In May 2022, the Supreme Court issued its opinion in Morgan v. Sundance, Inc., where it held that under the Federal Arbitration Act (“FAA”), courts may not “condition a waiver of the right to arbitration on a showing of prejudice.”¹ Prior to Morgan, a majority of federal circuit courts had required a showing of prejudice before finding arbitration waiver. According to the Supreme Court that was erroneous because the federal policy “favoring arbitration” does not permit courts to “invent special, arbitration preferring procedural rules.”² Rather, it simply requires courts to place arbitration agreements “on the same footing as other contracts.”³ Since “a federal court assessing waiver does not generally ask about prejudice,” the Court held it could not do so in the context of arbitration waiver either.⁴
Morgan provides an important reminder regarding the limitations of the federal policy favoring arbitration. According to the Court, that policy is “not about fostering arbitration,” it is about ensuring agreements to arbitrate are enforced just as any other contract would be.⁵
“The policy,” 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. Or in another formulation: The policy is to make arbitration agreements as enforceable as other contracts, but not more so. Accordingly, a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation. If an ordinary procedural rule—whether of waiver or forfeiture or what-have-you—would counsel against enforcement of an arbitration contract, then so be it.⁶
While earlier Supreme Court cases like Moses H. Cone Memorial Hospital v. Mercury Construction Corp. had stated otherwise in dicta,⁷ Morgan put that broader theory to rest.
As it stands, the policy in favor of arbitration applies to questions regarding the scope of an arbitration clause, such that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.”⁸ However, courts have found that the policy in favor of arbitration does not apply in the following circumstances:
Who Decides Arbitrability: questions regarding who decides threshold issues of arbitrability are presumptively for courts to decide unless the parties “clearly and unmistakably provide otherwise”;⁹
Note: Several courts have held that parties “clearly and unmistakably” agree to delegate arbitrability questions to an arbitrator by incorporating into their arbitration agreements institutional arbitration rules that empower an arbitrator to decide gateway arbitrability issues¹⁰
Formation of an Agreement to Arbitrate: “the presumption does not apply to disputes concerning whether an agreement to arbitrate has been made,” which is governed by state contract law;¹¹ and
Standing to Invoke an Agreement to Arbitrate: questions regarding who has standing to invoke an agreement to arbitrate are likewise governed by state contract law.¹²
And, of course, Morgan holds that the policy in favor of arbitration does not allow courts to create bespoke procedural rules favoring arbitration.¹³
In sum, counsel litigating arbitrability issues must review pre-Morgan case law with a careful eye to determine whether that precedent provides a reliable basis to invoke the federal policy in favor of arbitration.
For further analysis, see Parts III–V of Alto Litigation’s Morgan v. Sundance blog series.
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Please contact Alto Litigation partners Bahram Seyedin-Noor (bahram@altolit.com) or Bryan Ketroser (bryan@altolit.com) if you require counseling on a securities litigation matter.
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¹ Morgan v. Sundance, Inc., 142 S.Ct. 1708, 1713.
² Id.
³ Id.
⁴ Id.
⁵ Id.
⁶ Id. (internal quotations and citations omitted).
⁷ Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (“The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract . . . an allegation of waiver, delay, or a like defense to arbitrability.”) (emphasis added).
⁸ Id.
⁹ AT&T Tech’s, Inc. v. Comm’s Workers, 475 U.S. 643, 649 (1986).
¹⁰ See, e.g., T.Co Metals v. Dempsey Pipe & Supply, 592 F.3d 329 (2d Cir. 2010).
¹¹ Dasher v. RBC Bank (USA), 745 F.3d 1111, 1116 (11th Cir. 2014); see also Romo v. Y-3 Holdings, Inc., 87 Cal. App. 4th 1153, 1158 (2001).
¹² See, e.g., Capua v. Air Europa Lineas Aereas S.A. Inc., No. 20-CV-61438-RAR, 2021 WL 965500, at *5 (S.D. Fla. Mar. 15, 2021).
¹³ Morgan, 142 S. Ct. at 1713.