brief opposing certiorari. "There is simply no material disagreement among the circuit courts regarding the relevance of prejudice as a factor in the waiver analysis."

Moreover, the parties did not fully address prejudice as an element in the district court or the Eighth Circuit, Sundance said. It urged the Supreme Court to refuse to hear the case because the justices would have to evaluate arguments that the lower courts didn't consider.

Leah Nicholls, co-counsel for Morgan and attorney with Public Justice, interviewed with Law360 and said she hopes the court holds that arbitration should be treated as any other contractual right.

"We also hope that the court understands that parties shouldn't be able to have multiple bites of the apple," she said. "That is they shouldn't be able to engage in litigation and then when that's not going well switch to arbitration."

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