August 19, 2022 | Legal News

SCOTUS Update: Timeliness of Arbitration Clauses to Be Strictly Enforced

When a franchisor is served with a franchisee’s lawsuit even though its franchise agreement requires mandatory arbitration, one of the first questions should be whether to enforce the arbitration clause.  But sometimes franchisors put off compelling arbitration while they try to resolve the dispute through mediation or a motion to dismiss. Although franchisors risk waiving the right to arbitrate by not timely invoking it, for years, most federal courts have offered franchisors an escape from this harsh outcome. Specifically, those courts have required parties opposing arbitration to show how the franchisor’s delay in demanding arbitration prejudiced them (incurring additional legal expenses was often insufficient). Absent a showing of prejudice, courts would routinely compel matters to arbitration many months, on occasion even years, after those matters were initially filed in court.

Alas, no more. In a decision released in May of 2022, the U.S. Supreme Court eliminated the prejudice requirement. The Court reasoned that arbitration agreements must be treated on equal footing with—not more favorably than—all other contracts. Under federal law, the Court explained, a party seeking waiver of a contractual right need not show prejudice. To require prejudice to establish waiver of an arbitration agreement, the Court concluded, violates the equal footing principle. The Court’s decision serves as a stark reminder: franchisors must timely assert their right to arbitrate under their franchise agreements to avoid losing it.

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