• Thu. Sep 22nd, 2022

Supreme Court Overturns Taco Bell Franchise Arbitration Victory (1)

ByStephanie M. Akbar

May 23, 2022

The U.S. Supreme Court has ruled that a federal appeals court exceeded its authority by creating an arbitration-related rule in a dispute over a fast-food worker’s overtime case. ‘Iowa against a Taco Bell franchise.

The narrow unanimous court decision Monday overturned a ruling by the United States Court of Appeals for the Eighth Circuit, which ruled the company did not lose its right to force arbitration because it waited too long in the legal process to ask for it. The case will be referred to the Court of Appeal.

The Eighth Circuit found that Robyn Morgan, who sued the Sundance Inc. franchise in 2018, must show ‘prejudice’ or that the protracted litigation over her overtime dispute caused her harm in order to avoid arbitration . It is not a requirement under federal arbitration law, the judges said.

By requiring “this kind of proof before finding the waiver of a right to arbitrate, the Eighth Circuit enforces a rule found nowhere else – think of it as a bespoke rule of arbitration waiver” , Judge Elena Kagan wrote for the unanimous court.

The ruling settles a split between the circuits over how courts should handle disputes when a party waits to compel arbitration after the dispute has advanced, and whether that waives the right to enforce the contract.

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

Karla Gilbride, who represents Morgan, said she hoped the decision would send “a message to all companies that include arbitration clauses in their contracts with workers and consumers that these arbitration clauses will be treated as n any other clause in their contract – not worse, but not better either.

“All Robyn Morgan wants in this case is to be paid fairly by her former employer and for her legal arguments to be dealt with fairly by the courts, without a thumbs up because those arguments involve arbitration,” said Gilbride, co-director of Public Justice’s Access to Justice Project.

Sundance’s attorney did not immediately respond to a request for comment.

Delay tactic

Morgan’s lawsuit against the franchise languished in federal court for nearly eight months before the company invoked an arbitration clause in its standard employment contract.

“The opinion raises an extremely important point: the Federal Arbitration Act does not authorize courts to create special doctrines of Federal law favoring arbitration that are not authorized by the text of the statute,” said Scott Nelson, attorney for the Public Citizen Litigation Group, who filed a friend of the court brief in the case.

Federal appeals courts were divided on how to handle these disputes.

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

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

“When, as here, a party does not promptly assert a right to arbitration and first test the waters of the litigation process, arbitration no longer provides a fair, efficient and beneficial alternative to litigation,” according to the friend of the organization- memorial of the court.

Impact on court

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

The High Court left unanswered questions about the principles of waiver and also whether federal or state law applies, he told Bloomberg Law in response to the High Court’s decision.

Masslon argued in the brief that Morgan was seeking to “subvert reality by arguing that the FAA is rewarding her for breaching her contract with Sundance. The absurdity of the argument is obvious.

Yet judges have made important observations about their decisions in recent arbitration cases that may transcend the significance of the Morgan case, said Richard Silberberg, partner at Dorsey & Whitney LLP and director of the New York International Arbitration Center.

The Supreme Court has repeatedly pointed out that the FAA establishes a strong federal policy “promoting arbitration,” he said. But that case indicated that some federal courts have misinterpreted past rulings bolstering the practice and application of federal policy by adopting “special procedural rules that prefer arbitration,” Silberberg said.

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

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

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

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