On May 16, 2024, the Supreme Court issued its unanimous decision in Smith v. Spizzirri. No. 22-1218 (Sotomayor, J.). While the title of the lawsuit may seem innocuous, the potential impacts are anything but. Specifically, the Court addressed whether, under Section 3 of the Federal Arbitration Act (“FAA”), 9 U.S.C. 3, district courts are required to stay a lawsuit pending arbitration or whether they have the discretion to dismiss the lawsuit when all claims are subject to arbitration. The Court held that, when a district court finds that a lawsuit involves an arbitrable dispute and a party has requested a stay, section 3 of the FAA compels the court to issue a stay, and the court lacks discretion to dismiss the suit.
Consumer contracts and employment agreements commonly contain arbitration provisions. The outcome of cases handled by third party arbitrators are binding as the FAA requires courts to treat arbitration agreements as “valid, irrevocable, and enforceable.” The goal of the FAA is to move the parties out of court and into arbitration as expeditiously as possible. It is also quite common for employees to file their claims in federal court and have those claims either stayed or dismissed when the employer files a motion to compel arbitration and provides the signed arbitration agreement.
Under Section 3 of the FAA, a party to an arbitration agreement in a federal court proceeding may request a stay of the court case pending arbitration. Specifically, Section 3 states, “[i]f any suit or proceeding be brought in any of the courts of the United States upon any issues referable to arbitration . . . the court in which such suit is pending . . . shall . . . stay the trial of the action until such arbitration has been heard.” A stay places a pause on the case, but the case remains on the court’s docket and the court retains jurisdiction. Under Section 4 of the FAA, a party can compel the opposing party to resolve the dispute in binding arbitration under the terms of the agreement.
Plaintiffs in Spizzirri are current and former delivery drivers for Intelliserve. Intelliserve was sued in Arizona state court based on allegations of “misclassifying [delivery drivers] as independent contractors, failing to pay them required minimum and overtime wages, and failing to provide paid sick leave.” Intelliserve removed the case to federal court and then moved to compel arbitration. The district court granted the motion to compel and opted to dismiss the case as opposed to staying the matter. Citing the Ninth Circuit’s longstanding tradition that dismissal is appropriate if all claims are subject to arbitration, the United States Court of Appeals for the Ninth Circuit affirmed and ruled that district courts have discretion to dismiss a lawsuit instead of staying it.
The Ninth Circuit also noted that there is a split among the circuit courts on whether dismissal is permitted under the FAA. There is a 6-4 split amongst the circuit courts on this issue with six circuit courts ruling that a stay is the only appropriate remedy under the FAA. In affirming the district court’s dismissal, the Ninth Circuit cited judicial efficiency as their justification, going as far as to say that staying a case where all claims are bound to be arbitrated is a “waste of judicial resources.” Other circuits have cited the plain language of the law and concluded that they are required to stay a case pending arbitration and there is no discretion to dismiss a case.
The Supreme Court’s decision in Spizzirri could affect the strategies litigants use in cases where arbitration provisions are at issue. While a stay pending arbitration, as opposed to a dismissal, may seem insignificant as they both lead to arbitration, there are consequences regarding subsequent appellate procedure. Specifically, when a court stays a case pending arbitration, there is no immediate right to appeal. Therefore, unless the party seeks a discretionary appeal, they must wait until the conclusion of the arbitration to appeal the order to arbitrate. On the other hand, when a case is dismissed, the court’s order is a final decision that allows for an immediate appeal.
Looking to the text of the FAA, the Supreme Court considered the underlying purpose of the FAA: efficiency. If a district court dismisses a case, resulting in a final judgment, the parties may appeal such a ruling or appeal the applicability of arbitration which can significantly delay the arbitral process and increase costs for both parties. Contracts between parties include arbitration clauses as a way of avoiding the court system so permitting dismissals that may result in lengthy appeals seems contrary to the intent of the agreements. As the Court explained, Congress made clear in section 16(b) that, outside of a narrow exception, “an order compelling arbitration is not immediately appealable” and that if a district court could dismiss a suit subject to arbitration even when a party requests a stay, “that dismissal would trigger the right to an immediate appeal where Congress sought to forbid such an appeal.”
Another practical consideration is judicial oversight over settlements. “Staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts.” If a court dismisses a case outright and rules it is subject to arbitration, the court then forfeits their role in overseeing and approving any potential settlement and the settlement does not appear in the public record.
The Court’s decision in Spizzirri was one of three arbitration-related cases on the Court’s 2024 docket, and in issuing its decision, the Court has settled an issue that has divided the circuit courts. No doubt, the Court’s decision will have far reaching consequences for litigants in the realms of labor and employment and commercial litigation.
