U.S. Supreme Court: District Courts Must Stay (and May Not Dismiss) Lawsuits Sent to Arbitration

Earlier this month, in Smith v. Spizzirri, the U.S. Supreme Court held that Section 3 of the Federal Arbitration Act (FAA) requires district courts to stay a lawsuit pending arbitration when asked by a party to do so, and that district courts lack the inherent authority to instead dismiss such a case, even where it is undisputed that all underlying claims are subject to mandatory arbitration.  The Court’s decision resolves what had been a 6-4 Circuit split on the issue, and will have fairly significant procedural implications.

Statutory and Case Background

The FAA sets forth procedures for enforcing arbitration agreements in federal court.  Under Section 3 of the FAA, when a court determines that a dispute is subject to arbitration, the court “shall on application of one of the parties stay the trial of the action until [the] arbitration” has concluded.

In layperson’s terms, the full “stay” of a lawsuit generally refers to a court order directing a total pause or suspension in proceedings.  As part of a stay, the court maintains the suit on its (likely very congested) docket and continues to retain jurisdiction over it, while holding in abeyance the actual litigation of it.  In stayed disputes that are sent to arbitration, the parties will then fight out and resolve their disputes before an arbitrator or panel of arbitrators.  In contrast, a lawsuit is “dismissed” when the court has conclusively, outright terminated the action; in such cases, the court does not retain jurisdiction over the case.

Historically, courts in six Circuits had interpreted Section 3 as mandating a stay of arbitrable disputes in all cases, upon application by a party.  But four Circuits had carved out an exception to Section 3’s stay requirement, reasoning that courts have the discretion to dismiss actions when all of the claims raised in the action are subject to arbitration.

In the Spizziri case, plaintiffs were delivery drivers claiming violations of employment laws.  It was undisputed that all of the drivers had signed binding arbitration agreements covering all of their claims.  The drivers requested a stay of their lawsuit, but both the district court and the Ninth Circuit concluded that the case could be dismissed, holding that courts retain such discretion notwithstanding the FAA’s seemingly unequivocal language directing a stay.

Supreme Court Holding

In a unanimous decision, the Supreme Court rejected the lower courts’ position, concluding instead that “[w]hen a district court finds that a lawsuit involves an arbitrable dispute, and a party requests a stay pending arbitration, §3 of the FAA compels the court to stay the proceeding,” and that “the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.”

The Court’s reasoning went as follows.

First, the FAA’s text has a plain meaning on its face.  According to the Court, the use of the word “shall” in § 3 creates a mandatory obligation, leaving no place for judicial discretion to the contrary.  Similarly, the term “stay” means stay, as understood in the long-established legal meaning of the word.  The Court was unpersuaded by the argument that, where the parties concede arbitrability of all claims, there will be no “trial of the action” in federal court, such that the FAA’s direction to stay is inapplicable or that the term “stay” was intended to encompass dismissal in such circumstances.

Second, courts’ inherent authority to dismiss proceedings may, like other inherent powers of the courts, be expressly overridden by statute.  That is exactly what Section 3 does.

Third, the FAA’s structure and purpose confirm that a stay is required.  Section 3 was intended to ensure that parties can return to federal court, in the same case, if arbitration breaks down or fails to resolve the dispute.  If dismissal were permitted, the parties could return to federal court only by filing a new lawsuit.

Likewise, the FAA makes clear that when a court denies a request for arbitration, the party seeking arbitration can file an immediate appeal of the denial, but that when a court compels arbitration, the order compelling arbitration may not be straightaway appealed (absent extraordinary procedural circumstances).  That structure is consistent with the FAA’s goal of moving arbitrable disputes into arbitration efficiently, and if a court could dismiss arbitrable suits, triggering an immediate right to appeal, that would frustrate the quick and easy transfer of parties from court into arbitration.

Finally, “staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts.”  Keeping the suit on a court’s docket makes sense in light of these potentially ongoing supervisory roles – such as court assistance in appointing an arbitrator, enforcing arbitrator subpoenas, and facilitating recovery on an arbitral award – and helps avoid “costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections.”

Resulting Procedural Implications

The Spizzirri decision resolves what had been sharp Circuit conflict and attendant confusion on the issue.  There will now be a uniformity of approach in the federal courts:  If a district court determines that a lawsuit involves claims subject to arbitration and a party applies for a stay of the lawsuit pending arbitration, then the court must stay (and may not dismiss) the action.

From the perspective of a litigant seeking streamlined enforcement of an arbitration agreement, the decision promotes efficiency in cases compelled to arbitration.  Absent court permission, the party opposing arbitration can now generally no longer immediately appeal a decision compelling arbitration.  A similar streamlining benefit will arise when the prevailing party in arbitration seeks to confirm the arbitral award in federal court – the case will still be on the docket and under jurisdiction of the court that compelled arbitration, helping eliminate administrative fees, delay, and attorneys’ fees associated with filing a new action or seeking to reopen an old one.

The procedural rule announced in the decision is not binding on state courts, and litigants hoping to quickly and efficiently enforce arbitration agreements will now have additional motivation (at least in Circuits that had previously taken a contrary view) to remove their cases to federal court.

In many cases involving wage and overtime pay claims, court approval is required of parties’ settlements.  Since federal court wage and hour claims that are arbitrable will now need to remain on the docket, there may be less of a chance of avoiding federal court review of the settlement of such claims.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Attorney Gregory Feit who counsels clients on employment law, litigation, arbitration, negotiation, and trial advocacy. Mr. Feit served is admitted to practice in New York.