In a unanimous decision, the U.S. Supreme Court has clarified a key procedural issue that arises when a lawsuit is sent to arbitration. The question: When a federal court determines that a case belongs in arbitration, does it have the power to dismiss the lawsuit entirely?

The Supreme Court’s answer was clear. Once a court decides that a case is covered by an arbitration agreement and a party requests a stay, the Federal Arbitration Act (FAA) requires the court to stay the case. The court does not have the discretion to dismiss the lawsuit outright, even if arbitration will resolve the whole dispute.

The decision settles a longstanding disagreement among federal appeals courts. Some courts had held that judges could choose to dismiss a case entirely in this scenario. Others maintained that the FAA’s text mandates a stay when a party requests it.

Case background

The Supreme Court’s decision in Smith v. Spizzirri stemmed from a dispute between delivery drivers and Intelliserve, a Phoenix-based on-demand delivery service. The drivers filed suit in federal court, alleging various violations of federal and state wage and hour laws.

Intelliserve moved to compel arbitration and dismiss the suit. The drivers conceded their claims were arbitrable but argued the FAA required the court to stay rather than dismiss the case upon sending the dispute to arbitration.

The district court compelled arbitration but dismissed the lawsuit, relying on precedent from the 9th U.S. Circuit Court of Appeals allowing dismissal when all claims are subject to arbitration. The 9th Circuit affirmed, but acknowledged it was bound by precedent rather than a “plain text” reading of the FAA and urged the Supreme Court to take up the issue.

What it means

The Supreme Court’s decision clarifies that under Section 3 of the FAA, district courts must stay a case when compelling arbitration, if requested by a party. Courts do not have discretion to dismiss a case entirely on the basis that all claims are arbitrable.

In reaching this conclusion, the Court relied on Section 3, which states that courts “shall” grant a stay in this situation. The Court emphasized that “shall” creates a mandatory obligation for courts that overrides any inherent discretionary authority to dismiss a case.

The Court also found that the FAA’s structure and purpose support requiring a stay. It noted that Congress made orders compelling arbitration unappealable in most circumstances, while allowing immediate appeals of orders denying arbitration.

In other words, if a motion to compel arbitration is denied, the movant (for example, the employer) can appeal that decision immediately. But if a motion to compel arbitration is granted, the opposing party (for example, the employee) must adhere to the arbitration process, at least in the short term.

In practical terms, the Court’s ruling benefits plaintiffs by preserving their ability to return to court after arbitration concludes, such as to seek judicial review of an unfavorable award. It prevents employers from using arbitration to obtain a full dismissal.

However, employers can take solace in the fact that the decision does not undermine the overall enforceability of arbitration agreements. Courts will still compel arbitration when required by a valid agreement.