Executive Summary: On May 16, 2024, the U.S. Supreme Court decided Smith v. Spizzirri, holding that federal district courts have no discretion under Section 3 of the Federal Arbitration Act ("the FAA") to dismiss a case once the district court has determined that the claims properly belong in arbitration. The decision clarifies a longstanding dispute as to whether a district court must issue a stay pending arbitration or dismiss the case outright.
Background: The FAA sets forth procedures for enforcing arbitration agreements in federal district court. Specifically, the FAA provides that, when a dispute is subject to arbitration, the court "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." 9 U.S.C. § 3. Various courts have interpreted Section 3 as providing a district court with discretion to determine whether it could dismiss or issue a stay.
In the instant case, a group of delivery drivers sued their employers, alleging that they had been misclassified as independent contractors so the employer could avoid paying minimum wage, overtime, and other mandatory benefits under Arizona and federal law. The employers removed the suit from state to federal district court, and then filed a motion to compel arbitration and dismiss the suit. The drivers conceded that their claims were subject to arbitration but disputed the district court's authority to dismiss the suit. Instead, the drivers contended that Section 3 of the FAA required the district court to stay the action pending arbitration rather than dismissing it entirely.
The district court ultimately determined, partly based on other district court decisions in the Ninth Circuit, that it had the discretion to dismiss the case. It compelled the parties to arbitration and dismissed the suit without prejudice accordingly. The Ninth Circuit Court of Appeals affirmed—like the district court, it noted that other Ninth Circuit precedent had recognized that a district court had the discretion to dismiss a suit.
The Supreme Court's Decision: The Supreme Court unanimously held that district courts have no discretion under Section 3 of the FAA to dismiss a case; under the plain language of Section 3 of the FAA, the district courts must issue a stay pending arbitration. The Court noted that "[t]he statute's use of the word 'shall' creates an obligation impervious to judicial discretion." Although the employers had argued that "stay" means only that the district court must stop parallel in-court litigation, which they insisted could be achieved through dismissal, the Supreme Court disagreed. It observed that the employers' attempt to read "stay" to include "dismiss" cannot be reconciled "with the surrounding statutory text, which anticipates that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute." It thus reversed and remanded the Ninth Circuit's opinion.
Practical Effects of the Court's Decision
The Court's decision raises procedural considerations for litigators. Before, parties may have received a court dismissal and proceeded to arbitration and concluded the matter. For example, certain wage and hour lawsuits require court approval of settlements, and securing a dismissal of the underlying lawsuit before arbitration was advantageous to avoid court oversight of the settlement. Now, parties must keep in mind that the district court case is not closed even if arbitration is concluded. In other words, parties must ensure that potential settlements include a dismissal of the underlying suit that will remain pending with the district court, and that dismissal of the suit is actually secured.
The decision raises another important consideration—the appealability of the district court's order. The FAA prohibits an interlocutory (non-final) appeal of an order directing arbitration to proceed by the party opposing arbitration who desires to remain in court. See 9 U.S.C. § 16(b)(2). Because district courts now must issue a stay instead of dismissing the case outright, the party opposing arbitration is no longer able to obtain a final appealable order in the form of a dismissal. This means that parties will be unable to obtain appellate review of the district court's determination as to whether a case is subject to arbitration until after the arbitration is concluded, the stay has been lifted, and the district court dismisses the case. Parties should carefully review their arbitration agreements before deciding to pursue or oppose arbitration.
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