Supreme Court Holds Courts Must Stay, Not Dismiss, Cases Sent to Arbitration.

On May 16, 2024, the U.S. Supreme Court unanimously ruled that, when a party to a lawsuit seeks arbitration pursuant to an arbitration agreement, a court must stay – and may not dismiss – the lawsuit. In so holding, the Supreme Court resolved a split among the federal U.S. Circuit Courts of Appeals on this issue.

The Federal Arbitration Act. The Federal Arbitration Act (FAA) governs the enforceability of arbitration agreements. Section 3 of the FAA provides that courts “shall … stay” (i.e. suspend) a lawsuit when there is an arbitration agreement that covers the dispute and one of the parties has requested arbitration under the agreement. The federal Circuit Courts have differed on what to “stay” means. Some courts have determined only that it means the in-court litigation must stop, which can be done through dismissal, while other courts view it as only a temporary suspension of the lawsuit.

Background of the Case. In Smith v. Spizzirri, delivery drivers sued a delivery service for violations of state and federal employment laws, claiming that they had been misclassified as independent contractors, and that they had not received the minimum wage, overtime pay, or statutory sick leave. The delivery drivers had signed arbitration agreements and, at the delivery service’s request, the court then sent the case to arbitration. The federal district court held, and the U.S. Court of Appeals for the Ninth Circuit agreed, that it had the discretion whether to dismiss or stay the lawsuit pending arbitration. It chose to dismiss the lawsuit. Several judges on the Ninth Circuit noted, however, that sister Circuits were divided on whether courts have such discretion.

The Supreme Court’s Decision. On appeal, the Supreme Court found that the statutory language (i.e. “shall … stay”), structure and purpose all supported the conclusion that, “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 …” As the Supreme Court explained, “shall” is mandatory, while “stay” has a long-established meaning of a “temporary suspension.” Additionally, the FAA contemplates that the proceeding may return to court if arbitration breaks down or fails, which would not be available if the lawsuit were dismissed. Moreover, a dismissal triggers the right to an immediate appeal of the ruling – which the FAA specifically does not allow. And finally, according to the Supreme Court, the FAA contemplates a “supervisory role” for the courts in facilitating ongoing arbitration proceedings, which supports keeping the case on the court docket.

Lessons for Employers. Many employers have implemented arbitration agreements for employees and other relationships, like independent contractors. In some Circuits, they have been able to have lawsuits dismissed if the case fell within the arbitration agreement – but this will no longer be the case.