Arbitration At U.S. Supreme Court . . . Again, But Not On Bankruptcy—Whew! (Smith V. Spizzirri)

By: Donald L Swanson

Every now and then, the U.S. Supreme Court takes an arbitration case.  And it almost always rules in favor of arbitration over litigation.

Fortunately, the Supreme Court has, thus far, let arbitration vs. bankruptcy questions pass through without granting certiorari. Presumably, letting them pass through allows the lower courts to continue wrestling with how the two major federal laws interact. 

But here’s the concern:

• when the Supreme Court finally does take an arbitration vs. bankruptcy question, will its answer elevate arbitration over bankruptcy in a manner that’s harmful to the efficient and effective practice of bankruptcy law.?

So . . . every time the Supreme Court grants certiorari on an arbitration question, and it turns out that bankruptcy is not involved, a common reaction is this:

• “Whew!  We dodged the bullet . . . again.”

New Arbitration Case at U.S. Supreme Court

The latest of the “Whew!” cases is this: on January 12, 2024, the U.S. Supreme Court grants certiorari in Smith v. Spizzirri, Case No. 22-1218.

The Smith v. Spizzirri question is whether a federal court case that is referable to arbitration can be dismissed instead of stayed.

The question arises because of this language in Section 3 of the Federal Arbitration Act:

• “If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration . . . , the court in which such suit is pending, . . . shall . . . stay the trial of the action until such arbitration has been had . . .”

There is a 6-4 split among the circuit courts on whether such language:

• mandates a stay in every instance; or
• allows for dismissal as an alternative remedy when all issues in the lawsuit are referable to arbitration. 

Six circuit courts (Second, Third, Sixth, Seventh, Tenth, & Eleventh) say such language mandates a stay-only remedy; while four circuit courts (First, Third, Fifth, & Ninth) say dismissal of the case is allowed as an alternative remedy when all issues in the lawsuit are arbitrable.

What follows is a summary of the latest circuit court opinion on each side of the split. 

Spoiler opinion alert: the stay-only side of the circuit split seems to have the better rationale—by far.   

Ninth Circuit Rationale—Dismissal is Available.

Here is a summary of the Ninth Circuit’s rationale in the opinion from which certiorari is granted: Smith v. Spizzirri.

Although the plain text of Section 3 in the Federal Arbitration Act appears to mandate a stay pending arbitration, binding precedent establishes that district courts may dismiss suits when, as here, all claims are subject to arbitration.

Plaintiffs sued Defendant in state court alleging violations of federal and state employment laws.  Defendant removed the case to federal court, where it moved to compel arbitration and to dismiss the case.

Plaintiffs (i) agreed that all claims were subject to mandatory arbitration, but (ii) argued that the proper remedy is to stay the action pending arbitration—not dismiss it.

Congress’s use of the words “shall . . . stay” in Section 3 appears to require courts to stay litigation that is subject to mandatory arbitration. 

But the Ninth Circuit has long carved out an exception when all claims in the lawsuit are subject to arbitration.

Plaintiffs make four primary arguments to sidestep the binding precedent—none of which is persuasive.

1. The dismissal exception began in a case in which no party asked for a stay.  Here, Plaintiffs did request a stay. But this distinction makes no difference, because subsequent cases grant dismissals, even when a stay is requested.
2. Plaintiffs suggest that the plain text should dictate the outcome, despite our contrary precedents.  But as a three-judge panel we are bound apply this circuit precedent.
3. Plaintiffs argue that a recent Supreme Court decision abrogates our precedents, thereby permitting us to come to a different result.  But Plaintiffs misconstrue the effect of such decision for the present case.
4. Plaintiffs contend that, even if the district court had discretion to dismiss their suit, the court abused its discretion.  But no abuse of discretion happened.

Sixth Circuit Rationale—Stay is the only authorized remedy

The last circuit opinion to land on the stay-only result is Arabian Motors Grp. W.L.L. v. Ford Motor Co., 19 F.4th 938 (6th Cir. 2021).

Here is its rationale.

The question is: Whether the district court should have stayed the federal court action pending arbitration, instead of dismissing it?

The answer is: the district court should have granted the Defendant’s request for a stay.  That’s because § 3 of the Federal Arbitration Act shows that Defendant had every right to ask for a stay, and the district court should have granted it.

When a federal court faces an arbitrable issue, § 3 of the Act says that the court “shall on application of one of the parties stay the trial of the action until such arbitration has been had.”

Such language conveys a mandatory obligation.  And other provisions of the Act show why Congress requires a stay instead of dismissal, such as:

• § 5 allows the court to help parties appoint arbitrators;
• § 7 allows parties to enlist the court to summon witnesses to the arbitration; and
• §§ 9-11 say that, after the arbitration ends, the court may confirm, vacate, or modify an award.

So, when a district court stays a case and retains jurisdiction over it, the parties can use such statutorily-authorized mechanisms promptly and efficiently. Whereas, a dismissal would require the parties to file a new action—possibly in front of a different judge.

Further, a dismissal (unlike a stay) permits an objecting party to file an immediate appeal. That undercuts the appellate-review provisions of the Act:

• an immediate appeal can be taken from a court order denying arbitration or refusing a stay request; but
• appellate review is deferred, of decisions in favor of arbitration (such as the grant of a stay or a refusal to enjoin arbitration).

If a district court could freely dismiss cases, it would allow a party to:

• evade the normal requirement of bringing an appeal at the end of the action; 
• sidestep the clear policy preference of the Act (i.e., that pro-arbitration decisions are not appealable until the confirmation stage of the case) and continue litigating the issues in federal court; and
• thus disrupt the arbitration.

A district court might not always be bound to dismiss.  Circumstances might exist where dismissal is warranted, such as:

• when the dispute is moot or suffers from some other pleading or procedural defect;
• when all parties request a dismissal; or
• when neither party asks for a stay.

But the conventional rules—all of them—show that the district court erred in denying Defendant’s request for a stay.

Conclusion

Based on the explanations summarized above, the stay-is-required approach should prevail over the dismissal-is-an-option approach.

But . . . time will tell.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.