Could it be true? The U.S. Supreme Court recognizes some limits on Arbitration?

If you’ve followed my blog or ever read anything about forced arbitration in the United States, you’ll be aware that the U.S. Supreme Court loves arbitration. After all, they’ve spent the past 40 years expanding the scope of the Federal Arbitration Act, and during that time they have recognized fewer and fewer limits to these nasty little contract provisions that have become ubiquitous in modern commerce. Arbitration is unavoidable nowadays. If you have internet, a cell phone, a credit card, a bank account, a termite bond, a car loan, or just about any other necessity of daily modern life, you’re bound by numerous arbitration clauses.

Most people don’t know they’ve signed an arbitration agreement until they’ve got a legal issue with a corporation who’s done them wrong. Then once they’ve taken their case to court, the corporation’s lawyers file a motion to compel them to arbitration. In the past, one of the few limits on arbitration was that once a party had participated meaningfully in the litigation process (meaning, they’ve let the case proceed for a while in real court), that party was deemed to have waived their right to arbitrate. It makes sense, right? If you get sued under a contract that requires arbitration, and you file motions with the court and conduct discovery and have the court issue subpoenas to witnesses, etc., it wouldn’t be fair to then try to move the case to arbitration out of the blue.

But over the past 20 years, state and federal courts have made it harder and harder to prove that sort of waiver. Since the U.S. Supreme Court was repeating over and over again that the FAA constituted a “strong policy” in favor of arbitration, the lower courts took that to mean that every doubt about arbitration should be resolved in favor of arbitration, including questions of waiver. Most notably, a party claiming that an arbitration provision had been waived was required to prove substantial prejudice in order to keep a case in real court. That was extremely difficult in practice, because not only did the party opposing arbitration have to show that the other side gave up their right to arbitrate, but also that they suffered some sort of demonstrable and significant harm as a result. That has been the law in most circuits for a long time.

But this past week, the Supreme Court issued its ruling in the case of Morgan v. Sundance, Inc. and shocked the lawyer world by–gasp!–saying the old view was wrong. Waiver, of course, is a common defense to contractual liability. And since arbitration is itself a creature of contract, then waiver of an arbitration clause should be treated like every other sort of waiver. Normal contract law doesn’t require prejudice as a prerequisite to show waiver. All that is required is that you know you have a certain right and act in a manner indicating that you have relinquished that right.

Whether this will have a far-reaching impact on real cases remains to be seen. Most defense lawyers riddle their answers with dozens of defenses, including a disclaimer that they “reserve the right” to arbitrate a case. Plaintiffs who want to avoid arbitration should not simply proceed with a case hoping that the defense forgets about that arbitration clause. Consider a letter to defense counsel asking them to explicitly state their intentions on arbitration, or even a motion to strike such a reservation as an improper affirmative defense under state rules of civil procedure.