A federal appeals court recently refused to let a mortgage broker send its former employee’s disability discrimination lawsuit to arbitration, stating the company waived its right to arbitration when it actively participated in litigation for seven months.

For years, most federal Courts of Appeal have held that a party who participated in litigation had not waived its right to arbitrate unless there was prejudice to the opposing side. This same rule has been applied by the U.S. Court of Appeals for the Sixth Circuit, which issued the decision that is the subject of this bulletin. The prejudice requirement was derived from the policy favoring arbitration in the Federal Arbitration Act.

However, a pivotal shift occurred in 2022, when the U.S. Supreme Court, in Morgan v. Sundance, Inc., removed the prejudice prong of the analysis, asserting that the right to arbitrate can be waived, much like any other contractual right. After Morgan, the determining factor is whether there was an “intentional relinquishment or abandonment” of the contractual right to arbitrate.

The Sixth Circuit had not yet had an opportunity to apply Morgan until its recently published opinion in Schwebke v. United Wholesale Mortgage LLC.

The lawsuit

Jason Schwebke, a software developer who is deaf, brought a lawsuit against his employer, United Wholesale Mortgage, alleging disability discrimination under state and federal law. The plaintiff alleged that UWM did not provide him with the reasonable accommodations he needed and retaliated against him. In response, the company engaged in extensive discovery for several months, including production of thousands of pages of documents and issuance of 14 third-party subpoenas for education and employment records, without ever raising arbitration as an affirmative defense. Seven months into the case, the company moved to compel arbitration. However, the lower court denied the motion, saying the company had effectively waived its right to arbitration “because its conduct was completely inconsistent with reliance on its arbitration right.”

The Sixth Circuit agrees

The Sixth Circuit, applying Morgan for the first time, affirmed the denial of UWM’s motion. The appeals court compared Schwebke with a case it had decided pre-Morgan, Johnson Associates Corp. v. HL Operating Corp. In that case, the Sixth Circuit determined that the defendant’s actions were inconsistent with a desire to arbitrate because it waited eight months before moving to compel arbitration, did not raise arbitration as an affirmative defense, participated in various legal proceedings, and engaged in extensive discovery. The Sixth Circuit said that UWM engaged in similar conduct: it waited seven months before moving for arbitration, did not raise arbitration as an affirmative defense, participated in legal proceedings, and engaged in extensive discovery. Even worse, UWM conducted far more extensive discovery than did the defendant in Johnson Associates.

The court rejected UWM’s argument that its litigation was not significant enough to result in a waiver of its right to arbitrate, noting that participating in discovery without reference to arbitration suggested an intent not to enforce the arbitration clause. In a last-ditch effort, UWM also argued that it did not waive its right to arbitrate because its attorney did not initially know about the arbitration clause, which was the reason for the failure to raise arbitration earlier. The Court rejected this argument as well, saying that UWM had “imputed knowledge” of its employment agreement, which contained the arbitration clause, when it produced the agreement in its first set of discovery documents. Although the defendant in Johnson Associates had also asserted a counterclaim and engaged in settlement discussions facilitated by a magistrate judge – neither of which UWM did – these differences were not enough to overcome a finding of waiver, according to the court.

Employers, take warning

In light of the new standard for determining whether arbitration has been waived and the Schwebke decision, it is more important than ever that employers provide counsel with copies of any arbitration agreement at the outset of litigation so that counsel can move to compel arbitration as soon as possible. Such prompt action should dispel any contention that the employer waived its right to arbitrate.

Moreover, because the law surrounding enforcement of arbitration agreements is evolving, employers should also have their arbitration agreements routinely reviewed and (if needed) revised by their attorneys.

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