Consumer Finance Litigation

In Smith v. Spizzirri, 2024 WL 2193872 (U.S. May 16, 2024), the United States Supreme Court issued a ruling holding that courts must stay, rather than dismiss, cases that are subject to arbitration. The unanimous decision resolves a circuit split on the issue and has far-reaching implications on the continued role of courts in cases subject to arbitration. 

The Federal Arbitration Act (FAA) sets forth procedures for enforcing arbitration agreements in federal court. Specifically, Section 3 of the FAA specifies that when a dispute is subject to arbitration, the court “shall on application of one of the parties stay the trial of the action until [the] arbitration” has concluded.

Various courts, such as the U.S. Courts of Appeals for the First, Fifth, Eighth, and Ninth Circuits, have previously held that Section 3 of the FAA gave courts discretion as to either dismiss or stay an action that is subject to arbitration.

The case arose from the Ninth Circuit affirming a District Court’s decision to compel arbitration and dismiss a case without prejudice. The Ninth Circuit, while acknowledging the plain meaning of the word “shall” in Section 3 of the FAA, ultimately held that Circuit precedent recognized the District Court’s discretion to dismiss. The United States Supreme Court reversed and remanded this ruling.

In the Supreme Court’s unanimous decision, Justice Sotomayor, in delivering the opinion, first analyzed the plain meaning of the language in Section 3 of the FAA. The Court explained that the phrase “shall . . . stay the trial of an action” “creates an obligation impervious to judicial discretion.”

The Court further reasoned that the FAA’s structure and purpose confirm that a stay is required. Specifically, when a court dismisses a suit subject to arbitration, the dismissal triggers an immediate right to appeal, whereas an order compelling arbitration is not immediately appealable. The Court stated that the immediate right to appeal, which comes with dismissal, is inconsistent with Congress’s purpose in the FAA “to move the parties to an arbitrable dispute of out court and into arbitration as quickly and easily as possible.”

Moreover, the Court reasoned that staying rather than dismissing an action subject to arbitration aligns with the supervisory role that the FAA envisions for the courts. Specifically, keeping a case on the court’s docket “makes good sense” in light of the mechanisms that the FAA provides for courts to assist parties in arbitration.