By: Mark S. Abrajano, Smith Currie Oles LLP
June 5, 2024

The United States Supreme Court has held that a U.S. District Court must stay a case, rather than dismiss it, if the parties enter arbitration under the Federal Arbitration Act (“FAA”). The FAA states 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 [the] arbitration” has concluded. Despite this, when faced with a request to stay litigation pending arbitration, numerous courts have instead dismissed the case without prejudice. These Courts have disregarded the plain text of the FAA, instead relying on the Court’s inherent authority to dismiss cases (when all claims are arbitrable) and forcing litigants to re-file their lawsuit to enforce an arbitration subpoena or facilitate recovery of a subsequent arbitration award.

Inconsistent rulings from both trial and appellate courts created uncertainty for litigants and their counsel, but the Supreme Court has finally weighed in on this issue. In a unanimous decision in Smith v. Spizzirri, the Supreme Court held that “shall means shall” and “stay means stay.” This holding means that courts applying the FAA can no longer dismiss a case pending arbitration and must instead stay the litigation until the arbitration concludes. Under those circumstances, the FAA’s plain language overrides any inherent authority of the courts to simply dismiss those lawsuits unless some other reason exists, such as lack of jurisdiction. This opinion is also in line with the Supreme Court’s June 23, 2023, decision directing federal courts to stay litigation, as opposed to dismissing, when a party is appealing the court’s denial of a motion to compel arbitration.

Although not addressed in Smith, it is likely that the FAA’s plain language would also override conflicting procedural terms of an arbitration provision, such as requirements that lawsuits be voluntarily dismissed without prejudice after arbitration is demanded. This opinion serves as a reminder to both litigants and courts that statutes must be carefully read and faithfully applied, regardless of local norms and negotiated agreements. While arbitration panels and specialized courts maintain expertise in specific areas that may accommodate prevailing industry norms, trial and appellate judges will likely have extensive experience with statutory interpretation, where the text, structure, and purpose of a statute govern over industry or local norms.

Smith v. Spizzirri’s holding may appear obvious on its face – that “shall means shall” and “stay means stay” – but the Supreme Court chose to accept the appeal to resolve the Circuit split on interpretation of the plain text of the FAA. What may appear obvious in certain respects can sometimes be a trap for unsuspecting litigants. To avoid surprises, businesses should make sure to review and update their contracts to ensure vital clauses are indeed enforceable, as opposed to preempted or overridden by state or federal statutes. Not only statutes, but executive orders and federal agency guidelines can have immediate and dramatic impacts on common types of contracts. Whether it be new rules from the Federal Trade Commission that ban non-compete agreements, new state laws that invalidate pay-if-paid provisions, or Supreme Court decisions that re-write arbitration provisions, businesses must strive to stay aware of the ever-changing legal landscape in which they operate.

The author acknowledges and appreciates the significant contributions of Smith, Currie Oles legal intern Cortland Walton, in developing this article.

Smith Currie Oles provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.