FAA Preempts Iowa’s Arbitration-Specific “Prejudice” Waiver Test: Waiver of Arbitration Governed by Ordinary Contract Principles

Introduction

Leroy Eldon Cole v. Southeast Iowa Orthopaedics and Sports Medicine, PC; MGM Healthcare; Midwest Geriatric Management, LLC; Michael William Hendricks; Arbor Court Healthcare, LLC; and Arbor Court Realty, LLC c/o MGM Healthcare is an interlocutory appeal from an Iowa district court order compelling arbitration in a dispute arising from care provided to Betty Ann Cole at Arbor Court, a skilled nursing facility. Betty signed an arbitration agreement and died twelve days later. Her husband, Leroy Cole, individually and as executor of her estate, sued Arbor Court and other defendants asserting claims including negligence, gross negligence, wrongful death, and dependent adult abuse.

After nearly a year of district-court litigation, Arbor Court moved to compel arbitration. Cole resisted on two grounds: (1) the agreement was procedurally unconscionable, and (2) Arbor Court had waived any right to arbitrate by litigating. The Iowa Supreme Court reversed—on waiver—without reaching unconscionability.

Summary of the Opinion

The court held that the parties’ dispute is governed by the Federal Arbitration Act (FAA) and that, under Morgan v. Sundance, Inc., Iowa’s arbitration-specific waiver doctrine requiring a showing of prejudice (as stated in Mod. Piping, Inc. v. Blackhawk Automatic Sprinklers, Inc. and Wesley Ret. Servs., Inc. v. Hansen Lind Meyer, Inc.) is preempted where the FAA applies.

Applying ordinary Iowa contract-waiver principles (not an arbitration-specific test), the court concluded Arbor Court impliedly waived arbitration by continuing to litigate for months after knowing of the arbitration agreement—serving and receiving discovery and delaying a motion to compel—thereby objectively demonstrating an intent to relinquish the arbitration right. The order compelling arbitration was reversed and the case remanded.

Analysis

Precedents Cited

1) Iowa’s prior arbitration-waiver framework

  • Wesley Ret. Servs., Inc. v. Hansen Lind Meyer, Inc., 594 N.W.2d 22 (Iowa 1999): The opinion cites Wesley Retirement Services for the now-superseded Iowa articulation that waiver of arbitration required (i) conduct inconsistent with arbitration and (ii) prejudice to the party claiming waiver. The district court relied on this framework. The Supreme Court uses Wesley primarily as a contrast point to explain why Iowa’s arbitration-specific prejudice requirement cannot stand under the FAA post-Morgan.
  • Clinton Nat. Bank v. Kirk Gross Co., 559 N.W.2d 282 (Iowa 1997): Quoted in Wesley for the “conduct + prejudice” test, reinforcing that the prejudice prong had been embedded in Iowa arbitration-waiver doctrine.
  • Mod. Piping, Inc. v. Blackhawk Automatic Sprinklers, Inc., 581 N.W.2d 616 (Iowa 1998), overruled in part on other grounds by, Wesley Ret. Servs., Inc. v. Hansen Lind Meyer, Inc., 594 N.W.2d 22: Modern Piping exemplified waiver under the old framework, finding waiver when a party pursued lengthy litigation and used discovery tools unavailable in arbitration. The Cole opinion treats Modern Piping’s two-part test (especially prejudice) as the doctrinal feature that becomes impermissible under the FAA after Morgan.
  • Wesley Ret. Servs., Inc. v. Hansen Lind Meyer, Inc., 594 N.W.2d 22, 29 (Iowa 1999): Cited for the standard of review (“correction of errors at law”).

2) FAA equal-treatment and preemption authorities

  • Morgan v. Sundance, Inc., 596 U.S. 411 (2022): The central engine of the opinion. Morgan rejects arbitration-specific waiver rules—particularly a prejudice requirement— because the FAA demands arbitration agreements be treated like other contracts (“as enforceable as other contracts, but not more so”). Cole applies Morgan to state-court doctrine when the FAA governs.
  • Granite Rock Co. v. Int'l Brotherhood of Teamsters, 561 U.S. 287 (2010), and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967): Quoted (via Morgan) for the FAA’s purpose and the “not more so” principle—supporting the conclusion that adding a prejudice requirement uniquely for arbitration is impermissible.
  • Kindred Nursing Ctrs. Ltd. P'ship v. Clark, 581 U.S. 246 (2017), and AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011): These cases supply the doctrinal frame: FAA § 2’s “equal-treatment principle” allows generally applicable contract defenses, but preempts rules that single out arbitration or derive meaning from arbitration’s presence. Cole uses them to characterize Iowa’s prejudice requirement as arbitration-specific.

3) Iowa’s general (non-arbitration-specific) waiver doctrine

  • Scheetz v. IMT Ins. (Mut.), 324 N.W.2d 302 (Iowa 1982) (en banc): The controlling Iowa authority for implied waiver of contractual rights. Cole adopts Scheetz’s approach—intent inferred from conduct—and uses it as the proper framework under the FAA. Scheetz also supplies the key inferential phrasing: conduct can show the party “could have had no other intent than to relinquish” the right.
  • Travelers Indem. Co. v. Fields, 317 N.W.2d 176 (Iowa 1982): Cited (via Scheetz) for waiver as “the voluntary or intentional relinquishment of a known right.”
  • EMC Ins. Grp. v. Shepard, 960 N.W.2d 661 (Iowa 2021), and DuTrac Cmty. Credit Union v. Hefel, 893 N.W.2d 282 (Iowa 2017): Cited for the elements of waiver under Iowa law: existence of a right, knowledge, and intent to relinquish (express or implied).
  • In re Guardianship & Conservatorship of Collins, 327 N.W.2d 230 (Iowa 1982): Cited to confirm that, under general Iowa contract law, waiver of contractual rights does not require a showing of prejudice—highlighting the arbitration-specific nature of the prior Iowa test.

4) Post-Morgan waiver-by-litigation authorities

  • Thomas v. Pawn America, Minnesota, LLC (In re Pawn America Consumer Data Breach Litigation), 108 F.4th 610 (8th Cir. 2024): Used as an instructive post-Morgan application of ordinary waiver principles: substantial invocation of litigation machinery can objectively demonstrate intentional relinquishment. Cole analogizes Arbor Court’s conduct to Pawn America’s pattern of litigating first and invoking arbitration later.
  • McCoy v. Walmart, Inc., 13 F.4th 702 (8th Cir. 2021); Sitzer v. Nat'l Ass'n of Realtors, 12 F.4th 853 (8th Cir. 2021); Donelson v. Ameriprise Fin. Servs., Inc., 999 F.3d 1080 (8th Cir. 2021): Cited within the Pawn America discussion to articulate and support the “substantially invoke the litigation machinery” concept as evidence of implied waiver.
  • CNU of Ala., LLC v. Cox, 416 So. 3d 154 (Ala. 2024); Quach v. Cal. Com. Club, Inc., 551 P.3d 1123 (Cal. 2024); Kingery Constr. Co. v. 6135 O St. Car Wash, LLC, 979 N.W.2d 762 (Neb. 2022); Dall. Excavation Sys., Inc. v. Orellana, 697 S.W.3d 702 (Tex. Ct. App. 2024): These state cases are cited to show the broader national trend: state courts adjusting waiver doctrine post-Morgan by removing arbitration-specific prejudice requirements (at least in FAA-governed cases).

Legal Reasoning

  1. The FAA applies. The parties agreed, and the court accepted, that the FAA governs because the arbitration agreement contained an interstate-commerce provision and Arbor Court submitted evidence (administrator affidavit) of interstate commerce.
  2. Morgan v. Sundance, Inc. disallows arbitration-specific waiver rules. The court treats Morgan as establishing an FAA-based constraint: courts may not “tilt the playing field” via special procedural rules for arbitration. Because ordinary waiver doctrine generally does not require prejudice, a prejudice requirement applied uniquely to arbitration is an impermissible arbitration-favoring special rule.
  3. Iowa’s “conduct + prejudice” arbitration-waiver test is preempted (in FAA cases). The court identifies the prejudice requirement from Modern Piping/Wesley Retirement Services as arbitration-specific and thus inconsistent with the FAA’s equal-treatment principle (as articulated in Kindred Nursing and Concepcion). Accordingly, when the FAA applies, Iowa courts must use generally applicable contract-waiver principles.
  4. Ordinary Iowa waiver law controls: right + knowledge + intent (express or implied). Drawing from Scheetz, Travelers, EMC Ins. Grp., and DuTrac, the court applies a conventional waiver framework focused on objective conduct. It underscores that waiver may be implied and inferred from the circumstances; and when facts are undisputed, waiver is a question of law.
  5. Arbor Court impliedly waived arbitration by litigating after asserting the right. The court’s factual sequencing is central:
    • Arbor Court answered without pleading arbitration as an affirmative defense.
    • It participated in scheduling and proceeded under the district court’s trial track.
    • Even after counsel demanded arbitration (Oct. 31, 2023) and Cole refused the next day, Arbor Court did not promptly move to compel.
    • Instead, it continued to litigate and used district-court discovery: initial disclosures, interrogatories, requests for production, supplemented disclosures, and further written discovery after expert designations—obtaining discovery from Cole while leaving Cole’s discovery unanswered.
    • Only in May 2024—seven months after refusal—did Arbor Court move to compel, and only after Cole was preparing to compel discovery.
    The court acknowledges the October 31 demand was consistent with preserving arbitration, but holds Arbor Court’s subsequent litigation conduct was objectively inconsistent with an intent to arbitrate—demonstrating intentional relinquishment under Scheetz’s implied-waiver analysis.
  6. Procedural unconscionability not reached. Having found waiver, the court declines to decide whether the arbitration agreement was procedurally unconscionable.

Impact

  • Doctrinal shift in Iowa (FAA cases): When the FAA applies, Iowa courts may not require “prejudice” to find waiver of an arbitration right based on litigation conduct. This effectively displaces the arbitration-specific portion of the Modern Piping/Wesley Retirement Services test in FAA-governed disputes.
  • Earlier, cleaner arbitration motions—or waiver risk: Parties wishing to arbitrate must act consistently with that intent. Demanding arbitration but continuing to litigate—especially engaging in discovery—can establish implied waiver under ordinary contract principles.
  • Reduced strategic behavior: The ruling discourages “wait and see” tactics (e.g., testing litigation waters, securing discovery, or gauging case strength) before invoking arbitration.
  • Procedural consequences in nursing-facility litigation: Arbitration agreements are common in long-term care settings. Cole signals that facilities must operationalize prompt arbitration enforcement at intake and at suit-filing, or risk losing arbitration through litigation conduct.
  • Open question outside FAA scope: The opinion’s preemption holding is expressly tied to cases where the FAA is applicable; it does not fully map how waiver is to be analyzed in purely intrastate cases governed solely by state arbitration law (if any).

Complex Concepts Simplified

FAA preemption
If federal law (here, the FAA) applies, state rules that treat arbitration agreements differently from other contracts—either favoring or disfavoring arbitration—cannot be used. The federal rule overrides the state rule.
Equal-treatment principle
Courts must treat arbitration agreements like any other contract. They can be invalidated using defenses that apply to all contracts (fraud, duress, unconscionability), but not by special rules written just for arbitration.
Waiver (ordinary contract waiver)
Waiver means giving up a known right. Under Iowa law, it requires (1) the right, (2) knowledge of it, and (3) intent to relinquish it. Intent can be shown by actions, not just words.
Implied waiver
Even without saying “I waive,” a party can waive by behaving in a way that objectively shows it chose a different path—here, choosing litigation tools and delay instead of promptly seeking arbitration.
“Prejudice” (and why it mattered)
“Prejudice” means harm to the other side (such as wasted expense or lost advantages). Iowa’s older arbitration-waiver test required prejudice, making waiver harder to prove in arbitration cases than in other contract contexts. Under Morgan and the FAA, that arbitration-specific hurdle is not permitted in FAA-governed disputes.

Conclusion

The Iowa Supreme Court’s decision establishes a clear rule for FAA-governed cases: Iowa courts must evaluate waiver of arbitration rights under ordinary contract-waiver principles, not under arbitration-specific tests requiring proof of prejudice. Applying that framework, the court found Arbor Court waived arbitration by continuing to litigate—especially through discovery and delay—after knowing of the arbitration agreement and after Cole refused arbitration.

The case’s broader significance is structural: it aligns Iowa’s arbitration practice with the FAA’s equal-treatment command and raises the operational stakes for defendants who want arbitration—prompt invocation and consistent conduct are now central to preserving that contractual right.