In a recent decision, the United States Supreme Court held that Section 3 of the Federal Arbitration Act requires a court to stay a proceeding pending arbitration and provides no discretion for the court to dismiss the action. In Smith v. Spizzirri,1 the Supreme Court settled a significant circuit split on the interpretation of Section 3 of the Federal Arbitration Act ("FAA"). Whereas the Second, Third, Sixth, and Seventh Circuits held that Section 3 of the FAA mandated a stay of court proceedings, the First, Fifth, Eighth, and Ninth Circuits held that a district court had discretion to dismiss, rather than stay, where all the issues were subject to arbitration. This decision unequivocally held that a district court has no discretion to dismiss an action pending arbitration, and further requires the court to stay the matter.
Background
Plaintiffs are current and former delivery drivers for an on-demand delivery service, Intelliserve, owned and operated by Defendants. Plaintiffs sued Defendants in Arizona state court alleging several employment wage claims. Defendants removed the case to federal court and moved to compel arbitration and to dismiss the case. Whereas Plaintiffs conceded that all claims were subject to mandatory arbitration, they argued that Section 3 of the FAA required the district court to stay the action pending arbitration rather to dismiss the action. The district court noted that "As Plaintiffs rightly point out, the text of 9 U.S.C. § 3 suggests that the action should be stayed . . . . However, the Ninth Circuit has instructed that 'notwithstanding the language of § 3, 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.'"2 Finding that all Plaintiffs' claims were subject to arbitration, the district court entered an order compelling arbitration and dismissing the case without prejudice. The Ninth Circuit affirmed, albeit with two judges concurring with the majority opinion and encouraging the Supreme Court to take up the issue of interpretating Section 3 of the FAA, as there were inter-circuit and intra-circuit splits on the meaning of Section 3.
Case Ruling
The Supreme Court granted certiorari to determine "whether §3 permits a court to dismiss the case instead of issuing a stay when the dispute is subject to arbitration and a party requests a stay pending arbitration." In a unanimous decision, the Court held that it does not. Justice Sotomayor, writing for the Court, focused the Court's analysis on the statutory text, structure, and purpose. First considering the statutory text, the Court stated the following:
Section 3 of the FAA, entitled "Stay of proceedings where issue therein referable to arbitration," provides that, when any issue in a suit 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, providing the applicant for the stay is not in default in proceeding with such arbitration."
The Court noted that "the use of the word 'shall' 'creates an obligation impervious to judicial discretion,'" holding that "plain statutory text requires a court to stay the proceeding." The Court, unpersuaded by Defendants' argument that "stay" in Section 3 "means only that the court must stop parallel in-court litigation," stated that "Just as 'shall' means 'shall,' 'stay' means 'stay.'" The Court further considered the surrounding statutory text which ensures the parties can return to federal court if arbitration breaks down or it fails to resolve the dispute. Where the case is dismissed, rather than stayed, the parties would be unable to return to court without filing a new suit, which may lead to statute of limitations issues, and would "ignore[] the plain text of §3."
The Court made quick work in rejecting Defendants' argument that district courts retain inherent authority to dismiss proceedings subject to arbitration, stating that inherent powers of the court may be controlled or overridden by statute, and Section 3 of the FAA "overrides any discretion a district court might otherwise have had to dismiss a suit when the parties have agreed to arbitration."
As part of its analysis, the Supreme Court also considered the supervisory role of the courts in arbitration. The FAA provides various mechanisms for courts appoint arbitrators, enforce subpoenas, facilitate recovery of awards, and that "[k]eeping the suit on the court's docket makes good sense in light of this potential ongoing role," and it avoids potential additional costs and complications associated with bringing new suits to enforce FAA procedural protections.
The Court ultimately found that the statutory text, purpose, and structure of the FAA all lead to the same conclusion: that a district court does not have the discretion to dismiss a suit on the basis that all claims are subject to arbitration as Section 3 of the FAA mandates that a court stay its proceedings pending arbitration. Therefore, the Court reversed the Ninth Circuit's judgment and remanded the case back to the district court for further proceedings consistent with its opinion.
Impact of Court Decision
Accordingly, this decision overrules Fifth Circuit precedent that, like the Ninth Circuit, holds that a district court has discretion to dismiss suits where all claims are subject to arbitration.3 Practically speaking, this decision prevents a party, including an employer with a policy requiring arbitration of employment-related claims, from being able to both refer the dispute to arbitration and terminate the court-proceeding. Instead, if a court compels arbitration, it must stay the court-proceeding resulting in an administrative closure. Additionally, a district court's decision to compel arbitration is no longer immediately appealable as there is no final judgment. It is not until arbitration concludes that the case can then be reopened for the court to either confirm or overturn the arbitral award, or for a party to otherwise obtain a final judgment that can be appealed on the grounds that the court erred in compelling arbitration. These new procedural requirements in the Fifth Circuit could lead to longer court-proceedings at a greater expense to all parties, therefore, it is exceedingly important to confirm that where an employer desires arbitration of employment-related claims, that the agreement comports with all applicable laws, rules, and regulations and that such agreements remain up to date.
Footnotes
1. Smith v. Spizzirri, No. 22-1218, 2024 WL 2193872 (U.S. May 16, 2024).
2. Forrest v. Spizzirri, No. CV-21-01688-PHX-GMS, 2022 WL 2191931, at *1 (D. Ariz. June 17, 2022).
3. See, e.g., Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992).
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