(Article from Insurance Law Alert, May 2024)
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Holding
The United States Supreme Court ruled that when a party moves to stay or dismiss a suit pending arbitration, the Federal Arbitration Act (“FAA”) requires federal district courts to stay litigation pending arbitration of claims and that dismissal under such circumstances is impermissible. Smith v. Spizzirri, 2024 U.S. LEXIS 2170 (U.S. May 16, 2024).
Background
Petitioners, current and former delivery drivers for an on-demand delivery service operated by respondents, sued in state court, alleging violations of federal and state employment laws. Respondents removed the case to federal court, and moved to compel arbitration and dismiss the suit. Petitioners conceded that all of their claims were subject to arbitration, but argued that §3 of the FAA required the district court to stay the action pending arbitration rather than dismiss it entirely.
The district court issued an order compelling arbitration and dismissing the case without prejudice. The court stated that “the text of 9 U. S. C. §3 suggests that the action should be stayed,” but that circuit precedent “instructed that ‘notwithstanding the language of §3, 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. The United States Supreme Court granted certiorari noting the importance of the issue and the split among federal circuit courts. The Second, Third, Tenth and Eleventh Circuits interpreted §3 to mandate a stay when all claims are subject to arbitration and a party properly requests a stay, whereas the First, Fifth, Eighth and Ninth Circuits recognized a district court’s discretion to dismiss, rather than stay an action. The Seventh Circuit construed §3 to require a stay even where no party requested a stay.
Decision
The United States Supreme Court reversed the Ninth Circuit’s decision, ruling that the plain language of the FAA requires a stay of a suit pending arbitration and that a district court lacks discretion to dismiss the suit altogether. The Supreme Court reasoned that use of the word “shall” establishes “an obligation impervious to judicial discretion.” Further, the Court explained that “stay” means “stay,” rejecting the respondents’ assertion that “stay” in §3 “means only that the court must stop parallel in-court litigation, which a court may achieve by dismissing without retaining jurisdiction.”
The Court also rejected the assertion that notwithstanding the FAA’s explicit language, district courts retain inherent authority to dismiss proceedings subject to arbitration. The Court noted that even assuming district courts have such authority, the inherent powers of courts may be overridden or limited by statute.
Comments
As the Court noted, staying rather than dismissing a suit “comports with the supervisory role that the FAA envisions for the courts.” Further, a stay is administratively economical and avoids the potential cost and complication of filing a new suit in order to invoke the FAA’s procedural protections.
Importantly, the decision does not prevent a district court from dismissing a suit if there is an independent basis for dismissal, separate and apart from arbitration. For example, dismissal of a suit subject to arbitration may be appropriate if a court lacks jurisdiction. Similarly, the decision does not preclude district courts from implementing practices to minimize any administrative burden caused by FAA-mandated stays.