The U.S. Supreme Court has held unanimously in Smith v. Spizzirri that when a district court finds that a lawsuit involves an arbitrable dispute and a party has requested a stay of the court proceedings pending arbitration, Section 3 of the Federal Arbitration Act (FAA) compels the court to issue a stay of the suit; the court lacks jurisdiction to dismiss the suit on the basis that all of the claims are subject to arbitration. The decision, which is of great importance to arbitration practitioners, resolves a longstanding split between the Second, Third, Sixth, Seventh, Tenth and Eleventh Circuits (finding that a stay is mandated) and the First, Fifth, Eighth and Ninth Circuits (concluding that a district court has discretion to dismiss).
Section 3 of the FAA provides in relevant part 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 ….” Writing for the Court, Justice Sonya Sotomayor found that the FAA’s plain text, as well as its structure and purpose, supported the issuance of a stay rather than a dismissal. The Court reasoned:
- The word “shall” in Section 3 “‘creates an obligation impervious to judicial discretion.’” Moreover, “‘stay’ means ‘stay.’” Even at the time the FAA was enacted in 1925, “stay” meant the “‘temporary suspension’ of legal proceedings, not the conclusive termination of such proceedings.” Section 3 “ensures that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute. That return ticket is not available if the court dismisses the suit rather than staying it.”
- Section 16 of the FAA authorizes an immediate appeal when a motion to compel arbitration is denied, but not when arbitration is compelled. That is consistent with the FAA’s purpose of having arbitrable disputes moved out of court and into arbitration as quickly and easily as possible. However, “[i]f 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.”
The Court also emphasized that “staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts.” The Court explained:
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.
The Court reversed the judgment of the Ninth Circuit, which had affirmed a district court order compelling arbitration and dismissing the case without prejudice.
Although the Court’s opinion provides federal court practitioners with a uniform rule regarding the stay of district court proceedings pending arbitration, its effect on state court practice is less certain. While the FAA is applicable in both federal and state courts and preempts state laws that are contrary to the FAA’s purpose and policy of enforcing written arbitration agreements, it is questionable whether state procedural rules are preempted. Sections 3 and 16 of the FAA have been characterized as procedural rules, and Section 3 refers specifically to “courts of the United States.” In Spizzirri, the litigation was filed in state court, but it was subsequently removed to federal court. Only time will tell whether or not state court judges will find the Court’s reasoning to be persuasive even if not binding.
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