On May 16, 2024, in Smith v. Spizzirri, the US Supreme Court resolved a circuit split by holding that when a party asks a federal court to stay a lawsuit in a matter found subject to arbitration while the arbitration is pending, under Section 3 of the Federal Arbitration Act (FAA), the court must issue a stay and does not have discretion to dismiss the suit on grounds that all the claims are subject to arbitration ( (U.S. May 16, 2024)).

Petitioners, drivers for a delivery service operated by respondents, sued in Arizona state court alleging federal and state employment law violations. After removing the case to federal court, respondents moved to compel arbitration and dismiss the lawsuit. While petitioners agreed that all their claims were arbitrable, they argued that Section 3 of the FAA required the court to stay the action pending arbitration rather than dismissing it entirely. The district court issued an order compelling arbitration and dismissing the case without prejudice. The US Court of Appeals for the Ninth Circuit affirmed.

The Supreme Court reversed and remanded the case pointing to the FAA's statutory text, structure, and purpose.

The FAA sets out procedures for enforcing arbitration agreements in federal court. Section 3 of the FAA 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).

The Court found that the word "shall" creates an obligation that does not allow the court to exercise judicial discretion and order dismissal rather than a stay of proceedings. The respondents argued that "stay" means only that the court must stop parallel litigation, which could be achieved through dismissal. The Court disagreed, finding that respondents' interpretation conflicts with the established legal meaning of the word "stay" as describing a temporary suspension of legal proceedings, and with the FAA's surrounding text which anticipates that the parties can return to federal court if arbitration breaks down. Further, the FAA provides for immediate interlocutory appeals of orders denying (but not granting) motions to compel arbitration. If a district court dismisses a suit subject to arbitration even when a party requests a stay, that dismissal triggers the right to an immediate appeal where Congress meant to forbid such an appeal.

Staying rather than dismissing a lawsuit is also consistent with the supervisory role that the FAA envisions for the courts. For example, the FAA provides for courts to assist in the arbitration by appointing an arbitrator, enforcing subpoenas issued by arbitrators to compel testimony, and confirming the arbitral award.