The United States Supreme Court is set to decide Smith v. Spizzirri, and resolve a federal circuit split as to whether federal courts must stay lawsuits or dismiss lawsuits where arbitration is compelled.

Issue Before the Court

Does Section 3 of the Federal Arbitration Act require district courts to stay a lawsuit pending arbitration, or do courts have the discretion to dismiss when all claims are subject to arbitration?

Underlying Facts of the Case

Intelliquick Delivery, Inc. employs delivery drivers. The drivers sued their employer claiming that they were misclassified as independent contractors to avoid paying minimum wage, overtime, expense reimbursements, and sick pay under Arizona law. During the dispute, the parties agreed that the claims were covered by an arbitration agreement. A question arose regarding whether the district court was required to stay the case pending arbitration, or if it had the discretion to dismiss it. The court determined that it could dismiss.

The plaintiff drivers argued that if their case had been heard in another circuit the outcome would likely have been different. Thus far, the Ninth, First, Fifth and Eighth Circuits have ruled that district courts have the discretion to dismiss a case that is sent to arbitration while the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits have found that a stay must be issued while arbitration is pending.

The Federal Arbitration Act

The relevant Section 3 of the Federal Arbitration Act 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.

Two Sides to the Argument

Although the plaintiffs in the case agreed that their claims were covered by the arbitration agreement, they asserted that – under the clear language of the FAA -- the court was required to stay the proceedings pending the outcome of arbitration.

The trial disagreed, saying that despite the language in the FAA, district courts within the Ninth Circuit Court of Appeals have decided that lower courts have the discretion to stay or dismiss. On appeal, the Ninth Circuit agreed. Two judges on the three-member panel, expressed a hope that the Supreme Court resolve the circuit split.

The issue might not seem too important – especially when the parties' primary focus is whether to go to arbitration at all – but there are procedural implications as to what happens to a lawsuit that raises claims subject to arbitration. For instance, most courts throughout the country require court approval of wage and hour settlements. Where wage and hour disputes are sent to arbitration and the underlying lawsuit can be dismissed, the parties might be able to avoid subjecting their settlement agreement to court oversight and placing their settlement agreement into the public record.

This issue is also important because an order compelling arbitration and staying the case is not immediately appealable, while an order compelling arbitration and dismissing the action is.

The team at Wood, Smith, Henning and Berman will monitor the Supreme Court docket closely and update this article once the Supreme Court issues its ruling. Should you have any questions or concerns regarding this issue please do not hesitate to give the author of this article, or a member of our team, a call.

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