In depth

In Smith v. Spizzirri, __ US __, Case No. 22-1218 (16 May 2024), current and former drivers for an on-demand delivery service operated by defendants alleged violations of federal and state employment laws. Plaintiffs claimed that defendants misclassified them as independent contractors, failed to pay required minimum and overtime wages, and failed to provide paid sick leave. Defendants moved to compel arbitration and dismiss the suit. Plaintiffs conceded that all of their claims were arbitrable, but argued that Section 3 of the Federal Arbitration Act (FAA) required the district court to stay the action pending arbitration, rather than dismissing it entirely.

The district court noted that the text of Section 3 suggests that the action should be stayed, but Ninth Circuit precedent instructed that a district court may either stay the action or dismiss it outright when the court determines that all of the claims raised in the action are subject to arbitration. The Ninth Circuit affirmed. It acknowledged that “the plain text of the FAA appears to mandate a stay,” but explained that it, too, was bound by Circuit precedent that recognized the district court’s “discretion to dismiss”. The concurring opinion “encourage[d] the Supreme Court to take up” the issue, which it had side-stepped in earlier decisions.

The Supreme Court took up that invitation and reversed the Ninth Circuit. It held: “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.” Section 3 of the FAA 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.

According to the Supreme Court, the use of the word “shall” “creates an obligation impervious to judicial discretion.” When Section 3 says that a court “shall ... stay” the proceeding, the court must do so. The Supreme Court rejected the argument that “stay” in Section 3 means only that the court must stop parallel in-court litigation, which a court may achieve by dismissing without retaining jurisdiction. As the court explained, the word “stay” denotes the “temporary suspension” of legal proceedings, not the conclusive termination of such proceedings that accompanies a dismissal. In addition, Section 3 ensures that the parties can return to federal court if the arbitration breaks down or fails to resolve the dispute, which “return ticket is not available if the court dismisses the suit rather than staying it”.

The Supreme Court also supported its decision in the way the FAA addresses appeals. Denials of requests to arbitrate are immediately appealable under Section 16 of the FAA, but orders compelling arbitration are not typically appealable. This distinction is consistent with Congress’s purpose in the FAA “to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible”. If a district court dismisses a suit that was compelled to arbitration even when a party requests a stay, that dismissal triggers the right to an immediate appeal, which would be contrary to what Congress sought to forbid.

The Supreme Court reversed the decision of the Ninth Circuit and remanded for further proceedings consistent with its opinion. Left open by the decision is whether a stay is mandatory if neither party requests one.

Takeaways

Under the language of the FAA, a party who agreed to arbitrate but was forced to seek to compel arbitration when its counterparty sued in court instead should not have to be concerned about then having to continue the battle in court through an immediate appeal. Nevertheless, in some Circuits (such as Ninth), that risk of appeal was extant if the district court case was dismissed. The Supreme Court’s unanimous decision requiring a stay put an end to that risk. It is another pro-arbitration decision by the Supreme Court.