For some time, there has been a federal circuit split on whether a district court may dismiss a case where a dispute is subject to arbitration under section 3 of the Federal Arbitration Act (“FAA”) and one of the parties asks the court to stay the action pending arbitration rather than dismiss the proceeding. That question has now been answered by a unanimous Court.
In Smith v. Spizzirri, No. 22-1281 (U.S. Sup. Ct. May 16, 2024), an employment dispute, the case was removed to federal court and one side sought to compel arbitration and dismiss the case. The other side agreed that the dispute was arbitrable, but asked the court to stay the litigation pending the outcome of the arbitration. The district court dismissed the case and the Ninth Circuit affirmed. The question for the US Supreme Court was:
. . . whether §3 [of the FAA] permits a court to dismiss the case instead of issuing a stay when the dispute is subject to arbitration and a party requests a stay pending arbitration.
In a unanimous opinion issued by Justice Sotomayor, the answer was “It does not.” What this means is that in any litiigation, including insurance or reinsurance disputes, where a motion or petition is made to compel arbitration and dismiss the action, if the court determines that arbitration is in order but the other side (or any party) asks the court to stay the action pending arbitration, under Section 3 of the FAA, the court must stay the action. Dismissal in the face of a request for a stay is no longer an option for district courts.
The Court’s opinion is based on statutory interpretation. As the Court stated:
In this statutory interpretation case, text, structure, and purpose all point to the same conclusion: When 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.
Essentially, what the Court held is that “shall” means “shall” and “stay” means “stay.” Section 3 provides that 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 concluded with good reasons for why a stay is appropriate and leaves it to the district court to find ways to avoid an unnecessary administrative burden to keeping the case on the docket:
Finally, staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts. The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator, see 9 U. S. C. §5; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see §7; and facilitating recovery on an arbitral award, see §9. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections. District courts can, of course, adopt practices to minimize any administrative burden caused by the stays that §3 requires.
Simple and straightforward. And in a footnote, the Court reminds the district courts that dismissal may be appropriate for other reasons (e.g., lack of jurisdiction).
