On April 22, 2024, the Supreme Court of the United States conducted oral arguments in a case addressing federal courts’ handling of lawsuits after claims are compelled to arbitration. The Supreme Court seemed skeptical that dismissing lawsuits without prejudice is truly less burdensome on the court system than simply staying the lawsuits pending arbitration.

Quick Hits

• The Supreme Court heard oral arguments in a case over whether federal courts have discretion to dismiss lawsuits once the claims are compelled to arbitration.
• The decision could resolve a 6-4 circuit split with the majority holding that district courts must stay lawsuits pending arbitration, and a minority holding that district courts may dismiss.

The Supreme Court held oral arguments in Smith v. Spizzirri, a case asking the question of whether federal courts have the discretion under the Federal Arbitration Act (FAA) to dismiss lawsuits when all the claims are sent to arbitration. The appeal arose from a ruling by the U.S. Court of Appeals for the Ninth Circuit that affirmed the dismissal of a lawsuit based on its own precedent, but in which the appellate court acknowledged that the text of the FAA may actually require such lawsuits be stayed.

Section 3 of the FAA provides that when claims are determined to be subject to an arbitration agreement, courts “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 Supreme Court’s ruling could resolve a 6-4 circuit split as to whether the FAA allows district courts discretion to dismiss lawsuits once they determine that all the claims are subject to arbitration. The First, Fifth, Eighth, and Ninth Circuits permit district courts to dismiss, while the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits require district courts to issue a stay when requested by a party.

Background

Current and former delivery drivers filed suit against their employer claiming violations of Arizona employment laws. After the case was removed to federal court, the respondents moved to compel arbitration alleging that the delivery drivers were subject to mandatory arbitration agreements.

The delivery drivers conceded that the claims were subject to arbitration but argued that the FAA required the district court to “stay” the lawsuit pending the arbitration. The district court disagreed. Based on its interpretation of relevant precedent, the district court concluded it had discretion to dismiss the lawsuit.

The U.S. Court of Appeals for the Ninth Circuit affirmed that decision. In doing so, the Ninth Circuit panel stated that while “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.”

Stay vs. Dismissal

During Supreme Court oral arguments in the case, counsel for the respondents argued that when the U.S. Congress used the word “stay” in Section 3 of the FAA, it did not mean that district courts must retain jurisdiction. To that end, respondents’ counsel pointed out that, “stay,” at the time of the FAA’s drafting, held a different meaning than it does today. Respondents’ counsel further argued that the whole meaning of the FAA is to enforce the contractual obligations of parties to arbitrate disputes and avoid parallel litigation that ends up rewarding parties that ignore their arbitration agreements and go to the courts.

However, the justices questioned why keeping the lawsuit alive would be so burdensome when the alternative appears to be that the parties would need to file a whole new lawsuit post-arbitration to resolve issues or to confirm the outcome of the arbitration. Counsel for the respondents acknowledged the possibility that claims could end up back in court.

“It seems to me that the alternative would be a lot more burdensome than [if the lawsuit is] just … sitting there,” Chief Justice John Roberts said.

Justice Elena Kagan further inquired about situations in which there is an issue with the statute of limitations running if a new lawsuit needs to be filed after arbitration. Counsel for the respondents suggested that a party may need to raise such a statute of limitations problem for the court when considering whether to dismiss.

“But that’s just beginning to sound very complicated,” Justice Kagan stated. “It’s like sometimes I should dismiss; sometimes I shouldn’t dismiss. I have to go figure out what the statute of limitations consequences are.”

Counsel for the delivery drivers had argued that courts should follow the language of Section 3 of the FAA and stay claims pending arbitration, arguing that all courts must do is keep a case listed on its docket and wait for the parties to tell them when arbitration has concluded.

But Justice Ketanji Brown Jackson questioned whether the issue was complicated by the high court’s 2022 holding in Badgerow v. Walters, which narrowed the circumstances under which federal courts have jurisdiction to rule on motions to confirm, modify, or vacate arbitration awards under the FAA.

Counsel for the petitioners argued that the case was not an issue since it involved a situation where there was not an initial lawsuit in federal court. Counsel argued that once a court stays a lawsuit under Section 3, it retains jurisdiction.

Key Takeaways

The ruling in the case could resolve the circuit split over whether federal courts maintain discretion to dismiss lawsuits when all claims are sent to arbitration.

In Badgerow, the Supreme Court held that federal courts have only a relatively limited jurisdiction over cases seeking to confirm, modify, or vacate arbitration awards under the FAA. Some commentators suggested that the Badgerow decision could affect employers’ strategies in moving to compel arbitration, because the scope of federal jurisdiction is broader for such motions. In seeking to compel arbitration, employers may prefer that the federal court retain jurisdiction over the case pending the outcome of the arbitration so that the parties can return to that same federal court to address any subsequent motion to vacate, modify, or confirm the resulting arbitration award.

The Supreme Court appears inclined to hold in Smith v. Spizzirri that federal district courts must stay rather than dismiss cases when all claims are sent to arbitration. Such a decision would benefit employers that prefer to file motions to vacate, modify, or confirm arbitration awards in federal rather than state court by assuring that the federal courts will continue to have jurisdiction to address such motions after arbitration is complete.