The Second Circuit recently addressed a procedural issue regarding the Federal Arbitration Act: if a court finds that all claims in a lawsuit are subject to arbitration, does the court have discretion to dismiss the lawsuit, or must the court enter a stay of the litigation until arbitration is completed? Some circuits have suggested that district courts have discretion to dismiss the action, but the Second Circuit held the FAA requires district courts to stay the action instead. See Katz v. Cellco Partnership, No. 14-138 (2d Cir. July 28, 2015) (click here for a copy of the decision).
The Second Circuit relied on the text, structure, and policy of the FAA to reach its result. First, the text of section 3 of the FAA contains mandatory language that courts “shall on application of one of the parties stay the trial of the action” if a filed lawsuit contains issues referable to arbitration. Second, the appellate structure of the FAA indicates courts must stay the proceedings. The appellate provisions of the FAA allow for immediate, interlocutory appeals of court orders refusing to compel arbitration. The Second Circuit explained that if immediate, interlocutory appeals of such orders were not available, the parties would have to litigate the merits of their claims, and then an appeal of the arbitrability issue would make little sense. The FAA also provides that no interlocutory appeals are allowed for a stay of litigation under section 3, and turning to policy, the Second Circuit explained that such a denial of interlocutory appeals is consistent with the FAA’s policy of swiftly moving parties into arbitration. In light of this policy, the Second Circuit explained why district courts do not have discretion to dismiss the action when the FAA requires a stay:
“The dismissal of an arbitrable matter that properly should have been stayed effectively converts an otherwise-unappealable interlocutory stay order into an appealable final dismissal order. Affording judges such discretion would empower them to confer appellate rights expressly proscribed by Congress.”
The main impact of this Second Circuit decision is that, at least in the Second Circuit, there will be fewer appeals of court decisions finding a binding arbitration agreement.
The plaintiff also raised fascinating constitutional challenges to the application of the FAA in this case, such as compelling arbitration in this case would amount to an improper delegation of Article III Judicial Power, but the Second Circuit’s opinion did not engage with these arguments.