SCOTUS: Arbitration Cases Must Be Stayed, Not Dismissed

Follow us on LinkedIn to see future News.

May 30, 2024

On May 16, 2024, the Supreme Court of the United States ruled that, when a federal court finds that a lawsuit involves an arbitrable dispute, and a party has requested a stay of the court proceeding pending arbitration, the Federal Arbitration Act (“FAA”) compels the court to issue a stay, and the court lacks discretion to dismiss the suit.  See Smith v. Spizzirri, No. 22-1218, (May 16, 2024).  In resolving a circuit split, the Supreme Court:

• relied on Section 3 of the FAA. Section 3 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.”  The Supreme Court held that Section 3’s use of the word “shall” obligates the court to stay the suit and does not grant judicial discretion.
• reasoned that “stay” has a long-established legal meaning, which is the “temporary suspension” of legal proceedings. The language in Section 3 “until such arbitration has been had” and “providing the applicant for the stay is not in default in proceeding with such arbitration” secures the option for the parties to return to federal court if arbitration fails to resolve the dispute.  Therefore, Section 3 does not allow for “stay” to include the discretion to dismiss.  Although federal courts have inherent authority to dismiss suits, Section 3 of the FAA overrides the court’s power when the parties agreed to arbitration.
• relied on Section 16 of the FAA. Section 16(a)(1)(C) allows for an immediate interlocutory appeal when a trial court denies a motion to compel arbitration.  In contrast, Section 16(b) provides that a court order compelling arbitration is not immediately appealable absent a narrow exception.  These provisions are consistent with the purpose of the FAA to move a suit to arbitration as quickly and easily as possible.  If a 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 already sought to forbid an appeal.
• pointed to the FAA’s vision for courts to exercise supervisory duties to assist parties in arbitration. By keeping the suit on the court’s docket, the court can assist the parties in various capacities, including appointing an arbitrator, enforcing subpoenas, facilitating recovery of awards, helping avoid costs for new filing fees, etc.

Employer Takeaways

• Employers seeking to invoke arbitration clauses will benefit from a stay and potentially avoid costly litigation when an arbitration case is ongoing.
• District courts will no longer rely on precedent giving them discretion to dismiss a case pending arbitration. Federal court administration of arbitration cases will become consistent across the country and will likely avoid a waste of party and judicial resources.
• Federal courts may adopt practices to minimize their administrative burden caused by the stays that Section 3 requires.

This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice.  Always consult an attorney with specific legal issues.