The Supreme Court Favors Employees in Recent Arbitration Rulings

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Supreme Court

In two recent cases, the U.S. Supreme Court handed down rulings that favored employees based upon the Court’s interpretation of the Federal Arbitration Act (“FAA”).

Morgan v. Sundance, Inc. involved the concept of waiver. In Morgan, an employee for a Taco Bell franchise filed a lawsuit on behalf of employees across the nation, alleging that the franchise owner failed to properly pay overtime wages. While the employee had signed an agreement promising to arbitrate employment disputes, the employer did not immediately ask the district court (where the employee filed the lawsuit) to send the lawsuit to an arbitrator. The employer, instead, operated as if no such agreement to arbitrate had existed. The employer first tried to unsuccessfully dismiss the lawsuit, and then participated in an unsuccessful mediation.

Nearly eight months after the employee filed the lawsuit in a federal court, the employer filed a motion to compel the lawsuit to an arbitrator. In response, the employee argued that the employer waived its right to arbitrate by waiting so long.

Congress passed the FAA to authorize parties to arbitrate disputes instead of filing a lawsuit in a federal court, but appellate courts have disagreed as to the standard of waiver in arbitration matters. Because courts have explained that “federal policy favors arbitration,” some appellate courts have explained that waiver can only apply in arbitration matters if a party can demonstrate prejudice if the matter were to proceed to arbitration. But this prejudice requirement is not generally required to establish waiver.

The Supreme Court held that courts cannot create special procedural rules for arbitration and should solely rely on the text of the FAA. Arbitration contracts are the same as any other contract, and courts should not create new rules to allow arbitration over matters filed in court.

The Supreme Court held that the FAA does not authorize special rules for arbitration. Thus, a party does have to show actual prejudice to demonstrate that another party waived its right to arbitrate.

The practical impact of Morgan is two-fold: parties will not be able to have their cake and eat it too when it comes to arbitration. Court rooms and arbitration proceedings allow parties different benefits. For example, in Morgan, the employer was able to (though unsuccessfully) file a motion to dismiss and conduct a mediation, while incurring less costs than through arbitration.

The second impact was confirmed both in Morgan and in the Court’s second arbitration case of the year. The Court demonstrated that it will not deviate from the text of the FAA, regardless of any perceived congressional policy to favor arbitration.

The second decision is the case of Southwest Airlines Co. v. Saxon. This case also involved unpaid wages: a ramp supervisor filed a lawsuit for unpaid overtime wages on behalf of a collection of ramp supervisors. Ramp supervisors train and supervise teams that load baggage onto planes that make cross-country flights, and ramp supervisors also participate in baggage loading.

The employee had signed a contract to arbitrate claims, and the airline attempted to move the case to arbitration. The employee argued that the FAA was inapplicable because the FAA does not “apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” If the FAA exempted the workers, then the contract to arbitrate would not be enforceable.

The district court held that the FAA only exempted workers involved “in actual transportation,” not just employees who handled goods. Both the appellate court and the Supreme Court disagreed.

The Supreme Court held—in a unanimous decision (Justice Barrett did not participate in the case)—that the FAA exempted the ramp supervisors. Based on the statutory language, the Court held that ramp supervisors were a “class of workers engaged in foreign or interstate commerce” because they loaded the planes.

The Court further adopted a middle approach between the employee’s position and the airline’s position. While the employee argued that “class of workers” should be “all airline workers who carry out the ‘customary work’ of the airline, rather than cargo loaders more specifically,” the Court rejected this broader interpretation. The Court also rejected the airline’s narrower interpretation that the FAA only exempts workers who physically move goods in interstate state, for example, pilots.

The combination of the two cases demonstrates that the Court will not read new procedural rules or terms into the FAA. The Court explained, “we have no warrant to elevate vague invocations of statutory purpose over the words Congress chose.”