On May 16, 2024, the U.S. Supreme Court (“SCOTUS”) in Smith v. Spizzirri, 601 U.S. ___, No 22-1218, slip op. (U.S. May 16, 2024), decided 9-0 that Section 3 of the Federal Arbitration Act (the “FAA”) does not “permit[] a court to dismiss the case instead of issuing a stay when the dispute is subject to arbitration and a party requests a stay pending arbitration.” 601 U.S. at ___; slip op. at 1.
In an opinion written by Associate Justice Sonia Sotomayor, the Court concluded that the “text, structure, and purpose” of Section 3 and the FAA 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.” 601 U.S. at ___, slip op. at 3. The Court therefore held that if a lawsuit “involves an arbitrable dispute, and a party requests a Section 3 stay, the Court must stay the litigation. 601 U.S. at ___; slip op. at 6.
The Court’s opinion resolves a long-standing and deepening split in the circuits, which the Court left open in Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S. 79, 87 n.2 (2000), and Lamps Plus v. Varela, 587 U.S. 176, 181 n.1 (2019). That split in the circuits is discussed in note 1 of the Court’s opinion. 601 U.S. at ___ n.1, slip op. at 2-3 n.1 (citing cases).
Background
The underlying merits litigation that resulted in an order granting a motion to compel arbitration—but a dismissal despite the request for a Section 3 stay— was a state court action between current and former drivers for a delivery service and the operators of that service. Claims were made under state and federal employment laws based on alleged misclassification of the drivers as independent contractors rather than employees. Claimants sought damages for sick leave and overtime wages.
Defendants removed the case to federal district court in Arizona and moved to compel arbitration and dismiss the action. Claimants conceded arbitrability but argued that the action should be stayed under Section 3.
Ninth circuit precedent granted district courts considering an application to stay litigation under Section 3 the discretion to either stay or dismiss the action. Relying on that precedent, the district court dismissed the suit, reasoning that all claims in the litigation had been ordered to arbitration.
The Ninth Circuit affirmed, but two judges concurred, suggesting that this Ninth Circuit precedent was wrong and that SCOTUS should resolve the split in the circuits concerning whether a requested Section 3 stay was mandatory when claims in the litigation are subject to arbitration and a stay is requested.
SCOTUS granted certiorari, reversed the Ninth Circuit’s decision, and resolved the split.
Section 3 Text and FAA Structure, and Purpose
In terms of analysis and outcome Spizzirri is consistent with the Court’s trend in recent years to interpret the FAA according to its text. See, e.g., Badgerow v. Walters, 596 U. S. ___, 142 S. Ct. 1310 (2022); Southwest Airlines Co. v. Saxon, 596 U.S. ___, 142 S. Ct. 1783 (2022); Morgan v. Sundance, Inc., 596 U.S. ___, 142 S. Ct. 1708 (2022); see also Philip J. Loree Jr., 2021 Term SCOTUS Arbitration Cases: Is the Pro-Arbitration Tide Beginning to Ebb?, Arb. Law Forum (July 18, 2022).
Justice Sotomayor’s opinion nevertheless determined also that the outcome was not only warranted by the text of Section 3 but by FAA Chapter One’s structure and purpose as well.
Section 3’s Text
Section 3 of the FAA provides that “[i]f any suit or proceeding” is “brought in” a United States Court “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. . . is referable to arbitration[:]”
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.
The Court explained that “[h]ere, as in other contexts,” the term “shall” “creates an obligation impervious to judicial discretion.” 601 U.S. at ___, slip op. at 4 (quotation and citation omitted). Section 3’s directive therefore required the district court to grant the requested stay of proceedings pending arbitration. Id. It was something a “court must do. . . .” Id.
The Court found further support in prior precedent, stating the 1985 Byrd decision said that the use of shall in “neighboring sections of the FAA created a mandatory obligation that left ‘no place for the exercise of discretion by a district court.’” 601 U.S. at ___, slip op. at 4 (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985)).
The Court also said that the term “stay” meant “stay.” 601 U.S. at ___, slip op. at 4. The term “stay” in Section 3, the Respondent argued, “‘means only that the court must stop parallel in-court litigation, which a court may achieve by dismissing without retaining jurisdiction.’” Id. (quoting Brief for Respondents 15) But that argument failed because “it disregard[ed] the long-established legal meaning of the word ‘stay[,]” a term that means—and meant at the time the FAA was enacted in 1925—a “‘temporary suspension’ of legal proceedings, not the conclusive termination of such proceedings.” Id. (quoting Black’s Law Dictionary 1109 (2d ed. 1910) (“Stay of proceedings”)).
Respondent’s argument also failed because reading “stay” as including “dismiss” “cannot be squared with the surrounding statutory text.” 601 U.S. at ___, slip op. at 4. Section 3 directs a court to stay litigation “until such arbitration has been had in accordance with the terms of the agreement,” and provided that “the applicant. . . is not in default in proceeding with the arbitration.” 9 U.S.C. § 3. That allows parties to “return to federal court if arbitration breaks down or fails to resolve the dispute[,]” a “return ticket” that would be unavailable were the suit dismissed rather than stayed. 601 U.S. at ___, slip op. at 5.
Structure and Purpose of the FAA
The Court further supported its conclusion by pointing to two aspects of the FAA’s “structure and purpose.” First, the relationship between Section 3’s mandatory-when-requested stay and Section 16’s appealability provisions. 601 U.S. at ___, slip op. at 5-6. Second, the “supervisory role that the FAA envisions for the courts.” 601 U.S. at ___, slip op. at 6.
As respects the confluence of Section 3 and Section 16, the Court explained that Section 16(a)(1)(C) authorized immediate, interlocutory appeals of orders refusing to compel arbitration and but did not, in the absence of a 28 U.S.C. § 1292(b) certification, afford that same advantage to parties appealing orders compelling arbitration. That preferential treatment, said the Court, “is consistent with Congress’s purpose in the FAA ‘to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible.’” 601 U.S. at 5-6 (quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 22 (1983)).
But refusing to grant a Section 3 stay when requested makes appealable immediately not only orders refusing arbitration, but also orders granting arbitration, a class of orders from which Congress expressly withheld a right to interlocutory appeal: “If[,]” said the Court, “a district court dismisses a suit subject to arbitration even when a party requests a stay, that dismissal triggers the right to an immediate appeal where Congress sought to forbid such an appeal.” 601 U.S. at ___, slip op. at 6.
As respects judicial supervision of arbitration, the Court explained that, apart from Section 4 orders compelling arbitration, and Section 3 orders staying litigation pending arbitration, “[t]he FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator, see §5; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see §7; and facilitating recovery on an arbitral award, see §9.” 601 U.S. at ___, slip op. at 6.
“Staying rather than dismissing a suit[,]” said the Court, “comports with the supervisory role that the FAA envisions for the courts.” Id. “Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role,” said the Court, for “it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections[,]” and courts can, “of course adopt practices to minimize any administrative burden caused by the stays that §3 requires.” Id.
What does Spizzirri Portend for the Future?
While Spizzirri is a short, straightforward opinion rendered on a fairly narrow procedural issue, it nevertheless may have some significant consequences on future FAA practice and procedure. First, it should reduce the number of immediate appeals from orders granting arbitration. Except as set forth in 28 U.S.C. § 1292(b) (concerning certifications of appealability of controlling questions of law), Section 16 prohibits appeals from interlocutory orders compelling arbitration or staying litigation pending arbitration. 9 U.S.C. § 16 (b)(1)-(3). Where a stay is granted those orders cannot be “final decision[s] with respect to an arbitration” within the meaning of 9 U.S.C. § 16(a)(3). See 9 U.S.C. § 16(a)(3); Randolph, 531 U.S. at 86-89.
Whereas courts prior to Spizzirri would sometimes dismiss, rather than stay, the federal court litigation—thereby permitting the party who unsuccessfully challenged arbitration to lodge an immediate, interlocutory appeal, see Randolph, 531 U.S. at 88-89—that is no longer an option under Spizzirri.
Second, in combination with Coinbase, Inc. v. Bielski, 143 S. Ct. 1915, 1923 (2023), it delivers a one-two-punch to litigants who seek to proceed with federal court litigation on an issue claimed to be arbitrable, even if a district court determines that the matter in litigation is not subject to arbitration. Spizzirri ensures that, as long as the arbitration proponent party seeks a Section 3 stay of litigation pending arbitration, the stay will be granted, provided that the court determines the matter is arbitrable and the arbitration proponent is not in default in proceeding to arbitration. The right to appeal that decision is deferred at least until the arbitration is concluded. See 9 U.S.C. § 3 (stay in effect “until such arbitration has been had in accordance with the terms of the agreement. . . .”); 9 U.S.C. § 16(a)(3); Randolph, 531 U.S. at 88-89. And even if the district court rules that the dispute before the court is not arbitrable, then Coinbase ensures that, if the arbitration proponent appeals the district court’s decision, either the district court, or the Court of Appeals, will stay litigation pending appeal of the district court’s arbitrability decision. Coinbase, 143 S. Ct. at 1923.
Third, the decision may influence how Circuit Courts of Appeal resolve the issue of whether, post-Badgerow, courts in actions stayed-pending-arbitration continue to have subject matter jurisdiction to grant other relief under the FAA arising out of the arbitration.
That is an important issue in cases where subject matter jurisdiction over the stayed-pending-arbitration law suit is based on federal question jurisdiction and there is no independent basis (such as diversity of citizenship) for subject matter jurisdiction to support those applications for other FAA relief (including applications for confirmation, vacatur, or modification of an award).
Is there continuing or retained subject matter jurisdiction that authorizes courts to hear such applications in cases where the court would not otherwise have subject matter jurisdiction over them were they brought as independent, standalone applications divorced from any stayed-pending-arbitration lawsuit?
The circuits are split on this vexing issue post-Badgerow. Compare SmartSky Networks LLC v. DAG Wireless Ltd., ___ F.4th ___, No. 22-1253, slip op. (4th Cir. Feb. 13, 2024) (no continuing subject matter jurisdiction) with Kinsella v. Baker Hughes Oilfield Operations LLC, 66 F.4th 1099 (7th Cir. 2023) (court has continuing jurisdiction to hear applications for other FAA relief).
Prior to Spizzirri, we wrote some articles concerning this issue. (See here, here, and here.)
We expected that Spizzirri might provide some guidance on how SCOTUS might resolve it, and to that end the court’s opinion provides a somewhat cryptic hint:
Finally, staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts. The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator, see 9 U.S.C. §5; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see §7; and facilitating recovery on an arbitral award, see §9. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring new suit and pay a new filing fee to invoke the FAA’ procedural protections. . . .
601 U.S. at ___; slip op. at 6 (emphasis added).
One key reason the court’s discussion does not clearly authorize anchor or continuing jurisdiction is its statement “the FAA provides mechanisms for courts with proper jurisdiction to assist parties. . . .” 601 U.S. at ___, slip op. at 6 (emphasis added). Only “courts with proper jurisdiction” can therefore utilize those “mechanisms” to “assist parties,” a truism, admittedly, and one that leaves to informed speculation what the Court intended when it used the qualifier, “courts with proper jurisdiction[.]”
Does the court in the lawsuit—which had subject matter jurisdiction to hear it and the arbitration proponent’s motions under Sections 3 and 4 for orders compelling arbitration and staying litigation—have “proper jurisdiction” to hear other FAA applications arising out of the arbitration if the court would not have proper jurisdiction but for the existence of he stayed-pending-arbitration litigation?
That question remains open after Spizzirri, but we believe that Spizzirri offers some additional support for those advocating anchor or continuing jurisdiction.
A final observation is in order. Were we asked who, on balance, benefits most from the decision we would say it is arbitration proponents. And in many types of litigation—be it employment, consumer, or civil rights—that frequently pits relatively powerful economic persons against relatively less powerful persons— be they small businesses, consumers, employees, or others—the arbitration proponents—those for whom arbitration, on balance, usually benefits most—tend to be on the more economically powerful side of the equation.
That is the reality of dispute and dispute-resolution dynamics as applied to certain categories of disputes. The disparity may be less aggravated in some industry arbitration contexts, where both parties may have their reasons for embracing arbitration over litigation in many (but not necessarily all) cases.
Enough said.
Contacting the Author
If you have any questions about this article, arbitration, arbitration law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. (bio, here) has more than nearly 35 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related-litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.
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Tags: Anchor Jurisdiction, Appellate Jurisdiction, Badgerow, Bielski, Coinbase, Compel Arbitration, Continuing Jurisdiction, Kinsella, mandatory, Ninth Circuit, SCOTUS, Section 16, Section 3, Section 4, SmartSky, Spizzirri, Stay of Litigation, Subject Matter Jurisdiction, Supreme Court
