Supreme Court unanimously decides that federal courts must stay, and not dismiss, cases compelled to arbitration

On May 16, 2024, the US Supreme Court in Smith v Spizzirri issued a narrow decision resolving a circuit split on the question of whether Section 3 of the Federal Arbitration Act (FAA) requires a court to issue a stay of underlying litigation proceedings when a party seeks to compel arbitration pursuant to an arbitration clause.

While the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits had previously interpreted Section 3 to mandate a stay when a party requests one, the First, Fifth, Eight, and Ninth Circuits have held that a district court has discretion to either dismiss the litigation without prejudice or stay the litigation. This split was significant because, while a party may immediately appeal an order dismissing an action without prejudice, there is no immediate right of appeal from an order staying the proceedings.

The Supreme Court’s unanimous decision now sets a uniform procedure providing that, when a party requests a stay of the proceedings, the federal court must stay, rather than dismiss, the litigation.

Background

In Spizzirri, the plaintiffs, a group of delivery drivers, sued their employers in Arizona state court alleging they had been misclassified as independent contractors so their employer could avoid paying the drivers’ minimum wage, overtime, and other mandatory benefits under Arizona state and federal laws.

The employers removed the case to the District Court of Arizona and filed a motion to compel arbitration and dismiss the court action. The drivers agreed their suit was arbitrable but argued that Section 3 of the FAA required the District Court to stay the court action while the arbitration was pending rather than dismissing it entirely. Specifically, Section 3 of the FAA provides, in pertinent part:

If any suit or proceeding be brought … upon any issue referable to 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 … 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…

The District Court granted the drivers’ motion to compel arbitration but dismissed the court action without prejudice. The Ninth Circuit affirmed, noting that, notwithstanding the language of Section 3 of the FAA, the district court had discretion to dismiss plaintiffs’ suit because the parties agreed that all claims were subject to arbitration.

The drivers petitioned the Supreme Court to settle the Circuit split regarding the proper interpretation of Section 3 of the FAA.

The Supreme Court’s decision

In a decision delivered by Justice Sonia Sotomayor, the Court unanimously held that, “[w]hen 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.” Smith v. Spizzirri, No. 22-1218 (2024). Rather, the court must stay the proceedings while the arbitration is pending.

The employers argued that the objective of Section 3 of the FAA is to stop parallel litigation, which can be satisfied by either staying or dismissing the action. The Court disagreed, finding instead, based on a plain-text interpretation of the language of Section 3, that Section 3 provided no such discretion and instead mandated a stay.

The Court further reasoned that retaining the suit on the relevant court’s docket was consistent with the court’s supervisory role as envisioned by the FAA.

Notably, the Court left open the question of whether a court would have discretion to dismiss if dismissal, rather than a stay, was sought by the party seeking to arbitrate.

Significance

The Supreme Court’s decision in Smith furthers US public policy favoring arbitration and aims to preserve the efficiency of the arbitral process. It supports arbitration in at least two ways:

• First, because an order compelling arbitration and imposing a stay is not an immediately appealable, final order, the Supreme Court’s decision effectively deprives litigants seeking to resist arbitration of the ability to seek judicial interference with an arbitration through an appeal of the district court’s dismissal of the litigation proceeding.
• Second, requiring district courts to stay their own proceedings in aid of an arbitration ensures that the parties have immediate access to judicial assistance in aid of the arbitration without needing to commence a new court proceeding.

This latest decision can be viewed as a complement to the Court’s decision in Coinbase, Inc. v Bielski (see our prior alert here) less than a year ago, in which the Court held that a party appealing a district court’s ruling denying a motion to compel arbitration may not be forced to litigate the merits of the parties’ dispute while its appeal is pending. Viewed together, Smith v Spizzirri and Coinbase v Bielski illustrate a clear procedural asymmetry that strongly favors arbitration when there is a dispute over whether a case brought in litigation is arbitrable. Whereas the party seeking to arbitrate is entitled to a stay of litigation while appealing an adverse decision on arbitrability, the party opposing arbitration does not have the right to immediately appeal an adverse decision on arbitrability and must proceed to arbitration.

For more information, please contact the authors.