On May 16, 2024, the Supreme Court unanimously held that when a district court compels claims to arbitration and a party has requested a stay under section 3 of the Federal Arbitration Act (FAA), the district court is required to stay the case, and lacks the discretion to dismiss the suit outright. This decision is important for parties who seek to compel arbitration as oftentimes, parties likewise seek an outright dismissal of the case when their claims are arbitrable.

Case Background: Smith v. Spizzirri

Smith v. Spizzirri involved claims that the respondents had violated various federal and state employment laws. Specifically, the petitioners argued that they had been misclassified as independent contractors and were not paid the required minimum and overtime wages as a result. The respondents removed the lawsuit to federal court and, upon removal, sought to compel arbitration and dismiss the lawsuit. In turn, petitioners conceded their claims were arbitrable but argued that under § 3 of the FAA, the district court was required to stay the case, not dismiss it.

District Court’s Initial Ruling

The district court disagreed and issued an order compelling arbitration and dismissing the case without prejudice. While acknowledging that the text of § 3 appears to contemplate a stay, not outright dismissal, the district court found that precedent “instructed that ‘notwithstanding the language of §3, a district 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.’” The Ninth Circuit affirmed on appeal, and subsequently, the Supreme Court granted certiorari to resolve a Circuit split over whether courts can dismiss, as opposed to stay, a case pending arbitration under § 3 of the FAA.

Supreme Court’s Rationale

The Court found it to be an easy decision and unanimously reversed, noting that the:

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.

Justice Sotomayor, writing for the majority, first looked to the text of § 3, which states, in relevant part, that a court “shall on application of one of the parties stay the trial of the action… .” Focusing on the word “shall,” Justice Sotomayor concluded that it “creates an obligation impervious to judicial discretion.” Justice Sotomayor then turned to the word “stay” and likewise found it to be clear and unambiguous: “Just as “shall” means ‘shall,’ ‘stay’ means ‘stay.’” In so ruling, the Court also disagreed with respondent’s interpretation of the word “stay,” noting that any “attempt to read ‘stay’ to include ‘dismiss’ cannot be squared with the surrounding statutory text.” Rather, by directing a stay of the proceeding (as opposed to outright dismissal), § 3 ensures that parties can return to court if arbitration breaks down for one reason or another.

Implications of the Ruling

The Court also rejected respondent’s other claim that district courts have inherent authority to dismiss cases subject to arbitration. As the Court noted, “[e]ven assuming district courts have this inherent authority, ‘the inherent powers of the courts may be controlled or overrid­den by statute or rule.’” One such rule being § 3, which clearly contemplates a stay, as opposed to dismissal, of outright proceedings.