How Long Can An Employer Wait to Arbitrate? Eighth Circuit Softens Rule on Waiving Arbitration

On March 30, 2021, the Eighth Circuit Court of Appeals issued a decision reversing a trial court’s determination that an employer waived its right to compel arbitration by participating in litigation. Morgan v. Sundance, Inc., No. 19-2435 (8th Cir. Mar. 30, 2021).  In Morgan, the trial court had concluded the employer had effectively waived its right to compel arbitration after it had participated in the litigation for eight months. 

This was unsurprising, as prior similar cases had similar results.  However, in a somewhat expected move, the Eighth Circuit reversed the trial court’s conclusion and held the employer had not waived its right to compel arbitration, under the specific circumstances of this case.

Background

In September 2018, Robyn Morgan (“Morgan”) sued Sundance, Inc. (“Sundance”) for unpaid overtime under the Fair Labor Standards Act (“FLSA”).  In November 2018, Sundance moved to dismiss the case based on the “first-to-file” rule, claiming a similar lawsuit filed in federal court in Michigan precluded commencement of Morgan’s suit. 

Four months later, in March 2019, the Court denied Sundance’s motion to dismiss.  Sundance then answered Morgan’s complaint, but did not assert a right to arbitrate in said answer.  Sundance thereafter participated in a mediation with Morgan and the plaintiffs in the Michigan case.  The Michigan plaintiffs, but not Morgan, settled their claims.

In May 2019, eight months after Morgan filed her complaint, Sundance moved to compel arbitration of her claims.  The trial court denied the motion, concluding Sundance’s participation in the litigation waived its right to arbitration.  Sundance appealed.

Analysis

The majority began with the standard for waiving arbitration: “[a] party waives its right to arbitration if 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.’”  The majority opinion focused on the latter two elements.

Did Sundance act inconsistently with its right to arbitrate?

The majority suggested it did not “in light of the totality of the circumstances.”  The majority acknowledged certain actions could be construed as inconsistent with asserting a right to arbitrate, but the majority reached the opposite conclusion by reasoning:

  1. half of the 8-month delay in asserting a right to arbitrate was attributable to the trial court and the time it took to rule on the motion to dismiss;
  2. half of the 8-month delay in asserting a right to arbitrate was attributable to the trial court and the time it took to rule on the motion to dismiss;
  3. half of the 8-month delay in asserting a right to arbitrate was attributable to the trial court and the time it took to rule on the motion to dismiss;

Accordingly, the majority concluded: “although there was an eight-month delay, the parties spent very little of this time actively litigating and no time on the merits of the case.  Thus, shifting to arbitration would not duplicate the parties’ efforts.”

Was Morgan prejudiced by Sundance’s conduct?

Taking these reasons together, the majority also concluded there was no “prejudice” to Morgan caused by Sundance’s 8-month delay in moving to compel arbitration because:

  1. having to respond to Sundance’s motion to dismiss was not prejudice;
  2. having to respond to Sundance’s motion to dismiss was not prejudice;
  3. having to respond to Sundance’s motion to dismiss was not prejudice;

Dissenting Opinion

Unsurprisingly, the Eighth Circuit panel on appeal was not unanimous in their decision that the trial court erred.  One judge persuasively dissented and characterized the proceedings and Sundance’s conduct quite differently than the majority.  According to the dissent, “Sundance made a strategic choice to forego arbitration for more than seven months.”

First, the dissent addressed the nature of the motion to dismiss, noting it was not—contrary to the majority opinion—“quasi-jurisdictional.”  Instead, it concerned selection of venue.  Moreover, the motion to dismiss urged the trial court to stay or dismiss the case to avoid “conflicting rulings and duplicative discovery.”

Second, the dissent emphasized the failure of Sundance to assert any kind of right to arbitration in the answer it filed after denial of the motion to dismiss.

Third, the dissent stressed Sundance thereafter also participated in mediation in the case, which was, in its view, “participation in litigation-related activities.”  This is because “[s]ettlements depend on the parties’ assessment of the applicable law, the procedural characteristics of the forum, the availability of discovery, the cost of litigation, and the overall potential risks and rewards of proceeding to a final decision.”  Further, the dissent emphasized these considerations will also vary depending on the forum (e.g., federal court vs. arbitration).

Fourth, the dissent noted Sundance’s admission that its move to compel arbitration was tactical in nature, claiming a change in the law removed a previous risk that it could be compelled to arbitrate Morgan’s claims collectively.  As the dissent aptly noted, “the salient point is that Sundance was content with a judicial forum until it believed that an intervening court decision improved its prospect in arbitration.”

The dissent concluded by zeroing in on the “debatable” requirement of prejudice: “[t]he majority does not dispute that Sundance acted inconsistently with arbitration, but reverses the district court’s determination of waiver on the ground that Morgan was not prejudiced.”  While the dissent acknowledged a Circuit split among federal courts of appeals on the issue of having to prove prejudice to claim waiver, it noted the threshold for proving prejudice is not “onerous.”  And, according to the dissent, Sundance’s conduct was almost identical to the conduct of another party in a prior Eighth Circuit case in which a finding of prejudice occurred.  Given the record and this precedent, the dissent concluded it would have affirmed the trial court.

Takeaway

Waiver of the right to arbitrate will be determined by fact-intensive considerations of the parties’ conduct and the procedural history of a case.  Best practice to avoid waiver remains asserting all defenses available (including waiver) at the earliest possible point in a case.  Nonetheless, the Eighth Circuit appears to have softened the waiver rule to some extent.  Stay tuned for further developments.