Yesterday, the U.S. Supreme Court issued a unanimous decision in Smith v. Spizzirri holding that § 3 of the Federal Arbitration Act (FAA) requires district courts to issue an order staying a federal case pending the outcome of arbitration, rather than dismiss the case when a motion to compel arbitration is granted. This decision resolves a circuit split where previously the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits had held that the plain text of § 3 mandates a stay of the proceedings whereas the First, Fifth, Eighth, and Ninth Circuits had held that district courts have the discretion to dismiss the proceedings if the entire dispute was subject to arbitration.

Section 3 of the FAA provides: “If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, 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.”

In the opinion delivered by Justice Sotomayor, the Supreme Court focused on the plain text of the statute. Specifically, the Court emphasized that the use of the word “shall” in the statute creates an obligation impervious to judicial discretion, requiring the court to stay the proceeding. “When §3 says that a court ‘shall . . . stay’ the proceeding, the court must do so.” The Court also clarified that the term “stay” in § 3 denotes the “temporary suspension” not the termination of legal proceedings. “Just as ‘shall’ means ‘shall,’ ‘stay’ means ‘stay.'” The Court emphasized that § 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.” Staying a case rather than dismissing it allows the district court to play the “supervisory role” the FAA envisions, assisting the parties to an arbitration with subpoenas to compel testimony or produce evidence and facilitating recovery of an arbitral award.

Our Take

The Court’s interpretation makes sense and is entirely consistent with the text of the FAA. The decision will prevent the party opposing arbitration from taking an immediate interlocutory appeal as the FAA forbids such an appeal if the case is only stayed and not dismissed. This is significant in that the parties will have to proceed to and complete arbitration before having an opportunity to revisit the original decision on whether arbitration was appropriate in the first place. While an appeal certainly could happen post-arbitration, in many instances, litigants may be reluctant to prolong already costly litigation.