Introduction
During the court’s October 2023-2024 term, even after being considered an arbitrable dispute, the Supreme Court of The United States of America (SCOTUS) has ruled on the 16th of May 2024 in Smith v. Spizzirri (no. 22-1218) that under section 3 of the Federal Arbitration Act (FAA), the courts have no discretion to dismiss a case if the latter’s claims belong to arbitration and the party/ parties compelled to pursue the dispute via arbitration has/have requested a stay[1].
The ruling of that case was considered one of the most important decisions in the last two decades, although previous similar rulings assured the right of the parties to request a stay in the proceedings, for example, Katz v. Cellco P’ship [Katz v. Cellco P’ship, 12 CV 9193 (VB) S.D.N.Y. Dec. 12, 2013]. However, the latter was a ruling by United States District Court Southern District of New York, but Smith v. Spizzirri was rendered by The Supreme Court of the United States of America, the highest court in federal judiciary of the United States, which will leave no further leeway to any court to misinterpret the third section of the FAA.
Factual Background
“The petitioners—Wendy Smith, Michelle Martinez, and Kenneth Turner—are collectively referred to as “Smith” in the proceedings. Smith are current and former delivery drivers for on-demand delivery service Intelliserve LLC” (BALOTPEDIA 2024). Smith (representing the plaintiffs collectively) have sued the respondents in Arizona State court, alleging violations of state employment and federal law. Petitioners claimed that respondents misclassified them as independent contractors, failed to pay required minimum and overtime wages, and failed to provide paid sick leave (Smith v. Spizzirri, 601 U.S., 2024)). “In U.S. District Court for the District of Arizona, Spizzirri moved to compel arbitration with Smith and for the court to dismiss the case. Smith argued that Section 3 of the Federal Arbitration Act required the District of Arizona to pause pending arbitration while the lawsuit was ongoing.” (BALOTPEDIA 2024).
The third section of the Federal Arbitration Act states the following: “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.” (Federal Arbitration Act, 9 U.S.C. §§ 1-16, 1925)
Despite the explicit language provided by this section of the FAA, assuring the “stay proceedings” principles, the courts have almost always dismissed this factor, including the U.S District Court for the District of Arizona who dismissed without prejudice the claim of Smith for the stay of the proceedings. Following that decision, the appeal resulted in an affirmation in the favor of the respondents. On appeal, a three-judge panel of the United States Court of Appeals for the Ninth Circuit – Judges Susan P. Graber, Mark J. Bennett, and Roopali Desai – affirmed the United States District Court for the District of Arizona ruling (BALLOTPEDIA 2024).
On the 14th of June 2023, an appeal was raised by Smith to the SCOTUS and the latter accepted the case to its merit’s dockets for oral agreements on the 12th of January 2024. “The Supreme Court of the United States reversed the Ninth Circuit’s decision. The Supreme Court held that when a district court finds that a lawsuit involves an arbitrable dispute and a party has requested a stay of the court proceeding pending arbitration, Section 3 of the FAA compels the court to issue a stay, and the court lacks discretion to dismiss the suit.” (Smith v. Spizzirri, 601 U.S., 2024) .
The Reasoning: From State Court to SCOTUS
On the first hand, the U.S. District Court of District of Arizona has issued a ruling compelling arbitration and dismissing the case without prejudice. This decision was based on a precedent, the latter was the decision of the United States Court of Appeals, Ninth Circuit, in 2014, Johnmohammadi v. Bloomingdale’s, Inc. The Court of Appeal back then has ruled holding that under the FAA a court “may either stay the action or dismiss it outright when . . . the court determines that all of the claims raised in the action are subject to arbitration” [Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072 (9th Cir.), 2014]. Hence, the arbitration was compelled and the case was dismissed without prejudice on the basis that all the claims fall under the scope of arbitration, thus the case got dismissed by the court.
On the second hand, after an appeal to the Ninth Circuit, the latter, with a three judges panel affirmed the decision of the District Court of Arizona, holding that the court is bound by its own precedent [Forrest v. Spizzirri, 62 F.4th 1201 (9th Cir.), 2023]. Despite this, two of the three judges filed a concurring opinion urging the Supreme Court “to take up this question, which it has sidestepped previously, and on which the courts of appeals are divided.”(Vadum 2024)
At last, on the 12th of January, the Supreme Court of The United States has granted the plaintiffs petition for certiorari[2], or review, to resolve the splits among the federal courts of appeal. Even though the ruling of the Ninth Circuit re-affirmed the decision of the District Court of Arizona, as mentioned above, two of the three judges have declared the decision wrong and urged the Supreme Court to act and decide on the matter. Thus, under the scope of SCOTUS, Judge Sotomayor has taken the case to put end to this Circuit Split.
Firstly, one of the key elements on which the ruling was based is section 3 of the FAA, more specifically, the word “shall”, which indicates a clear order to the court resolving the matter to stay the proceedings. “In this statutory interpretation case, text, structure, and purpose 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” (Smith v. Spizzirri, 601 U.S., 2024). Hence, the court cannot dismiss the case on the basis that “all claims in the case belong to arbitration”. Secondly, the court has considered that the respondents’ claim is wrongful, when the latter have asked that the word “stay” indicates that the court must stop in-parallel court proceedings and that can be achieved if the court dismisses the case and gives up the jurisdiction. Nevertheless, the spirit of the context of the FAA clearly implies for a “temporary suspension” in proceedings and not a conclusive termination of such proceedings, and parties shall be able to return to the court in case arbitration has failed to resolve the dispute (Smith v. Spizzirri, 601 U.S., 2024)). Thirdly, in regards to the respondents claiming that the District Court has an inherent authority to dismiss the case, the latter claim was set aside by the Supreme Court, basing its decision on Degen v. United States “The inherent powers of the courts may be controlled or overridden by statute or rule (Degen v. United States, 517 U.S. 820, 1996)”. At last, the court has stated that staying the proceedings rather than dismissing the case might serve the purpose of arbitration, more specifically, the FAA has a helpful supervisory role that can help the parties in throughout the arbitral proceedings. Section 5 of the FAA provides an explicit guideline for appointing an arbitrator, giving jurisdiction to the court to appoint an arbitrator or an umpire in case the parties fail to do so or in case there was no method of appointing arbitrators, thus the court will appoint a single arbitrator unless otherwise provided by the agreement.[3] Also the FAA helps the arbitrators to enforce various subpoenas and facilitates recovery on arbitral award.[4] All this reasoning has led Judge Sotomayor to reverse the ruling of the Court of Appeal and order the proceedings to stay on the 16th of May 2024, in a unanimous decision for all nine judges of the Court: “When a district court finds that a lawsuit involves an arbitrable dispute, and a party requests a stay pending arbitration, §3 of the FAA compels the court to stay the proceeding. The contrary judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion. It is so ordered.”(Smith v. Spizzirri, 601 U.S., 2024).
However, to avoid potential misconceptions, it is crucial to mention that the court is not bound to stay the proceedings if other legal factors compel the court to dismiss the case, e.g. if the court has no jurisdiction over the case.
Key Implication: The end of the circuit split
For the last two decades, in the United States, courts have been ruling differently on the matter of “Stay or dismiss the case” when the claims of that case fall under the scope of arbitration, although section three of the FAA is explicit and compels the court to stay the proceedings until an arbitral award is issued. “Six federal circuits – the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits – have ruled that, under this language, a federal district court may only stay, and not dismiss, an action in which the claims are subject to arbitration. Four circuits, however – the First, Fifth, Eighth, and Ninth Circuits—have ruled that district courts have the discretion to dismiss, rather than stay, an action where all of the claims raised in the action are subject to arbitration.” (Biser & Tractenberg 2024). However, that split has finally come to an end after the unanimous decision of the Supreme Court of The United States on the 17th of June 2024, the opinion delivered by judge Sotomayor has put an end to it. Practically speaking, this decision prevents a party, including an employer with a policy requiring arbitration of employment-related claims, from being able to both refer the dispute to arbitration and terminate the court-proceeding (Berryman, Brechtel Beker & McGoey 2024).
Other implications
As for arbitration, this decision has reassured the respect of arbitration as an independent dispute resolution mechanism and re-instated trust for people or investors selecting arbitration as a mechanism to resolve their disputes. The FAA was established to advocate for arbitration as the favored method for settling disputes, ensuring that arbitration agreements are upheld according to their terms. The legislative history indicates a clear intent to reduce judicial intervention in arbitration cases, thereby promoting a more streamlined and effective dispute resolution mechanism. By enforcing stays, the Supreme Court aligns with the legislative goal of ensuring that arbitration agreements are respected and that arbitration processes proceed with minimal judicial interference (Smith v. Spizzirri, 601 U.S., 2024) . Moreover, SCOTUS has imposed its’ decision on all lower level courts, compelling them to abide by the context of the FAA and promoted its’ purpose for all stakeholders.
As for judicial efficiency, the decision has played a major role in resource conservation and cost and time effectiveness. Mandating stays instead of dismissals promotes judicial efficiency by conserving judicial resources and preventing duplicative litigation. This ensures that if arbitration fails to resolve the dispute, the case can continue in court without the parties needing to re-file, thereby saving time and reducing litigation costs (Smith v. Spizzirri, 601 U.S., 2024) .
Conclusion
The Supreme Court’s ruling in Smith v. Spizzirri is predicated on a meticulous textual interpretation of the Federal Arbitration Act (FAA), the legislative intent behind the Act, established judicial precedents, and principles of judicial efficiency. The Court, by mandating stays of proceedings instead of allowing dismissals, seeks to ensure a consistent and foreseeable application of the FAA, thereby underscoring the critical role of arbitration as an effective and binding method for dispute resolution.
Author: Rachid Al Bitar, Ph.D. candidate, University of Debrecen, Géza Marton Doctoral School.
References
- BALOTPEDIA (2024) Smith v. Spizzirri. https://ballotpedia.org/Smith_v._Spizzirri. (Accessed: 27 July 2024).
- Berryman, Z., Brechtel Beker, K. and McGoey, T.J. (2024) Supreme Court Resolves Circuit Split: Federal Arbitration Act Mandates a Stay of Court Proceedings, Not Dismissal, 22 June 2024. https://www.gulfcoastbusinesslawblog.com/2024/05/supreme-court-resolves-circuit-split-federal-arbitration-act-mandates-a-stay-of-court-proceedings-not-dismissal/ (Accessed: 27 July 2024).
- Biser, S.B. and Tractenberg, C.R. (2024). U.S. Supreme Court to Decide Whether Federal Courts Have Authority to Dismiss, Rather than Stay, Cases that Are Subject to Arbitration, 25 January 2024. https://globaldisputeresolutioninsights.foxrothschild.com/2024/01/u-s-supreme-court-to-decide-whether-federal-courts-have-authorityto-dismiss-rather-than-stay-cases-that-are-subject-to-arbitration/ (Accessed: 27 July 2024).
- Degen v. United States, 517 U.S. 820 (1996). https://supreme.justia.com/cases/federal/us/517/820/#:~:text=Held%3A%20A%20district%20court%20may,822%2D829. (Accessed: 26 July 2024).
- Federal Arbitration Act, 9 U.S.C. §§ 1-16 (1925). https://www.acerislaw.com/wp-content/uploads/2022/09/US-Federal-Arbitration-Act.pdf. (Accessed: 25 July 2024).
- Forrest v. Spizzirri, 62 F.4th 1201 (9th Cir.) (2023). https://casetext.com/case/forrest-v-spizzirri-1 (Accessed: 27 July 2024).
- Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072 (9th Cir.) (2014). https://casetext.com/case/johnmohammadi-v-bloomingdales-inc. (Accessed: 26 July 2024).
- Katz v. Cellco P’ship, 12 CV 9193 (VB) (S.D.N.Y. Dec. 12 (2013). https://casetext.com/case/katz-v-pship-3 (Accessed: 24 July 2024).
- Smith v. Spizzirri, 601 U.S. (2024). https://supreme.justia.com/cases/federal/us/601/22-1218/. (Accessed: 25 July 2024).
- Vadum, M. (2024). Supreme Court Rules 9–0 That Lower Court Should Have Put Delivery Drivers’ Lawsuit on Hold, 17 May 2024. https://www.theepochtimes.com/us/supreme-court-rules-9-0-that-lower-court-should-have-put-delivery-drivers-lawsuit-on-hold-5651857. (Accessed: 27 July 2024).
- Wex Definitions, L.I.I. (2024). Stay of proceedings, LII / Legal Information Institute. https://www.law.cornell.edu/wex/stay_of_proceedings (Accessed: 24 July 2024).
[1] “A stay of proceedings is a ruling by a court to stop or suspend a proceeding or trial temporarily or indefinitely. A court may later lift the stay and continue the proceeding. Some stays are automatic, but others are up to judicial discretion” for more please check (Wex Definitions, 2024), https://www.law.cornell.edu/wex/stay_of_proceedings#:~:text=A%20stay%20of%20proceedings%20is,or%20trial%20temporarily%20or%20indefinitely. [Accessed on the 24th of July 2024]
[2] Certiorari simply defined is a “writ” by which a higher court (such as an appellate court) reviews some lower court’s decision (such as a district court). See https://www.law.cornell.edu/wex/certiorari (Accessed: 25 July 2024)
[3] See FAA, 9 U. S. C. §5, https://www.acerislaw.com/wp-content/uploads/2022/09/US-Federal-Arbitration-Act.pdf (Accessed:27 July 2024)
[4] See FAA, 9 U. S. C. §7 & §9, https://www.acerislaw.com/wp-content/uploads/2022/09/US-Federal-Arbitration-Act.pdf (Accessed:27 July 2024)