Contributors

Eric P. Weiss

Principal

On May 16, 2024, the U.S. Supreme Court decided Smith v. Spizzirri holding that federal courts have no discretion under Section 3 of the Federal Arbitration Act (“FAA”) to dismiss a case rather than staying the case once the court determines that the claims are subject to mandatory arbitration under the FAA.

Facts

A group of delivery drivers for an on-demand delivery service brought a wage and overtime suit in state court, alleging their employers violated federal and state law by misclassifying them as independent contractors, failing to pay them required wages, and failing to provide sick leave. The employers removed the case to federal court and moved to compel arbitration and dismiss the suit.

District Court and Ninth Circuit ruling on dismissal of civil action

The district court issued an order compelling arbitration and dismissed the action without prejudice. The court noted that “the text of 9 U.S.C. § 3 suggests that the action should be stayed,” but that Ninth Circuit precedent allowed a district court to either stay the litigation or dismiss it outright if all claims are subject to arbitration. The Ninth Circuit affirmed, concluding that it was bound by Circuit precedent recognizing a district court’s discretion to dismiss.

Supreme Court decision

The Supreme Court reversed and remanded in a unanimous decision. The Court explained that the plain text of Section 3 requires a court to stay the proceeding upon request because “[t]he statute’s use of the word ‘shall’ creates an obligation impervious to judicial discretion.”

Although the employers argued that “stay” means only that the court must stop parallel in-court litigation, which they insisted could be achieved through dismissal, the Supreme Court disagreed, observing that the employers’ attempt to read “stay” to include “dismiss” cannot be reconciled “with the surrounding statutory text, which anticipates that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute.”

The Court also commented that the employers’ position conflicted with Section 16 of the FAA, which authorizes an immediate interlocutory appeal of the denial of an arbitration request, but makes clear that (outside a narrow exception) orders compelling arbitration are not immediately appealable. According to the Supreme Court: “If a district court dismisses a suit subject to arbitration even when a party requests a stay that dismissal triggers the right to an immediate appeal where Congress sought to forbid such an appeal.”

Key takeaway

In cases governed by the FAA, if a court grants an employer’s motion to compel arbitration, the action in court will be stayed, and not dismissed. Therefore, the court will retain its vestigial jurisdiction over the dispute even while the matter is resolved through court-ordered arbitration.