Stay or Dismiss? The Supreme Court Grants Cert on Its Third Arbitration Case This Term

Late last week, the U.S. Supreme Court granted a petition for certiorari to take the third arbitration case of its 2023-2024 term, Smith v. Spizzirri, No. 22-1218 (the Court’s case docket is available at https://bit.ly/48wt09w).

The case will refine the terms of Federal Arbitration Act Sec. 3 on the relationship between litigation and arbitration—specifically, whether the FAA binds the court to stay litigation when a case is sent to arbitration, instead of permitting the court to dismiss the case. 

The cert grant strongly invokes recent Supreme Court arbitration decisions that emphasize plain-text readings of the law to reach a decision. A close adherence to FAA Sec. 3 that correlates with recent Court opinions could see the Ninth Circuit precedent, and the case, reversed.

The case, deriving from Forrest v. Spizzirri, involves a group of drivers filing suit against their employer, Intelliserve LLC, a Phoenix-based delivery service, alleging violations of various state and federal employment laws. Forrest v. Spizzirri, 62 F.4th 1201, 1203 (9th Cir. 2023) (available at https://bit.ly/48Sswub). 

The parties agreed that all claims are subject to mandatory arbitration. The district court granted Intelliserve's motion to compel arbitration, but also dismissed the litigation without prejudice. Id. The plaintiffs argued that the district court should have stayed the action pending arbitration rather than dismissing it because of the FAA Sec. 3 language. Id.

FAA Sec. 3—"Stay of proceedings where issue therein referable to arbitration”--states,

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.

9 U.S.C. § 3 (available at https://bit.ly/43h4buX).

On its face, it would appear that federal district courts must stay suits pending arbitration. The Ninth U.S. Circuit Court of Appeals, however, has a longstanding exception that allows cases to be dismissed where all claims are subject to arbitration. Other circuits also permit dismissals rather than stays.

Spizzirri almost acts as a sequel to Badgerow v. Walters, 142 S. Ct. 1310 (2022) (available at https://bit.ly/47CVvRG), a plain-text reading by the Supreme Court on FAA Sections 9 and 10, which contrasted Sec. 3. Badgerow allows federal district court jurisdiction over enforcing an arbitration agreement in Sec. 4, but says the FAA does not automatically provide federal court jurisdiction over enforcing the awards themselves under the later sections. CPR Speaks coverage of Badgerow can be found here.

In Spizzirri, the plaintiffs contended that the plain text of FAA Section 3 requiring that the case be stayed while being arbitrated should be followed, rather than the Ninth Circuit precedent. But the appellate court did not agree.

The petitioners successfully cited a 6-4 circuit split on the issue of allowing dismissal instead of the Sec. 3 stay in asking the nation's top Court to hear the case.

The backdrop of the Court’s Spizzirri arguments will concern courts’ continuing jurisdiction for the arbitration matter.  If a federal court sends a case to arbitration, and does not stay but instead dismisses, then under Badgerow’s Sec. 9 interpretation, there will not be federal court jurisdiction to confirm or vacate an award, and the winner may be forced to go to state courts—which big defendants often dread.

The issue of dismissal versus stay "arises constantly in countless disputes,” says the cert petition, “burdening litigants and courts nearly every time a case is subject to arbitration. Yet as it now stands, the FAA’s core operation varies dramatically based on the happenstance of where a dispute arises. The stark division over such a fundamental question is untenable. This Court has twice confronted the question without answering it, and the problem is only getting worse.”

The brief for petitioner, Wendy Smith, cited the precedents that the Court should correct as Lamps Plus Inc. v. Varela, 139 S. Ct. 1407, 1414 n.1 (2019) (available at https://bit.ly/47EkhAS), and Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 87 n.2 (2000) (available at https://bit.ly/3Orsdiv). Daniel Geyser, a Dallas Haynes and Boone partner and chairman of the firm’s U.S. Supreme Court Practice, is counsel of record on the brief.

The Spizzirri plaintiffs provided four arguments—recounted in the successful Supreme Court cert petition--attempting to override the precedent of courts having discretion to dismiss cases going to arbitration, and enforce the FAA Section 3 language. The Ninth Circuit rejected all the arguments, but they could return and factor into a Scotus decision.

First, the plaintiffs-petitioners argued that the Ninth Circuit’s jurisprudence permitting the dismissal of claims subject to arbitration began in a case in which no party appears to have requested a stay. Spizzirri, 62 F.4th at 1205.

Next, they argued that the FAA's plain text should dictate the outcome despite the Ninth Circuit’s precedent to the contrary. Id.

Third, the plaintiffs argued that Badgerow abrogates Ninth Circuit precedents, permitting the court to find a different result. Id. In tandem with the plain-text argument, this is likely the plaintiffs' most compelling argument. But the Ninth Circuit denied this argument because although Badgerow supports the general proposition that courts should enforce the FAA’s plain text, it does not discuss FAA Sec. 3 or the district court's discretion to stay or dismiss an action pending arbitration. Id.

In Badgerow, the successful petitioner initiated an arbitration proceeding against her employer's principals alleging that she was unlawfully terminated. After arbitrators dismissed Denise Badgerow's claims, she filed suit in a Louisiana state court to vacate the arbitral award. The respondents, at the time including employer Ameriprise Financial Inc., removed the case to U.S. District Court and applied to confirm the award.

Badgerow then moved to remand the case to state court, arguing that the federal court lacked jurisdiction to resolve the parties’ requests—under FAA Sections 9 and 10, respectively—to vacate or confirm the award. Id. The Court relied on plain statutory text to limit the range of materials federal courts can consult when assessing jurisdiction over an application to confirm or vacate an arbitration award under FAA Sections 9 and 10. Id. at 18.

Despite the difference in facts, the Spizzirri issue--whether FAA Section 3 requires courts to stay a suit pending arbitration based on plain statutory text, or whether district courts have discretion to dismiss when all claims are subject to arbitration like the Ninth Circuit’s case precedent--is similar to that of the FAA reading Badgerow.

As their final argument in the Ninth Circuit, the plaintiffs argued that the district court abused its discretion by dismissing because there was going to be administrative benefits for Plaintiffs if the case was stayed. The Ninth Circuit held that because the district court did not misstate the law, misconstrue the facts, or otherwise act arbitrarily, it did not abuse its discretion in dismissing rather than staying the case.

After denying every plaintiff's argument against Ninth Circuit precedent that the court has discretion to dismiss arbitration cases, the Ninth Circuit affirmed the district court’s decision to dismiss the case. But Senior Circuit Judge Susan P. Graber’s concurrence encouraged the Supreme Court to “take up” the relevant issue and urged the Ninth Circuit to take the case en banc.

The Supreme Court is expected to schedule oral arguments and decide Smith v. Spizzirri in the current term. The new Scotus arbitration case joins Bissonnette v. Lepage Bakeries Park St. LLC, a case on the FAA Sec. 1 limits on an arbitration exemption, and Coinbase v. Suski, on who decides whether a case is arbitrated, as arbitration cases to be decided by the Supreme Court in this term. Those cases will be argued on Feb. 20, and Feb. 28, respectively. For more on those cases, see CPR Speaks, respectively, here and here.

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For more background on this issue, see Christopher R. Drahozal, “Mandatory Stay or Discretion to Dismiss? Interpreting Section 3 of the Federal Arbitration Act” (October 23, 2023). Ohio State Journal on Dispute Resolution, Vol. 39, 2023 (available at https://bit.ly/3vC1pW0). See also, Philip J. Loree Jr., “Weighing the ‘Jurisdictional Anchor’: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards,” Arbitration Law Forum (Oct. 23, 2023) (available at https://bit.ly/48AsyXR).

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The author, a second-year student at the Howard University School of Law in Washington, D.C., is a full-year CPR intern as part of CPR’s consortium program with Howard Law’s ADR program. Alternatives to the High Cost of Litigation editor Russ Bleemer assisted with the research and writing for this post.

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