United States Supreme Court Clarifies Whether District Courts Can Dismiss Lawsuits Referred to Arbitration

May 29, 2024

By: Stephen B. Stern

     In Smith v. Spizzirri, 144 S. Ct. 1173 (2024), a unanimous United States Supreme Court held that, “[w]hen a district court finds that a lawsuit involves an arbitrable dispute, and a party requests a stay pending arbitration, . . . the Federal Arbitration Act . . . compels the court to stay the proceeding, and the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.”

     In Smith, the plaintiffs were current and former delivery drivers for an on-demand delivery service.  They sued the defendants in Arizona state court, alleging violations of various state and federal employment laws, claiming they were misclassified as independent contractors and were not paid the required minimum wage and overtime, among other required wages.  The defendants removed the case to federal court and moved to compel arbitration and dismiss the suit.  The plaintiffs in turn acknowledged that the lawsuit was subject to arbitration, but they argued that Section 3 of the Federal Arbitration Act (“FAA”) required the district court to stay the proceeding pending the arbitration rather than dismiss the lawsuit in its entirety.  The district court ordered arbitration and dismissed the lawsuit without prejudice.  On appeal, the United States Court of Appeals for the Ninth Circuit affirmed.  The Supreme Court granted certiorari to determine whether district courts had discretion to dismiss a lawsuit subject to arbitration, an issue that had been split among the federal circuit courts.

     The Supreme Court’s analysis was direct and succinct.  It started by noting “[i]n this statutory interpretation case, text, structure, and purpose all point to the same conclusion: [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.”  In this regard, Section 3 of the FAA, which is entitled, “Stay of proceedings where issue therein referable to arbitration,” states clearly and unambiguously that, when a lawsuit is subject to arbitration, the district 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 elaborated by explaining that the term “shall” “creates an obligation impervious to judicial discretion.”  

     The Supreme Court further noted that there were two significant problems the defendants’ argument that the term “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.”  The Court first explained that this argument disregards “the long-established legal meaning of the word ‘stay.’”  The term “stay” denotes ‘“the temporary suspension’ of legal proceedings, not the conclusive termination of such proceedings.”  Next the Court explained that this argument seeks to inject the concept of dismissal into the meaning of stay.  The Court noted that this not only contradicts the meaning of stay, but the surrounding text in the statute does not comport with this interpretation because the stay is supposed to be implemented “until such arbitration has been had in accordance with the terms of the agreement.”  In this regard, the Court found that Section 3 of the FAA “ensures that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute [and] [t]hat return ticket is not available if the court dismisses the suit rather than staying it.”  

     The defendants further argued that courts have inherent authority to dismiss proceedings subject to arbitration.  The Supreme Court dispensed with this argument by noting “the inherent powers of the courts may be controlled or overridden by statute or rule” and, in this case, Section 3 of the FAA does precisely that by mandating the stay.  The Court buttressed this conclusion even further by relying on Section 16 of the FAA, which authorizes an immediate interlocutory appeal if a request for arbitration is denied.  This right to appeal if arbitration is denied contrasts with a party’s rights when arbitration is ordered, as such an order is not subject to an immediate appeal under the statute. Thus, the Court explained, if a court dismisses a lawsuit that is subject to arbitration, it triggers an immediate appeal, but that is not supposed to happen under the provisions of the statute because arbitration has been ordered.

     The Supreme Court’s decision in Smith is significant because it resolves a circuit split and clarifies that courts must stay cases referred to arbitration under the FAA and they retain jurisdiction over cases until the arbitration is resolved in the event that the arbitration process breaks down or there is some dispute about the arbitration process.