Second Circuit Clarifies That A District Court Must Stay, And May Not Dismiss, Arbitrable Claims Pending Arbitration

August.06.2015

​When a trial court determines that all of the claims before it must be arbitrated, does the court have discretion to dismiss the case or must it stay the case pending arbitration if one party has requested a stay? Widening a split among the Circuits, the U.S. Court of Appeals for the Second Circuit ruled on July 28, 2015 that Section 3 of the Federal Arbitration Act (also known as the "FAA") imposes a mandatory stay when all claims have been referred to arbitration and a party has requested a stay. Katz v. Cellco P'ship, No. 14-138, 2015 U.S. App. LEXIS 13055 (2nd. Cir. July 28, 2015). The Second Circuit's opinion, which overturned a ruling by Southern District Judge Briccetti dismissing the case, marks an important clarification of the law for practitioners in the Second Circuit, and underscores the disparate approaches to this issue among the Circuits. 

The Facts of the Case

In Katz, the plaintiff sued Verizon on behalf of a putative class of New York-area Verizon telephone subscribers, asserting breach of contract and consumer fraud claims arising out of a rate increase purportedly concealed as a monthly administrative charge. Katz's contract with Verizon incorporated the company's customer agreement, which contained a clause referring all disputes arising out of the agreement or Verizon's wireless services to arbitration. Verizon moved to compel arbitration and stay district court proceeding pending arbitration pursuant to Sections 3 and 4 of the FAA. Katz argued that if the court compelled arbitration, the action should be dismissed, not stayed. 

The District Court ruled that all of Katz's claims were arbitrable and dismissed the case. In so doing, the court noted that district courts in the Second Circuit were divided on whether a court has discretion to dismiss upon compelling arbitration, but stated that it agreed that dismissal was the proper remedy when all claims in a lawsuit are arbitrable. See Katz v. Cellco P'ship, No. 12-cv-9193, 2013 U.S. Dist. LEXIS 176784, at 42 (S.D.N.Y. Dec. 12, 2013). Both parties appealed, with Verizon seeking reversal of the District Court's decision to dismiss, rather than stay, the proceeding.

The Second Circuit's Ruling

In an opinion by Judge Wesley, the Second Circuit affirmed the ruling compelling arbitration, but reversed the District Court's dismissal of the action, resolving a split among district courts in the Circuit as to whether a stay or dismissal is appropriate where all claims have been referred to arbitration. 

The Court ruled that Section 3 of the FAA creates an obligation to order a stay, because its text states that, upon referring all claims to arbitration, courts "shall on application of one of the parties stay the trial of the action." 9 U.S.C. § 3 (emphasis added). In light of the word "shall," the Court held that this obligation is "impervious to judicial discretion." Moreover, the Court reasoned that a mandatory stay "comports with the FAA's statutory scheme and pro-arbitration policy." In particular, Section 16 of the FAA only permits appeal of an interlocutory order denying a motion to stay or compel pursuant to Sections 3 or 4 of the FAA, and expressly denies the right to an immediate appeal for an order compelling arbitration or staying proceedings pending arbitration. While acknowledging trial courts' interest in efficiently managing their dockets, the Court noted that affording judges discretion to dismiss matters in contravention of the FAA's plain language "would empower them to confer appellate rights expressly proscribed by Congress." Accordingly, the Court's ruling means that litigants in the Second Circuit that have successfully moved to stay in favor of arbitration are insulated from further litigation on issues of arbitrability during the pendency of the arbitration proceedings.   

As the Second Circuit acknowledged in Katz, the Circuits are divided on the issue, with the Seventh, Third, Tenth, Eleventh Circuits holding, or at least implying, that a stay is mandatory in light of the language of Section 3 of the FAA. The First, Fifth and Ninth Circuits have suggested that district courts may dismiss an action where all of the claims are arbitrable. The Supreme Court declined to address the issue in Green Tree Financial Corp. Alabama v. Randolph, 531 U.S. 79, 87 n.2 (2000). Moreover, practitioners in this area have often found widely disparate approaches among, and even within, the Circuits. For example, the Fourth Circuit recently acknowledged that two of its prior opinions are in tension on the matter, but declined to resolve the issue. See Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 376 (4th Cir. 2012). Furthermore, courts that have dismissed an action where all of the claims were found to be arbitrable have done so on the basis of Rule 12(b)(1), while others have dismissed on 12(b)(3) or 12(b)(6) grounds. See e.g., Atkins v. Louisville & Nashville R. Co., 819 F.2d 644, 647 (6th Cir. 1987) (dismissing on 12(b)(1) grounds); Cedars-Sinai Med. Ctr. v. Global Excel Mgmt., Inc., No. CV-09-3627, 2010 U.S. Dist. LEXIS 139848, at 25 (C.D. Cal. Mar. 19, 2010) (dismissing on 12(b)(3) grounds); Thinket Ink Info. Resources, Inc. v. Sun Microsystems, Inc., 368 F.3d 1053, 1060 (9th Cir. 2004) (dismissing on 12(b)(6) grounds). However, a common theme among courts that have dismissed, rather than stayed claims, is that staying a proceeding in which all claims are subject to arbitration would serve no useful purpose and simply clutter the docket. See, e.g, Reynolds v. de Silva, No. 09-Civ-9218,> 2010 U.S. Dist. LEXIS 18040, at 23 (S.D.N.Y. Feb. 24, 2010) ("It would be an inefficient use of the Court's docket to stay the action.").  In Katz, the Second Circuit expressly rejected that reasoning and held that the statutory mandate set out in Section 3 of the FAA trumps any interest in efficient docket management.

In sum, Katz represents an important clarification of the law in the Second Circuit and ensures that a party resisting a motion to stay under Section 3 of the FAA will no longer have a route to appeal an adverse ruling until after the arbitration proceedings are complete.