In Smith v. Spizzirri, No. 22-1218, 601 U.S. ___ (May 16, 2024), the U.S. Supreme Court unanimously ruled that when parties seek to compel arbitration pursuant to the Federal Arbitration Act (FAA), U.S. courts must stay the underlying litigation rather than dismiss it. The Spizzirri decision is important for arbitration practitioners because it not only resolves an open procedural question upon which U.S. federal courts have been split, but it also reaffirms the Supreme Court’s plain language approach to interpreting arbitration-related language and its pro-arbitration stance.
A. Background
Spizzirri concerned the interpretation of section 3 of the FAA and the procedural steps that U.S. federal courts must take when faced with an application to compel arbitration. FAA section 3 states that when a dispute is subject to arbitration, 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.” 9 U.S.C. section 3.
B. Federal appellate courts interpret directives of section 3 differently
While the language of section 3 of the FAA expressly states that courts must “stay” litigation that is subject to an arbitration clause, a federal appellate court split emerged over many years as to whether federal trial courts could instead dismiss litigation after compelling arbitration. A majority of federal appellate courts, including those encompassing significant arbitral seats such as New York, Philadelphia, Chicago and Miami, held that courts must simply stay litigation after compelling arbitration. Another group of federal appellate courts, including ones that encompass significant arbitral seats such as San Francisco, Los Angeles and Houston, concluded that rather than just stay litigation, federal trial courts could instead dismiss the underlying litigation after compelling arbitration.
The distinction is a significant one for two reasons. First, if litigation is stayed after compelling arbitration, it remains active on the docket, and the court to which it is assigned remains the supervisory court for the underlying arbitration. Conversely, if the underlying litigation is dismissed, there is no standing court ready to act as the supervisory court for the arbitration, and any party that requires judicial intervention in the arbitration must bring new litigation seeking that assistance.
Second, under U.S. federal court procedure, a trial level ruling to stay litigation cannot be immediately appealed without permission of the trial court, whereas a ruling to dismiss an action can immediately be appealed. Consequently, dismissing an action subject to an arbitration clause permits a party that wishes to avoid arbitration to continue fighting it right away.
C. The U.S. Supreme Court interprets section 3 to mean what it says
In Spizzirri, the Supreme Court unanimously ruled that section 3 of the FAA must be enforced as it is written and that trial courts may only stay litigation after compelling arbitration rather than dismissing it. Specifically, the Supreme Court stated 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.” No. 22-1218, slip op. at 3 (footnote omitted). The Court further noted that by requiring a stay in lieu of a dismissal, section 3 “ensures that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute.” Slip op. at 5.
Critically, the Supreme Court also noted that interpreting section 3 of the FAA to mean what it says furthers the FAA’s objective of swiftly and efficiently moving arbitrable disputes into arbitration. The Court also highlighted that “staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts” (slip op. at 6), and that keeping the suit on the court’s docket aligns with this role and avoids the costs and complications of initiating a new suit at the conclusion of the arbitration.
D. Implications for state court proceedings
While the Court’s decision establishes a uniform rule for federal court practitioners regarding the stay of district court proceedings pending arbitration, it may not apply in state courts, which are different court systems that are entitled to follow their own procedures so long as they do not conflict with the FAA. Accordingly, Spizzirri makes removal to federal court even more important when a defendant knows it will be seeking to compel arbitration. In Spizzirri itself, the litigation began in state court but was removed to federal court.
The difference in forum could be significant. For example, the state of Florida by appellate rule allows for appeals of orders denying arbitration. The FAA applies in both federal and state courts and preempts state laws that conflict with the FAA’s purpose of enforcing written arbitration agreements. However, whether state procedural rules are preempted is questionable. Sections 3 and 16 of the FAA are seen as procedural, and section 3 specifically refers to “courts of the United States.” And, at least one Florida court has said that section 16 does not apply in Florida state court. Alphagraphics Franchising, Inc. v. Stebbins, 617 So. 2d 463 (Fla. Dist. Ct. App. 1993) (section 16 does not create substantive right).
E. Conclusion
The Spizzirri decision is important for arbitration practitioners because it reconfirms the Supreme Court’s pro-arbitration stance. That stance was highlighted last year in Coinbase, Inc. v. Bielski, No. 22-105, 599 U.S. 736 (June 23, 2023), which required an automatic stay of district court proceedings pending appeal of a denial of a motion to compel arbitration. Taken together, the decisions effectively shut down all litigation in matters in which a defendant contends the matter is subject to arbitration.
Client Alert 2024-111
