Supreme Court Decides That Federal Courts Should Stay Cases Subject to Arbitration

New Jersey Law Journal

By Sarah Biser and Craig Tractenberg

In May, the U.S. Supreme Court decided an issue that has divided the federal courts of appeals: When claims at issue in a federal court suit are subject to arbitration, does the court have authority to dismiss the action, or should it stay the action pending resolution of the arbitration? In?Smith?v.?Spizzirri?(601 U.S. ___ (2024)),?the court ruled unanimously that, under the Federal Arbitration Act (FAA), even when all of the claims in a federal court action are subject to arbitration, the court may only stay the action pending resolution of the arbitration and not dismiss it, if one of the parties requests a stay. The Supreme Court also elaborated on the supervisory role of district courts in arbitration.

In?Smith, the plaintiffs were current and former delivery drivers who sued their employer in state court in Arizona, alleging multiple violations of federal and state employment laws. After removing the case to federal court in Arizona, the defendants moved to compel arbitration and dismiss the action, claiming that all of the plaintiffs’ claims were subject to mandatory arbitration.

While the plaintiffs conceded that their claims were arbitrable, they argued that the FAA required the court to stay the action pending arbitration, rather than to dismiss it. The district court granted the defendants’ motion to compel arbitration and dismissed the case, rather than staying it, citing Ninth Circuit precedent holding that “‘a district court may either stay the action or dismiss it outright when, as here, the court determines that all of the claims raised in the action are subject to arbitration.’”?Forrest v. Spizzirri, No. CV-21-01688-PHX-GMS (D. Ariz. Jun. 17, 2022)?(quoting?Johnmohammadi?v.?Bloomingdale’s, 755 F.3d 1072, 1074 (9th Cir. 2014)).?On appeal, the Ninth Circuit affirmed.?Forrest v. Spizzirri, 62 F.4th 1201 (9th Cir. 2023).?In an unusual concurrence, two of the judges on the three-member appellate panel encouraged the Supreme Court to consider the issue, noting that the circuits were split on the issue, and that the Ninth Circuit’s position seemed to conflict with the plain language of the FAA.

Section 3 of the FAA, 9 U.S.C. 3, provides:

“If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.”

Prior to the Supreme Court’s decision, six federal circuits—the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits—had ruled that, under this language, a federal district court may only stay, and not dismiss, an action in which the claims are subject to arbitration. Four circuits, however—the First, Fifth, Eighth, and Ninth Circuits—ruled that district courts have the discretion to dismiss, rather than stay, such an action.

The Supreme Court ruled that the “text, structure, and purpose” of the FAA “all point to the same conclusion: When a federal court finds that a dispute is subject to arbitration, and a party has requested a stay of the court proceeding pending arbitration, the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.”

Pointing to the language of the statute, the court noted that it used the words “shall … stay,” which, it said, leaves no room for a court to exercise discretion to dismiss, rather than stay, such an action, which “creates an obligation impervious to judicial discretion.” The court disregarded that the statute refers to staying “the trial?of the action,” rather than the action itself, which lower courts had found made the scope of the statutory mandate unclear.

The court also reasoned that allowing a court to dismiss such an action would create an anomaly, because the FAA makes clear that orders compelling arbitration ordinarily are not immediately appealable, but an order dismissing an action in favor of arbitration would be immediately appealable.

The court also said that staying rather than dismissing such an action “comports with the supervisory role that the FAA envisions for the courts.” For example, the FAA provides for courts to assist parties in arbitration by appointing an arbitrator, 9 U.S.C. Section 5; to enforce subpoenas issued by arbitrators to compel testimony or produce evidence, 9 U.S.C. Section 7; and to facilitate recovery on an arbitral award, 9 U.S.C. Section 9. The court also noted that district courts “can adopt practices to minimize any administrative burden caused by the stays that Section 3 requires.

The court’s decision supports the FAA’s goal of moving “parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible” and eliminates delays from appeals for parties resisting arbitration. As the court noted, orders either granting a motion to compel arbitration or an order staying a case and compelling arbitration are not appealable.