Waiver of Arbitration Post-Morgan v. Sundance – by Laura Athens

Waiver of Arbitration
Post-Morgan v. Sundance

by Laura Athens

Three years ago, the United States Supreme Court significantly changed the standard for determining whether a party has waived arbitration. In Morgan v. Sundance, Inc., the Supreme Court unanimously held that prejudice to the party opposing arbitration need not be shown to establish waiver. Prior to Morgan, nine of the twelve regional United States Courts of Appeals required a showing of prejudice in waiver cases.

Morgan resolved a split in the federal circuits by ruling that prejudice to the other party is “not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration.” The Court found that the Eighth Circuit, as well as eight other circuit courts, erred in conditioning waiver on a showing of prejudice. The Court saw no reason to treat an arbitration agreement different from other contracts that do not require a showing of prejudice to find waiver. Under Morgan, the relevant inquiry is whether there has been an “intentional relinquishment or abandonment of a known right,” which focuses on the conduct of the party asserting the right, not on the impact on the opposing party. [i]

The Court explained that federal circuit courts initially adopted the prejudice requirement based on the liberal policy of the Federal Arbitration Act (FAA) favoring arbitration. The Court noted that the FAA’s policy of favoring arbitration was intended to overcome the courts’ longstanding refusal to enforce arbitration agreements, not to permit federal courts to “invent special, arbitration preferring procedural rules.” To the contrary, the policy is “about treating arbitration contracts like all others, not about fostering arbitration.” [ii] Therefore, the right to arbitration can be waived like any other contractual right, even if the other party was not prejudiced by the delay.

Despite the Court’s unambiguous ruling, lingering references to prejudice, a heavy burden or similar language sometimes remain in cases and briefs. Under Morgan, the focus in waiver cases now must be on the actions of the party seeking to compel arbitration, not on any prejudice to or burden on the opposing party.

Circuit Court Decisions

Since Morgan, eight out of the nine circuits which formerly required prejudice to establish waiver, have explicitly acknowledged that Morgan changed the standard for determining whether waiver of arbitration has occurred.

The Second Circuit, in Brown v. Peregrine Enterprises, found that a federal district court erred by applying a two-part waiver test that included not only whether a party acted inconsistently with its right to arbitration, but also whether the conduct caused prejudice to the other party. The Second Circuit noted that although assessing prejudice was once proper, the prejudice requirement was abrogated by Morgan and the only pertinent inquiry now is whether a party “knowingly relinquish[ed] the right to arbitrate by acting inconsistently with that right[.]” [iii]

The Third Circuit in White v. Samsung Elecs. Am., Inc., acknowledged that the Supreme Court “rejected the prejudice-focused inquiry” that it and other circuits had previously followed. The Third Circuit noted the proper inquiry “must be identical to the inquiry for waiver of other contractual rights,” which is simply whether a party has intentionally relinquished or abandoned a known right. The Third Circuit pointed out that this approach “flows directly from the plain language of the FAA, which clearly states that an arbitration provision is valid, except ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ ” [iv] The court concluded that Samsung had knowingly waived its right to arbitration, by pursuing and winning motions to dismiss several claims on the merits, filing a motion for reconsideration, acquiescing to pre-trial orders, and participating in numerous court conferences. The Third Circuit agreed with the district court’s observation that Samsung, as “a large and sophisticated corporate leader in electronics,” was “uniquely positioned to . . . know exactly which models had arbitration agreements for its products” and, therefore, could not plausibly contend that it did not know of its right to arbitrate.

The Fourth Circuit found that even though defendants waited more than nine months before moving to compel arbitration, they had not waived their right to arbitrate because they had consistently requested arbitration before formally filing the motion to compel. The court found such “persistence” does not indicate an intentional relinquishment of a known right.[v]

In a per curium decision, the Fifth Circuit remanded a waiver case to the federal district court to permit consideration in light of the new standard created in Morgan.[vi]

In a class action alleging defects in General Motors (GM) vehicles, the Sixth Circuit, in Speerly v. Gen. Motors, LLC, affirmed a district court’s ruling that GM “acted inconsistently with, and therefore waived, its right to arbitrate” plaintiffs’ claims by engaging in litigation for over two years; filing two motions to dismiss on the merits, some of which were granted; and failing to raise arbitration in either motion.

In response to GM’s argument that it only learned of the arbitration agreements through the discovery process over two years after the litigation began, the court found it “difficult to believe” that “given the ubiquitousness of arbitration agreements in transactions such as that of a sale of a vehicle, …that the first time GM became aware that some Plaintiffs may be subject to arbitration agreements was two-and-a-half years after the original complaint was filed.” [vii]

Recently, the Eighth Circuit conceded in Parker v. Kearney Sch. Dist., that its former three-part, pre-Morgan standard for determining whether a party waived its right to arbitrate because it “(1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts” is now a two-part test that considers only the first two factors. [viii]

In Breadeaux’s Pisa, LLC v. Beckman Bros. Ltd., the Eighth Circuit affirmed the district court’s denial of plaintiff’s motion to stay all proceedings pending arbitration finding that plaintiff knew of its right to arbitrate, filed and lost its motion for a preliminary injunction, participated in mediation, and waited until after its discovery motions were overruled to file the motion to stay. The court ruled that a finding of waiver was proper because the plaintiff sought to stay litigation and pursue arbitration only after receiving a series of adverse judicial rulings.[ix]

In Armstrong v Michaels Stores, Inc., the Ninth Circuit explicitly recognized that, under Morgan, the party opposing arbitration “no longer bears a “heavy burden” to show waiver of the right to arbitration.” [x] The court noted that Morgan overruled its prior precedent in two important respects:  First, Morgan held there is no strong federal policy favoring enforcement of arbitration agreements; and second, Morgan abrogated the requirement that the party opposing arbitration demonstrate prejudice. In summary, the Ninth Circuit held that the new Morgan standard for contractual waiver generally requires an existing right, knowledge of its existence, and an actual intention to relinquish it with no required showing of prejudice.

Under Ninth Circuit precedent, a party generally “acts inconsistently with exercising the right to arbitrate when it (1) makes an intentional decision not to move to compel arbitration and (2) actively litigates the merits of a case for a prolonged period of time in order to take advantage of being in court.” [xi] The court concluded that the defendant did not act inconsistently with its right to arbitrate because it pleaded arbitration as an affirmative defense in its answers to both the original complaint and amended complaint, stated its intent to move to compel arbitration in the initial case management conference, and was consistently vocal about its intent to compel arbitration.

The Ninth Circuit also found that defendant did not actively litigate the merits of the case for a prolonged period because it moved to compel arbitration within a year after the complaint was filed, never sought a ruling on the merits, and never waffled about whether to arbitrate. The Ninth Circuit further found that defendant’s limited discovery requests did not constitute evidence of taking advantage of the judicial forum and affirmed the district court’s order compelling arbitration.

The Eleventh Circuit held in Pinnacle Constructors Grp. v. SSC Tuscaloosa Apartments LLC., that based on the totality of the circumstances and the Morgan test, the plaintiff “did not substantially invoke the litigation machinery prior to demanding arbitration.” [xii] The plaintiff moved to compel arbitration a little over two months after it filed suit, briefed motions filed by parties with whom it did not have an arbitration agreement, and participated in a Rule 26(f) meeting, including other parties with whom plaintiff did not have an arbitration agreement.

Conclusion

Morgan and its progeny clearly establish that any reference to “prejudice,” a “heavy burden” or “substantial detriment” to the party opposing arbitration is no longer appropriate when evaluating whether there has been a waiver of arbitration. Waiver of arbitration, like any other contractual right, occurs when the party seeking to compel arbitration has knowingly relinquished their right to arbitrate by acting inconsistently with that right even if the other party was not prejudiced by the delay.

A party seeking to preserve its right to arbitration should raise arbitration as an affirmative defense in their answer or in an initial, non-dispositive motion; consistently convey their intent to pursue arbitration; and promptly move to compel arbitration rather than actively engaging in litigation by filing dispositive motions and participating in extensive discovery.

[i] Morgan v. Sundance, Inc., 142 S.Ct. 1708, 1713 (2022).

[ii] Id. at 1713-14.

[iii] Brown v. Peregrine Enterprises, No. 22-2959 (2d Cir. December 20, 2023) quoting Morgan v. Sundance, Inc, 596 U.S. at 419. Accord, WCW, Inc. v. Atlantis Industries, Inc., No. 23-7726-cv (2nd Cir. 2024)(holding plaintiff acted wholly inconsistently with its right to arbitrate and knowingly relinquished that right by moving to compel arbitration after the district court denied its motion to dismiss and after more than a year of litigation).

^[iv] 61 F.4th 334, 339 (3d Cir. 2023).

[v] SZY Holdings, LLC v. Garcia, No. 23-1305 (4^th Cir. Aug. 29, 2024).

[vi] Barnett v. Am. Express Nat’l Bank, 37 F.4th 1100 (5^th Cir. 2022).

[vii] 115 F.4th 680, 713 (6th Cir. 2024).

[viii] No. 23-3727 (8th Cir. 2025).

[ix] 83 F.4th 1113 (8^th Cir. 2023).

[x] Armstong, 59 F.4^th 1011, 1014-15 (9^th Cir. 2023).

[xi] 59 F.4th at 1015 quoting Newirth v. Aegis Senior Cmtys., LLC, 931 F.3d 935, 941 (9th Cir. 2019).

[xii] No. 23-13397 (11^th Cir. June 18, 2024).

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Joe Basta heads Basta Resolutions, PLLC, an Ann Arbor-based firm specializing in mediation and arbitration of commercial and family disputes.  He is a former chair of the Alternative Dispute Resolution Section of the State Bar of Michigan.  Joe was a trial lawyer for over 34 years at Dykema, litigating complex commercial matters.  He teaches negotiation at the Michigan State University of College of Law and is a member of Professional Resolution Experts of  Michigan, Inc.