Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Welcome
Go
Free Newsletter Sign Up

Supreme Court Strikes Taco Bell Franchise’s Arbitration Win (1)

May 23, 2022, 2:37 PMUpdated: May 23, 2022, 8:06 PM

The US Supreme Court held that a federal appeals court overstepped its authority in creating an arbitration-related rule in a dispute over an Iowa fast-food worker’s overtime case against a Taco Bell franchise.

The unanimous court’s narrow decision Monday vacated a ruling from the US Court of Appeals for the Eighth Circuit, which ruled that the company didn’t lose its right to force arbitration because it waited too long in the court process to seek it. The case will be remanded to the appeals court.

The Eighth Circuit found that Robyn Morgan, who sued franchise Sundance Inc. in 2018, had to show “prejudice” or that the protracted litigation over her overtime dispute caused her harm in order to avoid arbitration. That’s not a requirement under the Federal Arbitration Act, the justices said.

By 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,” Justice Elena Kagan wrote for the unanimous court.

The ruling settles a split among the circuits over how courts should handle disputes when a party waits to compel arbitration after litigation has moved forward, and whether doing so waives the right to enforce the contract.

“The decision provides clarification on the federal policy favoring arbitration. It reminds the courts that it cannot be used to impose legal requirements that don’t otherwise exist,” said Martin Gusy, a partner with Bracewell LLP in New York, who leads the firm’s international arbitration practice.

Karla Gilbride, who represents Morgan, said she hopes the decision sends “a message to all corporations who include arbitration provisions in their contracts with workers and consumers that those arbitration provisions will be treated just like any other term in their contract—no worse, but also no better.”

“All Robyn Morgan wants in this case is to be paid fairly by her former employer and to have her legal arguments treated fairly by the courts, without a thumb on the scale because those arguments happen to involve arbitration,” said Gilbride, the co-director of Public Justice’s Access to Justice Project.

Sundance’s attorney didn’t immediately respond to a request for comment.

Delay Tactic

Morgan’s suit against the franchise proceeded in federal court for nearly eight months before the company invoked an arbitration provision in its standard form employment contract.

“The opinion makes a hugely important point: The Federal Arbitration Act doesn’t license courts to create special federal-law doctrines favoring arbitration that are not authorized by the act’s text,” said Scott Nelson, attorney with the Public Citizen Litigation Group, which filed a friend-of-the-court brief in the case.

Federal appeals courts had been split on how to handle such disputes.

The US Chamber of Commerce, the Restaurant Law Center, and a coalition of states, legal scholars, and workers’ advocates weighed in on the Supreme Court case ahead of the decision.

The National Academy of Arbitrators, which favors private dispute resolution, said it was concerned about the integrity of the arbitration process if the Eighth Circuit’s decision stood, calling it a “tactical device.”

“When, as here, a party fails promptly to claim a right to arbitrate, and instead first tests the waters of the litigation process, arbitration no longer provides a fair, efficient, and beneficial alternative to litigation,” according to the organization’s friend-of-the-court brief.

Court Impact

Yet the decision creates “more uncertainty” for courts, said John M. Masslon II, senior litigation counsel with the Washington Legal Foundation, which also filed an amicus brief in the case.

The high court left questions unanswered about the waiver principles and also whether state or federal law should be applied, he told Bloomberg Law in response to the high court’s ruling.

Masslon argued in the brief that Morgan sought to “flip reality on its head by arguing that the FAA rewards her for breaching her contract with Sundance. The absurdity of the argument is self-evident.”

Still, the justices made important observations about their rulings in recent arbitration cases that may transcend the importance of the Morgan case, said Richard Silberberg, a partner with Dorsey & Whitney LLP and director of the New York International Arbitration Center.

The Supreme Court has repeatedly emphasized that the FAA establishes a strong federal policy “favoring arbitration,” he said. But this case indicated that some federal courts misconstrued previous rulings bolstering the practice and application of federal policy by adopting “special arbitration-preferring procedural rules,” Silberberg said.

The case will go a long way to “stop gamesmanship in the courts,” said Gerson Smoger, a Dallas-based attorney with Smoger & Associates who penned a brief on behalf of the American Association for Justice.

“Arbitration is a contract like any other contract,” Smoger said. “Certain courts misunderstood the Supreme Court, and did everything they could to make sure things went to arbitration.”

The case is Morgan v. Sundance, Inc., U.S., No. 21-328, 5/23/22.

(Story updated with additional reporting throughout.)

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Martha Mueller Neff at mmuellerneff@bloomberglaw.com