TAKEAWAYS
- Some courts had previously interpreted Section 3 of the Federal Arbitration Act to allow for either a stay of the action or dismissal.
- Following the Supreme Court’s decision in Smith v. Spizzirri, once arbitration is compelled and a stay is entered, an appeal cannot be initiated until after the conclusion of the arbitration.
- The Smith decision allows a party to compel arbitration without having to simultaneously brief its counterparty’s appeal of the order compelling arbitration and also provides protection if the counterparty seeks to prevent the arbitration from occurring.
In Smith v. Spizzirri, 601 U.S. ____, 2024 WL 2193872 (May 16, 2024), a unanimous Supreme Court clarified the obligation of federal District Courts to stay cases pending the outcome of an arbitration where the court holds that the issues are arbitrable and a party requests a stay. The Supreme Court addressed the question of whether the Federal Arbitration Act (FAA), which provides procedures for the enforcement of arbitration agreements in federal court, permits a District Court to dismiss a case instead of issuing a stay after the court decides that the dispute is subject to an arbitration agreement and a party requests a stay pending arbitration. The Supreme Court unanimously decided that it does not.
Section 3 of the FAA provides that when a District Court determines that a dispute is subject to an arbitration agreement, 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.” Before Smith, some courts interpreted Section 3 to allow for either a stay of the action or dismissal. The Supreme Court rejected this approach.
The Supreme Court relied in part on the FAA’s structure and purpose. The purpose of Congress in passing the FAA was to “move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.” Id. (citing Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 22 (1983)). Consistent with that purpose, when a court denies a request for arbitration, the FAA authorizes an immediate interlocutory appeal. 9 U.S.C. § 16(a)(1)(C). However, when a court compels arbitration, that order is not immediately applicable. 9 U.S.C. § 16(b). If a District Court were to dismiss an action that it found arbitrable—as opposed to granting a stay when requested—a party opposing arbitration could bring an immediate appeal in contravention of Congress’s intent. After Smith, once the District Court finds that arbitration is compelled and a stay is entered, an appeal cannot be initiated until after the conclusion of the arbitration. This allows the party seeking arbitration to quickly move to the arbitration without also simultaneously responding to an appeal of the order compelling arbitration.
The Smith decision has several practical effects. First, a stay of proceedings preserves the District Court’s supervisory role that the FAA envisions to assist the parties in the arbitration, including by appointing an arbitrator (9 U.S.C. § 5), enforcing subpoenas issued by arbitrators to compel testimony or produce evidence (§ 7), and facilitating recovery on an arbitral award (§ 9). Second, a stay keeps the case on the court’s docket and avoids costs and issues that could arise if a party would be required to bring a new suit to invoke these protections.
Requiring a stay when requested also provides protections to parties seeking arbitration in scenarios where a party has refused to participate in the arbitration and takes actions in violation of their agreement to arbitrate, for example, by initiating a competing lawsuit in a foreign jurisdiction. With the case stayed rather than dismissed, a party can quickly and efficiently seek injunctive relief to enforce the court’s order compelling arbitration and prevent another party from taking actions that threaten the arbitration. Further, if injunctive relief alone is not enough to compel compliance with an order compelling arbitration, a party could also seek an order of contempt or sanctions for failure to comply. If the case were dismissed, seeking such relief would require the party to initiate a new action, a costly and time-consuming process, instead of quickly seeking the requested relief in the stayed proceeding.
As a takeaway for future cases, litigants should remember to request a stay when seeking an order to compel arbitration. If the court issues an order compelling arbitration and a stay is requested, it will be required to stay the proceedings and the parties will have a readily available court in which to seek relief in support of the arbitration; the party opposing arbitration cannot appeal until after the arbitration has concluded.
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