In a published opinion issued on March 27, 2024, the Sixth Circuit applied for the first time the waiver standard announced in the Supreme Court's 2022 opinion, Morgan v. Sundance, Inc., 596 U.S. 411 (2022), in affirming the denial of a motion to compel arbitration due to the defendant's extensive participation in the litigation. Post-Morgan, plaintiffs need not prove that defendants' participation in litigation prejudiced them—instead, plaintiffs in the Sixth Circuit need only prove that the defendants' litigation conduct was "completely inconsistent" with any reliance on an arbitration agreement.
Prior to Morgan, many federal courts, including the Sixth Circuit, held that a party who participates in litigation prior to moving to compel arbitration has not waived its right to arbitrate unless, among other things, its conduct prejudiced the other side. But in Morgan, the Supreme Court clarified that courts should apply ordinary waiver rules when deciding whether a party waived its right to arbitrate by its litigation conduct, without any additional prejudice requirement.
Schwebke v. United Wholesale Mortg. LLC, Nos. 23-1507/1551 (March 27, 2024), presented the first time the Sixth Circuit was asked to apply Morgan. Under the Sixth Circuit's pre-Morgan case law, a party waived its right to arbitrate when it both (1) takes action that is "completely inconsistent with any reliance on an arbitration agreement," and (2) delays asserting its right to arbitrate "to such an extent that the opposing party incurs actual prejudice." Because the parties in Schwebke did not challenge the first prong of the Sixth Circuit's test—whether a party's actions are "completely inconsistent" with reliance on an arbitration agreement—the court assumed without deciding that it survived Morgan.
On the merits, Schwebke concerned an employee's claims against his employer for retaliation and failure-to-accommodate under the Americans with Disabilities Act. The defendant's counsel was unaware that the plaintiff's employment agreement contained an arbitration agreement until seven months into the litigation, at which point the defendant moved to compel arbitration.
The Schwebke court held that the following conduct met the "completely inconsistent" standard: waiting seven months before moving to compel arbitration; failing to raise arbitration as an affirmative defense; raising other affirmative defenses; participating in a discovery conference; filing a joint discovery plan; serving interrogatories and requested documents; responding to discovery and producing tens of thousands of pages of documents; issuing 14 third-party subpoenas; defending three witnesses' depositions; noticing two depositions; filing a witness list; and agreeing to an extension of the discovery deadline. Notably, Schwebke differed from the Sixth Circuit's prior precedent in that waiver was found even though the defendant did not request affirmative relief by filing a counterclaim or a dispositive motion.
Schwebke serves as a reminder that employers who utilize arbitration agreements with their employees must be diligent in moving to compel arbitration at the earliest possible juncture to avoid waiver. Stites & Harbison's employment attorneys can assist employers in both drafting valid arbitration agreements and enforcing them once a dispute has arisen.
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