The U.S. Supreme Court has issued frequent opinions involving interpretation of the Federal Arbitration Act (the FAA), which governs the enforcement of arbitration agreements in federal court. On May 16, Justice Sonia Sotomayor writing for a unanimous court issued an opinion in Smith v. Spizzirri, regarding the supervisory role of federal courts in cases that should be arbitrated, reinforcing the importance of arbitration as a method of dispute resolution, particularly in franchise disputes.

Section 3 of the FAA states 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. The issue presented is whether Section 3 permits a court to dismiss the case instead of issuing a stay when the dispute is subject to arbitration and a party requests a stay pending arbitration. The court concluded that the case must be stayed and not dismissed, which has been the practice by many district courts. The court had previously identified the issue and decided not to address it. However, due to the rising popularity of commercial arbitration for dispute resolution, the differing practices by the district courts have led unexpected results. This decision confirms and elaborates on the role of federal courts in aiding dispute resolution as Congress intended.

As a statutory interpretation case, the court examined the text, structure and purpose of the FAA. The only conclusion which could be drawn is that “when a federal court finds that a dispute is subject to arbitration, and a party has requested a stay of the court proceeding pending arbitration, the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.”

The procedural history is interesting because the courts below acknowledged that the plain reading of the FAA required the case to be stayed, but nevertheless followed U.S. Court of Appeals for the Ninth Circuit precedent that granted the discretion to dismiss the case. The case started in state court alleging violations of federal and state employment laws. The case was removed to federal court where a motion was filed under the FAA to compel arbitration and dismiss the suit. The plaintiffs conceded that their claims were arbitrable, but contended that §3 of the FAA required the district court to stay the action pending arbitration rather than dismissing it entirely. The district court issued an order compelling arbitration and dismissed the case without prejudice following the discretion granted by Ninth Circuit precedent. The Ninth Circuit affirmed, but Judges Susan Graber and Roopali Desai in a concurrence stated that the Ninth Circuit precedent granting district courts the discretion to dismiss the case was inconsistent with the FAA text and urged the Supreme Court to address the issue.

The court focused on the word “shall.” Citing precedent, the court concluded that the statute’s use of the word “shall” “creates an obligation impervious to judicial discretion,” which is the obligation is to stay the proceeding. The court rejected the argument that “stay” “means only that the court must stop parallel in-court litigation, which a court may achieve by dismissing,” The court concluded that such an argument disregards the long-established legal meaning of the word “stay” as a temporary suspension of legal proceedings. The court similarly rejected any attempt to read “stay” to include dismissal, which anticipates that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute. The court refused to conclude that the district court in its inherent authority had the discretion to dismiss proceedings subject to arbitration, reasoning that “the inherent powers of the courts may be controlled or overridden by statute or rule.” The court concluded that Section 3 simply overrides the discretion of the district court to dismiss.

To illustrate the statutory scheme, the court explained how Congress envisioned the application of the FAA. Section 16(a)(1)(C) of the FAA authorizes an immediate interlocutory appeal of the denial of an arbitration request. But an order compelling arbitration is generally not immediately appealable. If a district court could dismiss a suit subject to arbitration even when a party requests a stay, that dismissal would trigger the right to an immediate appeal where Congress sought to forbid such an appeal.

The court further explained how this interpretation was consistent with the congressional intent to aid dispute resolution through arbitration:

Finally, staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts. The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator, see 9 U. S. C. Section 5; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see Section 7; and facilitating recovery on an arbitral award, see Section 9. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections. District courts can, of course, adopt practices to minimize any administrative burden caused by the stays that Section 3 requires.

This decision may invigorate the federal courts to do more than just direct litigation traffic when arbitrable disputes arise. Previously, when arbitrable cases were dismissed, the parties had disagreements where to enforce the arbitration award and whether the federal courts even had jurisdiction to confirm or enforce an arbitration award. Now it is clear that Congress intended federal courts remain available in arbitration cases to advance dispute resolution and enforcement of any arbitration award. The supervisory role of federal courts may be the biggest lesson learned from this case.