Stay or Dismiss? The Supreme Court Resolves a Split Among Federal
Appellate Circuits Regarding the Effect of Arbitration Agreements

Written by: William G. Beatty, Chicago

In Smith v. Spizzirri, 601 U.S. 472 (2024), the petitioners, a group of current and former delivery drivers, sued the
respondents, an on-demand delivery service, in an Arizona state court, claiming that the respondents had mischaracterized
them as independent contractors rather than employees. The petitioners also claimed that the respondents had failed to
pay required minimum and overtime wages, and likewise, had failed to provide them with paid sick leave. Smith, 601
U.S. at 474. The respondents, after removing the case to federal court, moved to dismiss the suit because the action was
subject to an arbitration agreement between the parties. Id.
The petitioners conceded that their case was subject to arbitration but that the Federal Arbitration Act (FAA), 9
U.S.C. §1, et seq., required the district court to stay the action pending arbitration pursuant to section 3 of the FAA. Id.
The district court issued an order compelling arbitration and dismissed the case without prejudice pending the arbitration.
Id. The Court of Appeals, Ninth Circuit affirmed, despite the fact that the FAA appears to mandate a stay rather than a
dismissal, but said it was bound by precedent when it recognized the district court’s discretion to dismiss. See Forrest v.
Spizzirri, 2022 WL 2191931 (D. Ariz. June 17, 2022); Forrest v. Spizzirri, 62 F.4th 1201 (9th Cir. 2023).
The Supreme Court granted certiorari to resolve a split among federal appellate circuits as to whether a dismissal is
proper, rather than staying the case, where an arbitration agreement governs the claim. Smith, 601 U.S. at 475. The Ninth
Circuit in the underlying case had joined the minority of federal circuits (the First, Fifth, and Eighth Circuits) in allowing
the district courts discretion to dismiss the case where an enforceable arbitration agreement is present. The Court of
Appeals, Fifth Circuit affirmed this approach in Rainey v. Citigroup, Inc., 779 F. Appx. 258 (5th Cir. 2019). In the Rainey
case, the plaintiff sued his employer alleging age discrimination and retaliation. An arbitration agreement existed between
the parties and the plaintiff conceded that he was obligated to submit the dispute to arbitration but asked the court to stay
the case rather than dismiss it. The defendant filed a motion to compel arbitration and to dismiss the case with prejudice,
which the district court granted. Rainey, 779 F. Appx. at 258.
On appeal of the dismissal with prejudice, the Fifth Circuit said, “Furthermore, dismissal, as opposed to a stay
pending arbitration is proper when all of the issues raised in the district court must be submitted to arbitration. Id. at 259
(quoting Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992) (internal quotations omitted).
Likewise, in Griggs v. S.G.E. Mgmt., L.L.C., 905 F.3d 835 (5th Cir. 2018), the Fifth Circuit again acknowledged the split
among the circuits but stated, “Some circuits have held that district courts must stay a case when all claims are submitted
to arbitration, but this circuit allows district courts to dismiss such claims outright.” Griggs, 905 F.3d at 839.
In contrast, the majority of federal circuits (the Second, Third, Sixth, Seventh, Tenth, and Eleventh circuits) only
permit the district courts to stay a case pending the outcome of the arbitration. For example, Katz v. Celco P’ship, 794
F.3d 341(2d Cir. 2015), acknowledged that “the Courts of Appeal are about evenly divided as to whether a stay must be
issued following a referral to arbitration or whether the district courts enjoy the discretion to dismiss the case.” Katz, 794
F.3d. at 345. In a case truly prescient of the Smith decision, the Court of Appeals, Second Circuit examined the text,
structure and underlying policy of the FAA to conclude that the FAA requires a stay, recognizing “that efficient docket
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management is often the basis for dismissing a wholly arbitrable matter.” Id. at 346. While district courts have “an
inherent authority to manage their dockets. . .. that authority cannot trump a statutory mandate like Section 3 of the FAA,
that clearly removes such discretion.” Id.
Closer to home, the Court of Appeals, Seventh Circuit has said that “the proper course of action when a party seeks
to invoke an arbitration clause is to stay the proceedings pending arbitration rather than to dismiss outright.” Cont’l Cas.
v. Am. Nat’l Ins. Co., 417 F.3d 727, 733, n. 7 (7th Cir. 2004) (internal citations omitted).
The Seventh Circuit also holds that a stay rather than a dismissal is especially appropriate where the case co-mingles
claims subject to an arbitration agreement with non-arbitrable claims, since a stay facilitates a return to the district court
following arbitration to resolve the remaining claims. Omni Tech Corp. v. UPC Solutions Sales, LLC, 432 F.3d 787 (7th
Cir. 2005).
For example, in Aggarao v. MOL Ship Mgmt Co. Ltd., 675 F.3d 355 (4th Cir. 2012), the plaintiff, a severely injured
seaman, had to submit his injury claims to arbitration because his employment agreement foreclosed a federal suit for
such actions. In addition to his personal injury claims, however, the plaintiff also asserted a public policy claim that was
not foreclosed by the arbitration agreement. The Court of Appeals, Fourth Circuit considered the plaintiff’s options to
preserve his public policy claims while his injury case went to arbitration, saying: “[a]lthough plaintiff could conceivably
initiate a new court proceeding following arbitration, staying this action removes any doubt that. . .. he will have a full
opportunity for judicial review of his public policy [claims].” Aggarao, 675 F.3d at 379-80.
To resolve this conflict, the Supreme Court in Smith examined the text of the FAA, specifically section 3 of the
statute, which entitles litigants to a “stay of proceedings where the issue therein is referrable to arbitration.” Smith, 601
U.S. at 476. Section 3 states that the district court “shall on application of one of the parties stay the action until
arbitration” is concluded. Id. (emphasis added). Focusing on the words “shall” and “stay,” the Court, citing prior Supreme
Court precedent, said “the use of the word ‘shall’ ‘creates an obligation impervious to judicial discretion.’” Id. (citing
Lexicon, Inc. v. Millberg, Weiss, Bershad, Hynes & Lerach, 523 U.S. 26, 35 (1998)).
The Court contrasted the word “shall” with the word “may” and said that, whereas “may” implies the existence of
judicial discretion, the word “shall” “in neighboring sections of the FAA created a mandatory obligation that leaves no
place for the existence of discretion by a district court.” Id. (citing Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218
(1985)).
Succinctly stating this interpretation of section 3 of the FAA, the Court said, “Just as ‘shall’ means ‘shall,’ ‘stay’
means ‘stay.’” Id. at 477.
The Court noted that staying the action rather than dismissing it “ensures that the parties can return to federal court
if arbitration breaks down or fails to resolve the dispute” whereas “[t]hat return ticket is not available if the court dismisses
the suit rather than staying it.” Id.
Lastly, the Court rejected the respondent’s argument that, notwithstanding the FAA’s statutory language, district
courts retain inherent authority to dismiss proceedings subject to arbitration. The Court interpreted this argument as an
“attempt to evade the plain meaning of the text,” citing cases which hold that “the inherent powers of the court may be
controlled or overruled by statute or rule.” Smith, 601 U.S. at 477 (citing Degan v. United States, 517 U.S. 820, 823
(1996)). Summarizing the holding of the case, Justice Sotomayor, speaking for a unanimous Court, said that “[w]hen a
district court finds that a lawsuit involves an arbitrable dispute, and a party requests a stay pending arbitration, section 3
of the FAA compels the court to stay the proceeding.” Id. at 478.
Therefore, if you are handling a case in the district courts within the Seventh Circuit, and you find that the plaintiff’s
claims are subject to a valid arbitration agreement, you may move the court for an order compelling arbitration, but the
court will issue a stay of the case pending the outcome of the arbitration rather than dismissing it.
IDC Quarterly Volume 34, Number 4 (34.4.4) | Page 3
Illinois Defense Counsel | www.idc.law | 800-232-0169
Statements or expression of opinions in this publication are those of the authors and not necessarily those of the association. IDC Quarterly, Volume 34,
Number 4. © 2024. Illinois Defense Counsel. All Rights Reserved. Reproduction in whole or in part without permission is prohibited.

About the Author

William G. Beatty recently retired from the Chicago law firm of Johnson & Bell, Ltd. where he practiced for 45 years,
primarily in product liability and employment law. Mr. Beatty is a past member of the IDC’s Board of Directors and is a
past recipient of the IDC’s Presidents Award. He was instrumental in the formation of the Employment Law Committee,
has chaired the annual meeting and has written frequently for the IDC Quarterly.

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