Supreme Court Rules Trial Courts Must Stay, Not Dismiss, Lawsuits During Arbitration
On May 16, 2024, the United States Supreme Court resolved a circuit split regarding whether Section 3 of the Federal Arbitration Act (“FAA”) provides trial courts the discretion to dismiss a lawsuit when all claims are subject to arbitration. In Smith v. Spizzirri, a unanimous Court ruled trial courts do not have discretion to dismiss a lawsuit that involves an arbitrable dispute, and must instead stay the proceedings.
In Smith, the petitioners were current and former delivery drivers for an on-demand delivery service. The drivers sued respondents, the delivery service, in Arizona state court alleging respondents misclassified them as independent contractors, failed to pay required minimum and overtime wages, and failed to provide paid sick leave. After removing the case to federal court, respondents moved to compel arbitration and dismiss the lawsuit. While petitioners did not contest the arbitrability of their claims, they argued Section 3 of the FAA required the trial court to stay, rather than dismiss, their claims. The United States District Court for the District of Arizona disagreed and issued an order compelling arbitration and dismissing the case without prejudice. The Ninth Circuit affirmed, following Circuit precedent recognizing the District Court’s discretion to dismiss instead of stay the matter.
In delivering the opinion of the Court, Justice Sotomayor noted the “text, structure and purpose” of the FAA “all pointed 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.”
The Court’s decision focused on the language of Section 3 of the FAA which states a 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, providing the applicant for the stay is not in default in proceeding with such arbitration.” The Court found the FAA’s use of the word “shall” created an obligation “impervious to judicial discretion.” Likewise, the use of the word “stay” denoted only a temporary suspension of legal proceedings. The Court also noted that staying, rather than dismissing, a lawsuit serves the practical purpose of ensuring parties can return to court if arbitration fails to resolve a dispute and allowing courts to maintain a supervisory role for arbitrations as envisioned by the FAA.
We will continue to monitor the impact of the Supreme Court’s decision in Smith and provide updates as they become available.
