In close succession, the Supreme Court of the United States recently decided two short but meaningful cases that arbitration litigants must keep in mind: Coinbase, Inc. v. Suski, 144 S.Ct. 1186 (May 23, 2024) and Smith v. Spizziri, 144 S.Ct. 1173 (May 16, 2024).

Coinbase, Inc. v. Suski, 144 S.Ct. 1186 (May 23, 2024) – A tale of a fourth order.

In Coinbase, the Supreme Court dealt with a unique situation in the deceptively complex topic of whether a court or an arbitrator decides questions of arbitrability (e.g., “whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy”). Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 69 (2010) (citations omitted). The situation in Coinbase was unique because, as described below, the case involved two contracts with competing dispute resolution clauses which made the question of arbitrability especially challenging.

Before proceeding to the merits of Coinbase, a brief primer on arbitration jargon is helpful. Arbitration practitioners already recognize terms like “gateway,” “arbitrability,” “threshold,” and “delegation.”¹ SCOTUS has used these terms in cases involving questions of arbitrability – both in cases deciding whether a dispute is arbitrable at all, and in cases deciding whether the arbitrability is decided by a court or an arbitrator. Thanks to Coinbase, each of the following terms is now part of SCOTUS’s lexicon and should be understood by all arbitration practitioners:

• First Order Dispute: A first-order dispute is a “contest over ‘the merits of the dispute.’”
• Second Order Dispute: A second-order dispute involves the question of “whether [the parties] agreed to arbitrate the merits” of the dispute.
• Third Order Dispute: A third-order dispute involves the question of who, i.e. an arbitrator or judge, wields the authority to decide a second-order dispute.
• Fourth Order Dispute: Implicitly new from Coinbase—the decision does not call it that—a fourth-order dispute involves the question of who, i.e. an arbitrator or judge, decides the third-order dispute when faced with conflicting instruments.

Coinbase, 144 S.Ct. at 1193 (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995).

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¹ I covered these items in this article.

Returning to the merits of Coinbase, the parties executed two contracts with conflicting conflict-resolution provisions. The first contract contained an arbitration provision that delegated to an arbitrator the power to decide all disputes under the contract, including whether a given disagreement is arbitrable.² By contrast, the subsequent contract contained a forum selection clause that required contractual disputes to be decided in court in California.³ See id., at 1190-91.

When a legal dispute broke out between the parties, one side insisted that the first contract’s delegation clause established the terms by which all disputes were to be resolved—so that the arbitrability of the dispute was arbitrable—while the other side insisted that the second contract’s forum selection clause superseded the first agreement and the delegation clause. Thus, the case presented the following fourth-order dispute: “When two such contracts exist, who decides the arbitrability of a contract-related dispute between the parties—an arbitrator or the court?” Coinbase, at 1191. As SCOTUS described:

In prior cases, we have addressed three layers of arbitration disputes: (1) merits, (2) arbitrability, and (3) who decides arbitrability. This case involves a fourth: What happens if parties have multiple agreements that conflict as to the third-order question of who decides arbitrability?

Id., at 1193.

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² The delegation provision provided as follows: “This Arbitration Agreement includes, without limitation, disputes arising out of or related to the interpretation or application of the Arbitration Agreement, including the enforceability, revocability, scope, or validity of the Arbitration Agreement or any portion of the Arbitration Agreement. All such matters shall be decided by an arbitrator and not by a court or judge.” Coinbase, at 1191 (emphasis in original).
³ The forum selection clause provided as follows: “The California courts (state and federal) shall have sole jurisdiction of any controversies regarding the [sweepstakes] promotion and the laws of the state of California shall govern the promotion. Each entrant waives any and all objections to jurisdiction and venue in those courts for any reason and hereby submits to the jurisdiction of those courts.” Coinbase, at 1191.

The Court answered the question by noting that “traditional contract principles” always apply. Id. And indeed they do. It is well-established that parties cannot be compelled to arbitrate the merits of a dispute, let alone its arbitrability, unless they agreed to do so. See id., citing First Options, 514 U.S. at 942; Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. 63, 69 (2019) (“before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists.”). As to arbitrability, the Supreme Court “has consistently held that parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by ‘clear and unmistakable’ evidence.” Henry Schein, 586 U.S. at 69 (quoting First Options, at 944).

After noting these basic principles, the Court held that the question of which conflict-resolution provision controlled boiled down to whether the parties had agreed to arbitrate the arbitrability of their dispute, “and, per usual, that question must be answered by a court.” Coinbase, at 1193 (emphasis in original). By “default,” it is courts, not arbitrators, who decide arbitrability. Attix v. Carrington Mortg. Servs, LLC, 35 F.4th 1284, 1395 (11th Cir. 2022). See AT&T Tech., Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986) (“Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.”). Thus, the Court held that the arbitrability question must be answered by the court. Coinbase, at 1193.

To be clear, the holding did not turn on whether the second contract’s forum selection clause superseded the first contract’s delegation provision. The Court did not address that issue as it was “outside the scope” of the question presented. Coinbase, at 1194. Instead, again, the Court based its decision on the default principle that arbitrability must be determined by courts, as opposed to arbitrators, unless the parties expressly agreed otherwise. Coinbase, at 1194-95. That, in a nutshell, is a fourth-order dispute, and courts by default resolve them.

Smith v. Spizziri, 144 S.Ct. 1173 (May 16, 2024) – Stayed, not dismissed.

Time flies. It had been 24 years since the Supreme Court passed on the issue of whether a court should, when compelling parties to arbitrate, stay the case instead of dismissing it. See Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S. 79, 87, n. 2 (2000). The issue had already been brewing and it kept brewing after 2000, leading to a circuit split with four federal circuits on one side and six on the other.⁴ The Supreme Court finally decided the issue in Smith v. Spizziri, 144 S.Ct. 1173 (May 16, 2024), in which it sided with the Circuits that adhered to the plain text of the Federal Arbitration Act (FAA) provision that governs the enforcement of arbitration agreements, 9 U.S.C. §3.

Section 3 of the FAA (titled, “Stay of proceedings where issue therein referable to arbitration”) provides as follows:

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, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. §3 (emphasis added).

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⁴ Recognizing a trial court’s discretion to dismiss, rather than stay, action where all the issues are subject to arbitration were Green v. SuperShuttle Int’l, Inc., 653 F.3d 766, 769–770 (8th Cir. 2011); Bercovitch v. Baldwin Sch., Inc., 133 F.3d 141, 156, n. 21 (1st Cir. 1998); Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992); Sparling v. Hoffman Constr. Co., 864 F.2d 635, 637–638 (9th Cir. 1988). Interpreting section 3 of the FAA as requiring a stay were Arabian Motors Grp. W.L.L. v. Ford Motor Co., 19 F.4th 938, 941–943 (6th Cir. 2021); Katz v. Cellco P’ship, 794 F.3d 341, 345–347 (2d Cir. 2015); Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557, 561 (7th Cir. 2008); Lloyd v. HOVENSA, LLC, 369 F.3d 263, 269–271 (3d Cir. 2004); Adair Bus Sales, Inc. v. Blue Bird Corp., 25 F.3d 953, 955 (10th Cir. 1994); Bender v. A.G. Edwards & Sons, Inc., 971 F.2d 698, 699 (11th Cir. 1992).

The statutory text is plain enough, but the Ninth Circuit and other courts of appeal had instead held that a court had the discretion to dismiss, rather than stay, the action where all the issues are subject to arbitration. See Forrest v. Spizziri, 62 F.4^th 1201, 1203 (9th Cir. 2023) (“Although the plain text of the FAA appears to mandate a stay pending arbitration upon application of a party, binding precedent establishes that district courts may dismiss suits when, as here, all claims are subject to arbitration.”) (citing cases dating to 1978). That approach to arbitration is now historical.

Based on Spizziri, courts must now stay the case; there is no discretionary dismissal. The “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.” Spizziri, 144 S.Ct. at 1176 (footnote omitted; emphasis added).⁵ Whatever inherent authority the trial court may have (such as here to dismiss a case rather than stay it) “‘may be controlled or overridden by statute or rule.’” Id., at 1177-78 (quoting Degen v. U.S., 517 U.S. 820, 823 (1996)). Section 3 of the FAA did “exactly that.” Id., at 1178. The Court buttressed its holding with the following vocabulary lessons:

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⁵ Dismissal may be proper only if there is an independent, unrelated basis for it such as if the court lacks jurisdiction. See Spizzirri, at 1176, n. 2.

• “[T]he use of the word ‘shall’ ‘creates an obligation impervious to judicial discretion.’” Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 35 (1998).
• “‘Unlike the word “may,” which implies discretion, the word “shall” usually connotes a requirement.’” Maine Cmty. Health Options v. U.S., 590 U.S. 296, 310 (2020) (quoting Kingdomware Tech., Inc. v. U.S., 579 U.S. 162, 171 (2016)).
• “Just as ‘shall’ means ‘shall,’ ‘stay’ means ‘stay….’ Even at the time of the enactment of the FAA, that term denoted the ‘temporary suspension’ of legal proceedings, not the conclusive termination of such proceedings.” Black’s Law Dictionary 1109 (2d ed. 1910) (“Stay of proceedings”).

Spizziri, at 1177 (emphasis added).

The Court also explained that section 3 of the FAA requires a stay and not a dismissal because it “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.” Id. (footnote omitted). The aptly named “return ticket” “comports with the supervisory role that the FAA envisions for the courts,” which includes, for example:

• appointing an arbitrator, (see 9 U.S.C. § 5);
• enforcing subpoenas issued by arbitrators to compel testimony or produce evidence (see 9 U.S.C. § 7);
• confirming the award, thus facilitating recovery on an arbitral award (see 9 U.S.C. § 9); and
• though the Court did not say so, adjudicating an application to vacate an arbitral award (see 9 U.S.C. § 10) or modify an arbitral award (see 9 U.S.C. § 11).

Smith, at 1178. As observed by the Court, “It is no answer to say, as respondents do, that a party can file a new suit in federal court in those circumstances. Even if that is true as a practical matter, … requiring a party to file a new suit ignores the plain text of § 3.” Id., at 1177 n. 3.