Four Key Considerations
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.” 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.” Rather, it simply requires courts to place arbitration agreements “on the same footing as other contracts.” 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.
Counsel litigating arbitrability issues in the wake of Morgan must be cognizant of at least the following issues:
Limited Policy Favoring Arbitration: Although the federal policy favoring arbitration is firmly entrenched, it does not mean that every issue of arbitrability requires putting a thumb on the scale in favor of arbitration – the presumption applies when assessing the scope of an agreement to arbitrate, but does not reach questions regarding contract formation, who has standing to invoke arbitration, who determines arbitrability, or procedural rules.
The Morgan Rule is Susceptible to Different Readings: Does Morgan require federal courts to excise prejudice from their current arbitration waiver standards, or does it require courts to simply apply their general contract waiver standards to the arbitration context?
State Implied Contract Waiver Rules Might Require A Different Result: If states apply a prejudice rule to the implied waiver of all contracts, should they continue to apply that rule in the wake of Morgan?
Outcomes May Not Be Affected: The cases decided since Morgan suggest that the new waiver rule may not change outcomes. That is likely due to the fact that the litigation conduct that typically results in a finding of implied waiver is the same kind of conduct that often results in prejudice to the opposing party.
These topics are treated in greater depth in Parts II–V of Alto Litigation’s forthcoming blog series on Morgan v. Sundance.
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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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