WASHINGTON (CN) — Getting rid of a special federal court rule that favors arbitration agreements, the Supreme Court sided unanimously Monday with a Taco Bell worker suing the company for unpaid overtime.
Sundance Inc. owns 150 Taco Bell restaurants across the United States. In 2015, Robyn Morgan briefly worked at a Sundance-owned Taco Bell in Iowa where the company avoided paying overtime by moving any of an employee’s hours that exceeded 40 hours per week to a different week of the employee's timesheet. Morgan brought a class action suit under the Fair Labor Standards Act.
Sundance tried and failed to have Morgan’s case dismissed on the basis that it was duplicative of another one already underway in Michigan, Woods v. Sundance Inc.
In 2019, Morgan and representatives in the Wood case met for a joint mediation. Sundance came to a settlement in the Wood case but not with Morgan. Sundance then moved to compel arbitration.
A trial court turned down Sundance’s attempt at arbitration, finding that it had waived its rights by having already participated in litigation up to that point. The Eighth Circuit later reversed.
The Federal Arbitration Act allows for companies to stay litigation in favor of arbitration. This often happens — as in this case — after months or even years of litigation has passed, forcing courts to ask if the company’s request to switch to arbitration is too late. Appeals courts have used a special rule claiming the FAA has a policy favoring arbitration. The justices ruled Monday that the FAA did not authorize federal courts to create an arbitration-specific rule.
Karla Gilbride, an attorney with Public Justice representing Morgan, said the decision will take the thumb off the scale in favor of employers and allow courts to treat legal arguments fairly.
“We are hopeful that today’s decision will bring Ms. Morgan a step closer to a fair result in her dispute with Sundance, and we’re also hopeful that it will send a message to all corporations who include arbitration provision in their contracts with workers and consumers that those arbitration provision will be treated just like any other term in their contract — no worse, but also not better,” Gilbride said in a statement.
The arbitration-specific rule considers prejudice where other contexts do not. To ask if a party has intentionally relinquished or abandoned a known right, the court focuses on the party who holds the right asking if its actions caused harm.
“As Judge Colloton noted in dissent below, a contractual waiver ‘normally is effective’ without proof of ‘detrimental reliance,’” Justice Elena Kagan wrote for the court. “So in demanding that kind of proof before finding the waiver of an arbitration right, the Eighth Circuit applies a rule found nowhere else — consider it a bespoke rule of waiver for arbitration.”
Kagan traced the history of the special rule from its Second Circuit origins, saying it eventually came to justify a prejudice requirement based on the liberal national policy favoring arbitration.
As the justices determined Monday, however, the courts went too far.
“But the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules,” Kagan wrote.
The original policy goal was to make arbitration agreements the same as other contracts but not more enforceable than them.
“Accordingly, a court must hold a party to its arbitration contract just as the court would to any other kind,” Kagan wrote. “But a court may not devise novel rules to favor arbitration over litigation.”
Paul Clement, an attorney with Kirkland & Ellis representing Sundance, did not immediately respond to a request for comment on the ruling.
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