The United States Supreme Court ruled unanimously earlier this month in an employment misclassification case (Smith v. Spizzirri, U.S., No. 22-1218, 5/16/24), that federal courts lack the discretion to dismiss lawsuits even after determining that all the underlying claims are subject to mandatory arbitration agreements. The ruling settles a split among federal circuit courts on the issue while clarifying the scope of judges’ jurisdiction over cases subject to arbitration.
The case interprets the Federal Arbitration Act (FAA) and arose out of a suit by delivery drivers who alleged that IntelliQuick Delivery Inc. misclassified them as independent contractors to avoid paying minimum wage, overtime, expense reimbursement, and sick leave required by federal and state laws. The FAA sets forth procedures for enforcing arbitration agreements in federal court. Section 3 of the FAA, entitled “Stay of proceedings where issues therein are referable to arbitration,” provides 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 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.
In this case, petitioners filed suit against respondents in state court and respondents then removed the case to federal court and filed a motion to compel arbitration and dismiss the suit. Upon the motion, both parties agreed that the issue was subject to mandatory arbitration. The drivers, however, requested a stay pending arbitration, rather than dismissal. The district court dismissed the case in favor of arbitration and its ruling was upheld by the 5th Circuit Court of Appeals.
The Supreme Court unanimously reversed and ruled that the FAA requires district courts to stay lawsuits rather than dismiss them pending the outcome of private dispute resolution proceedings when one party requests it. Noting that Section 3 of the FAA directs that a district court referring a case to arbitration “shall on application of one of the parties stay the trial of the action until such arbitration has been had,” the Court found that there is no discretion for the district court. “In this statutory interpretation case, text, structure and purpose all point to the same conclusion: 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,” Sotomayor wrote.
IntelliQuick’s attorneys argued that the FAA doesn’t bar dismissal and that Congress never intended to allow courts to retain jurisdiction over cases sent to arbitration. They further argued that the law’s purpose is to enforce parties’ contractual obligations to arbitrate disputes and avoid parallel litigation, and that allowing a stay would encourage parties to ignore their arbitration agreements and jump right to filing suit, which could overburden the court system and unnecessarily drain judicial resources. IntelliQuick also argued that district courts have inherent authority to dismiss cases subject to arbitration.
Justice Sotomayor, writing for the unanimous Court “[e]ven assuming district courts have this inherent authority, ‘the inherent powers of the courts may be controlled or overridden by statute or rule.’ Section 3 [of the FAA] does exactly that.” The plain language of the FAA “overrides any discretion a district court might otherwise have had to dismiss a suit when the parties have agreed to arbitration.” Moreover, staying a case rather than dismissing it would allow a party to not have to restart the legal process by filing a new complaint post-arbitration to settle issues arising out of arbitration, thereby saving additional legal fees they would’ve otherwise incurred, the Court said.
Sotomayor reiterated in the ruling that keeping the suit on the docket “comports with the supervisory role that the FAA envisions for the courts.” It “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,” the opinion said. “District courts can, of course, adopt practices to minimize any administrative burden caused by the stays that” Section 3 requires.
The case may have unintended consequences for workers attempting to challenge the enforceability of mandatory arbitration agreements. Such agreements are commonly used by companies to handle employment disputes because the process resolves cases quicker and with reduced expense. Some employee advocates prefer courts to arbitration because of the perception that the judicial system provides private citizens and consumers with more options and are less likely to side with the companies being sued. Now, however, if a case is stayed pursuant to this ruling, it cannot be appealed since it is not a final ruling, and the parties must go through arbitration before being able to challenge the determination that the dispute is subject to arbitration in the first place.
Sotomayor noted Congress had made clear in Section 16(b) of the statute that an order compelling arbitration is not immediately appealable, therefore dismissal when a party requests a stay would trigger the right to appeal where Congress sought to forbid one. Sotomayor wrote that staying a case makes more sense for the “supervisory role” intended for the courts, and by keeping a case on the court’s docket, a judge can assist throughout arbitration.
Jennifer A. Shoemaker is a Partner in Underberg & Kessler LLP’s Litigation, Labor & Employment, and Family Law Practice Groups where she represents private and public-sector clients in a wide variety of litigation and employment matters. She can be reached at jshoemaker@underbergkessler.com.
Reprinted with permission from The Daily Record and available as a PDF file here.