Brownstein Hyatt Farber Schreck LLP– Travis Chance and Emily L. Dyer
USA / May 20 2024
The Federal Arbitration Act (FAA) governs contracts “evidencing a transaction involving commerce” wherein the parties have agreed to arbitrate any dispute that may arise out of the contract. 9 U.S.C. Section 2. The FAA’s application is broad—in the words of the United States Supreme Court, “it is perfectly clear that the FAA encompasses a wider range of transactions than those actually in commerce—that is, within the flow of interstate commerce[.]” Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003) (internal quotation marks and citations omitted). The FAA, thus, generally preempts parties’ choice-of-law provisions invoking the arbitration statutes of a state, unless such provision expressly evidences the parties’ intent that the state’s arbitration law applies instead of or in addition to the FAA.
Often, a party to a contract seeks to escape or dispute the applicability of an arbitration provision by filing claims in court instead of initiating arbitration. The defendant then has the burden to move the court to compel arbitration. If the court finds that the claims must be first brought in arbitration, the case must proceed to arbitration. But what happens to the court case once the parties are compelled to arbitrate if the defendant seeks dismissal and the plaintiff requests a stay?
On May 16, 2024, the Supreme Court answered this question. In Smith v. Spizzirri, current and former delivery drivers filed suit in Arizona state court against the operators, alleging various employment claims under Arizona and federal law. The operators removed the case to federal court and then moved to compel arbitration and dismiss the case. The drivers conceded their claims were subject to arbitration, but argued that Section 3 of the FAA requires the case be stayed—not dismissed—pending arbitration. Section 3 of the FAA provides that 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[.]”
Agreeing with the operators and based on Ninth Circuit precedent holding that the district court retains the discretion to dismiss the action if all the claims are subject to arbitration, the district court compelled arbitration and dismissed the case without prejudice. The drivers appealed to the Ninth Circuit. The Ninth Circuit affirmed the district court’s decision based on the circuit court’s precedent, but acknowledged that Section 3 of the FAA mandates the case be stayed. Facing a split among the circuits on this issue, with the majority of the circuits holding that Section 3 mandates a stay (Second, Third, Sixth, Seventh, Tenth and Eleventh) and the other circuits (First, Fifth, Eighth and Ninth) maintaining that the district court has the discretion to dismiss, the Supreme Court took the issue head on.
In its decision, the Supreme Court focused on Section 3’s use of the term “shall,” concluding that the plain text requires that the case be stayed pending the arbitration. In an attempt to get around this mandate, the drivers argued the term “stay” in Section 3 means that the litigation must be stopped while the arbitration proceeds, which can be achieved by staying or dismissing the case. Rejecting this argument, Justice Sotomayor, who authored the opinion with unanimous support from the other justices, succinctly confirmed that “[j] just as ‘shall’ means ‘shall,’ ‘stay’ means ‘stay.’”
Further confirming that Section 3 requires a case to be stayed pending arbitration, the Supreme Court recognized that “staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts.” Indeed, the FAA includes several provisions permitting judicial intervention during an arbitration, such as appointment of an arbitrator, enforcement of subpoenas, and confirmation and collection of arbitration awards. Thus, instead of initiating new cases to seek assistance from the court under these provisions if the initial case were dismissed, these issues can be more easily and efficiently raised in a case that has been stayed.
The decision resolved a split among the circuit courts and brought clarity to a common issue that parties face when arbitration provisions are involved (even where parties may believe their arbitration provisions are governed exclusively by state law). Since parties will now not need to initiate a new case in order to seek judicial relief complementary to the arbitration process, the decision will promote the efficiency and cost-savings policy of alternative dispute resolution. Additionally, because an order compelling arbitration and dismissing the action is appealable, while an order compelling arbitration and staying the case is not, this decision also eliminates the ability of a party resisting arbitration to delay the arbitration and the litigation of claims by filing an appeal after dismissal.
Going forward, it is likely that state courts interpreting statutes similar to Section 3 of the FAA will confirm that cases must be stayed pending arbitration.
The Uniform Arbitration Act, which was promulgated by the Uniform Law Commission in 1955, was adopted by the majority of states. In 2000, the commission enacted the Revised Uniform Arbitration Act, which has since been adopted by 22 states, including Colorado and Nevada. Both the original and the revised versions of the Uniform Arbitration Act follow Section 3 of the FAA’s language that “the court on just terms shall stay any judicial proceeding that involves a claim subject to the arbitration” if arbitration is compelled. The other states that have not adopted either version of the Uniform Arbitration Act, like California, New York and Texas, have their own arbitration statutes. Still, many, if not all, of those states have statutes that are reminiscent of Section 3, mandating a stay pending arbitration.
The Supreme Court’s recent interpretation of the FAA’s stay provision is likely to be highly persuasive to state courts interpreting their own arbitration statutes’ stay requirements, and litigants subject to state law arbitration provisions are likely to see the same benefits as those that are subject to the FAA.
