Does the Supreme Court have doubts about arbitration?

One of the most valuable protections businesses have against class action lawsuits is the ability to include provisions in their employee and consumer contracts that require any disputes to be submitted to individual arbitration rather than pursued through of a class action. This mechanism has been controversial, and many state courts and lower federal courts (as well as some state legislators and federal policymakers) have attempted to limit companies’ ability to enforce these provisions.

Over the past four decades, the United States Supreme Court has consistently rejected such efforts, repeatedly referring to a “federal policy favoring arbitration” embodied in the Federal Arbitration Act. In its recent decision in Morgan c. Sundance Inc., however, the Supreme Court made it clear that the phrase had a much narrower meaning than many had long thought.

Does this reflect a sea change in the Supreme Court’s view on arbitration? Probably not, especially in light of the Supreme Court’s more detailed statements about the FAA in another ruling released just three weeks later. But Morgan may require a reframing of how FAA matters are handled.

Two-part test rejected

In Morgan, a unanimous Supreme Court rejected the two-part test applied by most circuits to assess whether a party has waived its right to enforce the performance of an arbitration agreement. According to this test, the waiver would only be found if a party acted in a manner inconsistent with its arbitration rights and this inconsistency caused prejudice to the other party.

The primary rationale for the harm requirement was the “federal pro-arbitration policy” often cited by the Supreme Court. Finding that the usual test of contractual waiver generally requires only inconsistent conduct, the High Court found it inappropriate to graft an additional harm requirement onto the waiver analysis only for arbitration agreements.

Although the two-part test has been majority rule in lower courts, its rejection is unlikely to have a major impact on waiver decisions. The primary effect will be an increased focus on exactly what conduct is sufficiently “inconsistent” with the right to arbitrate to create a waiver.

The Supreme Court has not commented on this, but the answer is likely to leave the result in most cases the same as it would have been under the two-part test – inconsistent conduct significant enough to cause a harm will generally create a waiver, whereas conduct so insignificant that it is entirely non-harmful is unlikely to be considered sufficiently “inconsistent” with arbitration rights to waive those rights.

What is perhaps more important is the basis for the decision in Morganwhere the Supreme Court explained that the “federal policy favoring arbitration” should not be interpreted as referring to anything other than confirming that an arbitration agreement is just as binding as any other contract: “The Federal policy is to treat arbitration contracts like any other, not to favor arbitration.

Although the Supreme Court pointed to language in some earlier decisions that was consistent with this narrower interpretation, the lower courts can hardly be faulted for viewing the earlier High Court decisions as a whole as suggesting that federal policy supports arbitration itself, and not merely the performance of arbitration contracts as contracts.

As Judge Antonin Scalia pointed out in his ground-breaking opinion in AT&T Mobility vs. Concepcion“Our cases show beyond dispute that the FAA was designed to promote arbitration.”

Some can see Morgan as reflecting a significant shift in the Supreme Court’s view of the FAA, but its broader scope is likely to be limited.

Admittedly, the proposition that arbitration contracts should be treated “like all others” is often easier to state in the abstract than to apply in the context of specific situations that are inherently unique to arbitration agreements. The courts have found that the “federal policy favoring arbitration” plays a useful role in bridging the gaps by helping to resolve ambiguous situations. That said, nothing in Morgan involves reconsideration of any previous Supreme Court decision in favor of arbitration.

viking river Decision

Moreover, only three weeks after Morgan, the Supreme Court rendered its decision in Viking River Cruises Inc. vs. Morianain which it struck down a California court that refused to enforce an arbitration agreement against a plaintiff bringing a claim under the California Attorney General Act.

Of particular note is the High Court’s explanation that the FAA’s preemption is not limited to state rules that are on their face discriminatory against arbitration, such as rules that prohibit the arbitration of certain types of claims.

The Supreme Court upheld that the FAA can also override rules “that are generally enforceable as a formal matter,” but which have the effect of rendering arbitration agreements ineffective because they are inherently inconsistent with arbitration. These rules would include those that would require a party to arbitrate in class or not at all. Whatever else the high court may think, she is still solidly behind her 2011 Design decision.

At the end of the day, Morgan reinforces the essential core of the Supreme Court’s landmark arbitration jurisprudence: the principle that arbitration contracts must generally be enforced and that the FAA does not authorize courts, adjudicators, or legislators (other than Congress) to impose special limitations based on hostility to arbitration. As long as this principle remains firmly in place, the Supreme Court’s unwavering defense of arbitration agreements is likely to continue.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Write for us: guidelines for authors

Author Information

Winner Sonya is a partner in the San Francisco office of Covington & Burling LLP. She is co-chair of the firm’s Class Action Litigation practice group.

Ashley Simonson is a partner in the Los Angeles office of Covington & Burling LLP. She focuses on defending technology, financial services and consumer brand clients against complex class action lawsuits.

Comments are closed.