Smith, et al., v. Spizzirri, et al. (United States Supreme Court, on the merits)
NELF has filed an amicus merits-stage brief in support of the respondents in this case. At issue is whether Section 3 of the Federal Arbitration Act (FAA) requires a federal court, upon a party’s application, to stay a suit that belongs entirely in arbitration under the parties’ agreement, or whether the court may, instead, dismiss the suit and compel arbitration. Section 3 provides, in relevant part:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, 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.
9 U.S.C. § 3 (emphasis added).
NELF is committed to the use of arbitration as a private contractual alternative to litigation for the resolution of disputes. To that end, NELF seeks to uphold the FAA’s mandate that arbitration agreements should be enforced according to their terms. Therefore, when the parties’ agreement has delegated all of the issues in a lawsuit to arbitration, as in this case, a court should dismiss the suit and compel arbitration.
In its brief, NELF argues that when the parties’ arbitration agreement delegates all issues in a suit to arbitration, as in this case, a court should dismiss the suit and compel arbitration. Section 3 of the Federal Arbitration Act (FAA) applies only when an arbitration agreement is partial in scope and, therefore, bifurcates the issues between arbitration and a “trial of the action” in court.
In particular, when the agreement refers some issues to arbitration but leaves other issues in court, and a party files an application for a stay, Section 3 provides that the court “shall stay the trial of the action until such arbitration has been had.” This language clearly indicates that a court will adjudicate the merits of the parties’ nonarbitrable claims after the parties have resolved their arbitrable claims. Section 3 ensures the orderly resolution of arbitrable and nonarbitrable claims in a bifurcated suit.
When, however, the parties have referred all issues in a lawsuit to arbitration, as in this case, Section 3 does not apply. In such a case, no issues remain in court for a “trial of the action.” To conclude otherwise would render this key statutory language superfluous.
Section 3’s granular “any issue” language differs from the expansive language of Section 4, which allows a federal court to compel arbitration when it would have jurisdiction to decide the parties’ entire controversy. This pointed textual difference must mean that a Section 3 stay does not apply when the parties’ entire dispute is arbitrable.
Since Section 3 does not apply when the whole suit belongs in arbitration, the FAA leaves undisturbed a federal court’s power to dismiss the suit and compel arbitration. Dismissal is appropriate because the court has declined to exercise its jurisdiction to decide the underlying arbitrable controversy, in order to enforce the parties’ arbitration agreement and the FAA’s mandate.
When Congress enacted the FAA in 1925, arbitration was generally limited to the resolution of ordinary contract disputes between merchants, decided by nonlawyer fellow merchants who applied industry norms, not legal principles. Accordingly, arbitration was deemed to be unsuitable for resolving complex legal issues. Therefore, it would have made sense at the time for parties to agree to keep those legal issues in court, while agreeing to arbitrate their standard business disputes.
Section 3 of the FAA apparently reflects the limited scope of arbitration as it was then practiced. In Section 3, Congress provided for the orderly resolution of arbitrable and nonarbitrable issues in a suit that was subject to a limited arbitration agreement.
Contrary to the petitioners’ arguments, a federal court’s stay of a suit that the court has sent entirely to arbitration cannot provide the necessary “independent jurisdictional basis” that would allow the court to entertain an “FAA-created arbitration action.” In Badgerow v. Walters, 596 U.S. 1 (2022), the Court held that a party seeking to confirm or vacate an arbitral award under the FAA must establish a jurisdictional basis on “the face of the application itself.” The Court made clear that only the distinctive language of Section 4 (a petition to compel arbitration) allows a court to “look through” the petition to find a jurisdictional basis in the underlying federal suit.
The Court’s holding in Badgerow should apply regardless of whether the FAA application is a freestanding action or whether the application is filed in a pending suit that a court has stayed, while sending all claims to arbitration. In neither case has Congress authorized resort to “the controversy between the parties” to establish jurisdiction over the FAA application, as Congress has expressly done in Section 4.
Moreover, when a court has stayed a suit but has submitted the entire underlying controversy to arbitration, the court has relinquished its jurisdiction to decide that arbitrable controversy. This differs markedly from the ordinary motion arising out of an ordinary civil suit, in which the court’s exercise of jurisdiction to decide the pending suit anchors its jurisdiction to decide the motion.
Nor does the text of Section 3 provide that a federal court may retain jurisdiction over a case that it has sent entirely to arbitration. By contrast, Section 8 of the FAA, which applies to arbitrable admiralty disputes, provides that a federal court “shall retain jurisdiction to enter its decree upon the [arbitral] award,” after it has exercised its “jurisdiction to direct the parties to proceed with the arbitration” of their admiralty dispute. The absence of any such jurisdictional language in Section 3 must be a deliberate policy choice of Congress.