For more than 50 years, the Second Circuit’s test for determining whether a party had waived the right to arbitrate was the prevailing approach across the country. That test, which was based on the strong public policy favoring arbitration, focused on whether there was prejudice to the party opposing arbitration. In Morgan v. Sundance, Inc., 596 U.S. 411 (2022), the U.S. Supreme Court expressly rejected the Second Circuit’s approach. It abolished the prejudice requirement in favor of asking: “Did that party ‘knowingly relinquish the right to arbitrate by acting inconsistently with that right?’” In the wake of Morgan, the federal district courts in New York took varying approaches to analyzing arbitration waivers. The Second Circuit recently clarified the applicable standard in its first precedential decision since Morgan was decided.
The Case: Doyle v. UBS Fin. Services, Inc., 144 F.4th 122 (2d Cir. 2025)
In Doyle v. UBS Financial Services, Inc., the plaintiff-trustees brought an action against the defendants alleging breach of fiduciary duties in the defendants’ management of the trust’s investment advisory accounts. The defendants moved to stay or dismiss the complaint under the Colorado River doctrine, and after the motion was denied, they moved to compel arbitration under the Federal Arbitration Act. The plaintiffs argued that the defendants’ participation in the litigation and material delay in demanding arbitration resulted in a waiver of their right to demand arbitration. The district court denied the motion to compel on other grounds, finding there was a factual issue as to whether the arbitration agreement was valid.
On appeal, the Second Circuit affirmed the district court’s denial of the motion to compel but did so on the alternative ground that the defendants waived their right to seek arbitration. Applying Morgan, the court of appeals focused on the defendants’ litigation conduct prior to filing the motion to compel. The defendants expressly joined in a motion to dismiss the complaint under the Colorado River abstention doctrine, setting forth substantive arguments to support that position. Nowhere in their motion papers did the defendants raise the issue of arbitration. In fact, the first time the defendants mentioned arbitration in any filing to the district court was in their motion to compel arbitration. The Second Circuit concluded that under Morgan, the conduct of the defendants was inconsistent with the right to arbitrate. By moving to dismiss all claims against them without even mentioning the possibility of arbitration, the defendants intentionally availed themselves of the district court’s authority and sought affirmative, dispositive relief, thereby “knowingly relinquish[ing] the right to arbitrate.”
The Takeaway:
Morgan has dramatically changed the arbitrator waiver calculus in the Second Circuit. Prejudice to the non-moving party is no longer relevant. Instead, litigants now waive the right to arbitrate by acting inconsistently with that right, including by first affirmatively seeking resolution of a dispute in the district court. Arbitration is not a “fallback” position. Rather, a party with a right to arbitrate faces a binary choice: litigation or arbitration. Accordingly, parties in the Second Circuit must raise arbitration as early as possible, and keep in mind that any substantive motion practice – particularly motions to dismiss – risks waiving the right to arbitrate.
