U.S. Supreme Court Holds Section 3 of the Federal Arbitration Act Requires a Stay When a Dispute is Subject to Arbitration

Gil Walton

In Smith v. Spizzirri, the Supreme Court of the United States unanimously held that, when a district court grants a motion to compel arbitration, Section 3 of the Federal Arbitration Act requires district courts to stay the lawsuit pending arbitration; it does not permit dismissal of the case.  While at first blush this question may appear highly technical, it resolves a deep circuit split among the federal courts of appeals and will have widespread impact on arbitration practice.

Section 3’s Text and a Circuit Split

Section 3 of the FAA reads as follows:

“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.”

(emphasis added).  Relevant here is Section 3’s use of the word “shall”—specifically that a court “shall,” upon application of a party, “stay the trial of the action” pending completion of arbitration.  While “shall” is traditionally construed as mandatory and would thus suggest that district courts must stay actions pending arbitration, the First, Fifth, Eighth, and Ninth Circuits had each concluded that Section 3 gives courts discretion to dismiss—and not just stay—actions in which all claims are subject to arbitration.  On the other side of the split, the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits required a stay and did not permit dismissal.  This 6-4 circuit split took center stage in Spizzirri.

Below, Petitioners Agree to Arbitrate Their Claims and Request a Stay, but the District Court Dismisses Their Case

In the proceedings below, the petitioner delivery drivers sued their employers in Arizona state court for violations of, among other things, state and federal employment laws.  The employer removed the case to federal court and then moved to compel arbitration and dismiss the case.  While that motion to compel arbitration was pending, the petitioners agreed their claims were subject to arbitration but argued under Section 3 that the district court must stay, rather than dismiss, the action pending arbitration.  The district court rejected the petitioner’s arguments and dismissed the case without prejudice.

The Ninth Circuit Reluctantly Affirms the Dismissal

The Ninth Circuit affirmed the district court’s order.  While the panel majority (authored by Judge Bennett) noted that, “[o]n its face, Congress’s use of ‘shall’” in Section 3 “appears to require courts to stay litigation that is subject to mandatory arbitration, at least where all issues are subject to arbitration,” the Ninth Circuit has “long carved out an exception if all claims are subject to arbitration.”  In those circumstances, the majority continued, the district court may either stay the action or dismiss it outright.  The majority stated in a footnote that this question was the subject of a circuit split, but it nevertheless concluded that the Ninth Circuit’s binding precedent required affirmance.

Judges Graber and Desai concurred “fully in the majority opinion” but “encourage[d] the Supreme Court to take up this question” of Section 3’s meaning, “which it has sidestepped previously.” 

The Supreme Court took the hint and granted certiorari to decide “[w]hether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.”

The Parties’ Positions

In their merits briefs before the Supreme Court, petitioners and respondents both asserted the plain text of Section 3 supported their positions.  Petitioners, on the one hand, relied heavily on “shall,” arguing that the term is mandatory and thus “ties a court’s hands” in ordering a stay, rather than dismissing.  They also noted that the structure of the FAA compels the conclusion that a stay is mandatory.  Just last term, the Supreme Court concluded in Coinbase v. Bielski, 143 S.Ct. 1915 (2023), that Section 16 of the FAA provides for immediate interlocutory appeals of orders denying, but not granting, motions to compel arbitration.  If Section 3 permits district courts to dismiss actions, petitioners argued, it would convert a case into a final judgment and thereby allow immediate appeal of orders granting motions to compel arbitration—exactly what Section 16 forbids.  The Chamber of Commerce of the United States also filed an amicus brief pointing out this seemingly inconsistent result. 

Respondents, on the other hand, emphasized that Section 3 “requires a court to ‘stay the trial of the action,’” which they contended “means only that the court must stop parallel in-court litigation, which a court may achieve by dismissing without retaining jurisdiction.”  Respondents also leaned on the argument that Section 3 does not include a “clear statement” stripping district courts of their inherent authority to dismiss cases.  In response to petitioners’ Section 16 arguments, respondents made two additional contentions: (1) Section 16 was enacted more than sixty years after Section 3, and thus it is implausible that Section 16 was meant to alter the meaning of Section 3 sub silentio, and (2) Section 16 deals only with interlocutory appeals, and any dismissal pursuant to Section 3 would result in appeal of a final judgment, not an interlocutory appeal.

The Supreme Court Unanimously Reverses the Ninth Circuit

In a six-page, 9-0 decision authored by Justice Sotomayor, the Supreme Court sided with the petitioners and reversed the Ninth Circuit, concluding that “[w]hen 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 Court’s decision is grounded in two considerations: the text of Section 3 and the structure and purpose of the FAA.  On the text, the Court stated that Section 3’s use of the word “shall” imposes a mandatory obligation on the district court to stay proceedings; there is “no place for the exercise of discretion by a district court.”  The Court went on to reason that “stay” could not colorably be construed to also mean “dismiss,” as use of the term “stay” in Section 3 “ensures that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute.”

With respect to the structure and purpose of the FAA, the Court emphasized that dismissal of a suit subject to arbitration would trigger an immediate right to appeal the grant of a motion to compel arbitration, a result inconsistent with Section 16 of the FAA and the Court’s recent decision in Coinbase v. Bielski.  Moreover, a stay (rather than dismissal) “makes good sense in light of” the district court’s ongoing supervisory role in the arbitration—for example, “appointing an arbitrator,” “enforcing subpoenas issued by arbitrators to compel testimony or produce evidence,” and “facilitating recovery on an arbitral award.”  This ongoing “supervisory role” reduces costs and complications for both parties in a suit subject to arbitration. 

Key Takeaways

The Supreme Court’s decision in Spizzirri will likely confer benefits on both plaintiffs and defendants.  On the one hand, a stay reduces expenses for plaintiffs and defendants, as dismissal of a suit subject to arbitration adds “costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections.”  And on the other hand, for parties seeking to compel arbitration, a stay avoids the immediate right to appeal an order granting a motion to compel arbitration, thereby increasing the efficiency of the litigation and avoiding unnecessary costs and fees that would be incurred on appeal.