Supreme Court of the United States Resolves Circuit Split Over Arbitration Issue

by Brian P. Nally, Esq. and Michael A. Arnold, Esq.

On May 16th, the United States Supreme Court unanimously held in Smith v. Spizzirri that the Federal Arbitration Act (FAA) requires courts to stay proceedings when a dispute involves an arbitrable issue, and a party has requested a stay pending arbitration. Justice Sotomayor, writing for the Court, emphasized that both the text and purpose of the FAA mandates a stay, not a dismissal. This decision resolves a circuit split between the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits—which have held that Section 3 mandates a stay—and the First, Fifth, Eighth, and Ninth Circuits—which have held that courts had discretion to dismiss under Section 3. This ruling also reinforces the notion that federal courts should support and supervise matters referred to arbitration, rather than removing them from their dockets.

The Federal Arbitration Act, codified at 9 U.S.C. §§ 1-16, ensures the validity, irrevocability, and enforceability of arbitration agreements. Under the FAA, courts cannot set aside arbitration awards if the agreement is valid. The Smith opinion focused on Section 3 of the FAA, which addresses staying court proceedings when an issue has been referred to arbitration. Section 3 states:

If any suit or proceeding be brought in any of the courts of the United States 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 in such suit or proceeding is referable to arbitration under such an agreement, 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.S. 3.             

In Smith v. Spizzirri, former and current delivery drivers (Plaintiffs) filed suit in Arizona state court, alleging that an on-demand delivery service (Defendant) misclassified them as independent contractors and violated state and federal employment laws by not paying minimum wage, overtime, and sick leave. Defendant removed the case to federal court and filed a motion to compel arbitration and dismiss. Plaintiffs agreed that the claims were subject to arbitration but argued that the FAA required the district court to stay the case pending arbitration rather than dismiss it. The district court ordered arbitration and dismissed the case, citing that while the text of FAA Section 3 mandates  a stay, precedent allowed for either a stay or dismissal. The Ninth Circuit affirmed, noting again that the plain language of Section 3 seemed to mandate a stay, but precedent permitted dismissal at the district court’s discretion.

The U.S. Supreme Court granted certiorari to resolve the circuit split on whether Section 3 stays were discretionary or mandatory. The Court concluded that the text, structure, and purpose of the FAA all indicate that when a federal court finds a dispute subject to arbitration and a party requests a stay, the court must stay the proceedings and does not have the discretion to dismiss the case. Smith v. Spizzirri, 601 U.S.(2024). Defendants argued that the district courts retain inherent authority to dismiss proceedings subject to arbitration. Id. However, the Court did not find this argument persuasive, highlighting that “the inherent powers of the courts may be controlled or overridden by statute or rule.” Degen v. United States, 517 U. S. 820, 823, 116 S. Ct. 1777, 135 L. Ed. 2d 102 (1996). Section 3 did exactly that, overriding any discretion a district court might otherwise have to dismiss a suit when the parties have agreed to arbitration, according to the Court. Smith, 601 U.S.

The Court went on to state that Section 16 of the FAA further resolved any doubt as to whether a stay is required. Under Section 16, when a court denies a request for arbitration, that denial is subject to immediate interlocutory appeal. See 9 U.S.C.§16(a)(1)(c). In contrast, Congress has clarified that when a court compels arbitration without certifying a controlling question of law under 28 U.S.C. §1292(b), which governs interlocutory decisions, the order is not immediately appealable. See U.S.C. §16(b). Emphasizing that if 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. Smith v. Spizzirri, 601U.S.(2024).

Lastly, the Court notes that staying the suit, rather than dismissing it, aligns with the supervisory role envisioned by the FAA. The FAA allows courts to assist in arbitration through the appointment of arbitrators See 9 U.S.C §5, enforcement of subpoenas See §7, and recovery of awards See §9.

As of now, the Smith decision will streamline many of the ways courts may be involved after a case is compelled to arbitration. This will allow litigants to directly involve the court for subpoenas (during the arbitration process)—instead of having to open a new case or domesticate a subpoena for an arbitration. This will also streamline the post-award process with the filing of motions to vacate, modify, or confirm arbitration awards in federal court, rather than state court, assuring that federal courts will retain jurisdiction over the case following arbitration. In addition, the Smith decision will greatly limit the opportunity of parties who oppose arbitration to appeal an order compelling arbitration.

If you have questions on the Smith decision, please contact a member of Reminger’s Financial Services Liability Practice Group.