What happens when a party required by contract to arbitrate a claim tries pursuing it in court, nonetheless? Should the case be dismissed? Or must the court hold the case on its docket while the parties seek resolution through arbitration?

The final answer, per the United States Supreme Court’s recent decision in the case of Smith v. Spizzirri—stay those cases at the district court pending resolution in arbitration. As a result, arbitration agreements might lose some of their appeal.

Circuit Split

Before the Court considered Smith, there was a split among the United States Courts of Appeals on this issue. The Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits had held that matters subject to mandatory arbitration, but brought in a district court, should be stayed while they are resolved through arbitration. The First, Fifth, Eighth, and Ninth Circuits, conversely, held those matters should be dismissed in favor of arbitration.

Supreme Court Decision

In a unanimous decision, the Supreme Court cited three overarching reasons why it believes a stay, rather than dismissal, is appropriate when a matter subject to mandatory arbitration is initially brought before a district court. First, the Court noted that the plain language of the Federal Arbitration Act (the “FAA”) clearly indicates that a stay is the appropriate course of action. Relatedly, the plain language of the FAA supersedes any discretion a court might claim to dismiss the matter—which was the rationale cited by some lower courts in favor of dismissal before the Smith decision. Finally, the Court concluded that staying matters rather than dismissing them aligns with the intent underlying the FAA; namely, that the courts will serve in a supervisory role for matters subject to arbitration.

Implications for Employers

Employers use arbitration agreements with their employees for several reasons, which often include reduced costs and confidentiality. The decision in Smith could undercut those benefits.

Regarding costs, the decision could open the door to a wave of initial case filings in district courts. With clear precedent providing for a stay rather than dismissal, the plaintiff’s bar may be more inclined to pursue claims in court—ostensibly on the basis that doing so will protect plaintiffs. For example, as contemplated during oral arguments in Smith, plaintiffs’ counsel may claim a need to file in court to protect against the possibility of later running afoul of the statute of limitations, or to allow the plaintiff more easily to seek the court’s assistance with matters that prove difficult to resolve in arbitration.

Notwithstanding the plaintiff’s claimed rationale for initiating these claims in court, defendant employers would incur costs associated with moving to stay the federal court proceedings. Thereafter, employers also may incur costs associated with periodic status reports or conferences, which district courts often require even when a matter has been stayed in favor of arbitration.

Furthermore, cases filed in district court typically become a matter of public record. Those filed in arbitration generally do not. Accordingly, to the extent the plaintiff’s bar opts to file cases subject to mandatory arbitration in district court first, employers may lose some of the privacy they were seeking through their mandatory arbitration programs.

Ultimately, in light of Smith, employers using arbitration agreements with employees may experience an uptick in matters initiated in district courts, which will likely cause inconvenience, added cost, and less confidentiality.