New FAA ruling solves

Federal courts lack the discretion to dismiss lawsuits after determining that all the underlying claims are subject to mandatory arbitration agreements, the US Supreme Court held in an employment misclassification case that curtailed an appellate strategy to keep disputes from being arbitrated at all.

The justices on Thursday ruled unanimously that the Federal Arbitration Act requires district courts to put on hold lawsuits pending the outcome of private dispute resolution proceedings. The court noted that Section 3 of the FAA, which governs the enforcement of arbitration agreements, explicitly says 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.”

“Indeed, this court previously noted that the use of ‘shall’ in neighboring sections of the FAA created a mandatory obligation that left ‘no place for the exercise of discretion by a district court,’” Justice Sonia Sotomayor wrote for the court.

The high court ruling vacated a US Court of Appeals for the Ninth Circuit order that upheld the dismissal of a wage-and-hour lawsuit against delivery service company IntelliQuick Delivery Inc. in favor of arbitration. The appellate court acknowledged that its decision, though based on circuit precedent, may actually run counter to the text of the FAA, which suggests that courts should stay cases instead of dismissing them.

IntelliQuick insisted that lower courts have inherent authority to dismiss proceedings subject to arbitration, but Sotomayor said this was the company’s “attempt to evade the plain meaning of the text” of the law.

“Even assuming district courts have this inherent authority, ‘the inherent powers of the courts may be controlled or overridden by statute or rule.’ Section 3 does exactly that,” the opinion said. “It overrides any discretion a district court might otherwise have had to dismiss a suit when the parties have agreed to arbitration.”

The Supreme Court’s ruling resolves a split among federal circuit courts on the question while clarifying the scope of judges’ jurisdiction over cases subject to arbitration.

The Ninth, Eighth, Fifth, and First circuits allow the dismissal of disputes subject to mandatory arbitration agreements on the basis that the discretion to do so flows from courts’ inherent authority to manage their dockets.

The Eleventh, Tenth, Seventh, Sixth, Third, and Second circuits say courts should instead stay cases—when requested by a party—while arbitration proceeds.

Misclassification Case

A group of current and former drivers accused IntelliQuick and some related entities of misclassifying them as independent contractors instead of employees who are entitled to minimum wage, overtime, and paid sick leave protections under federal and Arizona state law.

Both parties agreed that the case was subject to arbitration, but the drivers said it should have been put on hold while arbitration proceeded.

During oral argument in April, several justices indicated that the Ninth Circuit’s ruling wasn’t in line with Section 3 of the FAA, which governs the enforcement of arbitration agreements. That provision explicitly says 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.”

Haynes and Boone LLP partner Daniel L. Geyser, who argued for the drivers, said courts must follow the strict language of the FAA and stay cases. The law doesn’t mention dismissal, and courts lack the authority to modify Congress’ directives, he told the justices.

IntelliQuick’s attorney, Orrick Herrington & Sutcliffe LLP partner E. Joshua Rosenkranz, argued that the FAA doesn’t bar dismissal and that Congress never intended to allow courts to retain jurisdiction over cases sent to arbitration.

The law’s purpose is to enforce parties’ contractual obligations to arbitrate disputes and avoid parallel litigation, Rosenkranz said. Allowing a stay would encourage parties to ignore their arbitration agreements and cause a flood of cases to end up in court, which may overburden judicial resources, he said.

Judicial Efficiency

But some of the justices challenged this argument, saying that pausing a case rather than dismissing it pending arbitration actually promotes judicial efficiency.

Keeping a case alive would prevent a party from restarting 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, they said.

Sotomayor reiterated that point again in Thursday’s ruling, writing 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.

Geyser told Bloomberg Law in a statement that the justices’ “decision is short, sweet, and exactly right,” and “establishes the proper way for federal courts to handle arbitration cases across the country.”

“It secures a necessary backstop that protects litigant rights if an arbitration falls through. It prevents premature appeals that undermine the FAA’s scheme,” he said. “It protects the ability of federal courts to seamlessly facilitate the underlying arbitration. And it advances the core purposes of the FAA itself: eliminating waste, avoiding unnecessary litigation, and sending parties to arbitration as quickly as possible.”

Rosenkranz didn’t immediately respond to a request for comment.