Aon  |  Financial Services Group

A restaurant franchise was sued in federal court by employees for wage theft and unpaid overtime. The franchise defended itself in court for eight months before invoking the mandatory arbitration clause in the employment contract, and compelling arbitration under the Federal Arbitration Act (FFA).

When companies delay enforcing arbitration provisions, they are typically waived. In this situation, the 8th Circuit Court of Appeals allowed Sundance, Inc. to invoke the provisions later, stating that doing so after eight months did not prejudice the claimant. Prejudice, the Court held, requires “lost evidence, duplication of efforts, use of discovery methods unavailable in arbitration, or litigation of substantial issues going to the merits.”

The claimant appealed to the United States Supreme Court. Counsel for the claimant argued that the prejudice standard is nowhere in FAA. Instead, it was derived by the Courts as a “federal policy favoring arbitration.” The Supreme Court agreed in a unanimous decision to put arbitration agreements on equal footing with other contracts. As a result, the Court held that federal rules of procedure do not on their own have any requirement to show prejudice. The lower Appellate Court will focus its analysis on whether the defendant waived its right to arbitrate by acting inconsistently with that right. Such analysis should not include prejudice as an aspect. The broader impact of the decision is the Court’s sole holding - the courts may not make up new procedural rules based on the FAA’s “policy favoring arbitration.”

Companies should work with legal counsel on their litigation strategy and consider invoking existing arbitration agreements early to help avoid unfavorable situations.