Courts Ordering Arbitration Should Stay Their Cases to Retain Jurisdiction: Amicus Brief

The U.S. Supreme Court has presumed that enforcement of arbitration agreements is beneficial, resulting in dispute resolution at lower cost and with faster results, but many Americans are also facing "greater unfairness" in the arbitration process, said the American Association for Justice in an amicus brief Monday (docket 22-1218) in support of neither party in Smith v. Spizzirri.

Petitioners Wendy Smith, Michelle Martinez and Kenneth Turner in Smith v. Spizzirri are asking SCOTUS to reverse the 9th U.S. Circuit Appeals Court’s affirmation of the district court’s dismissal of their case after ordering their claims to arbitration, saying the case presents an important question of “statutory construction” under the Federal Arbitration Act. The case is being watched closely to determine whether the FAA’s Section 3 requires district courts to stay a lawsuit pending arbitration, or whether they have discretion to dismiss when all claims are subject to arbitration.

One of the starker recent examples: the three plaintiff-appellants in the 9th Circuit false-advertising appeal against SiriusXM joined with that company in a stipulation Feb. 16 to ask the court to stay that appeal, pending the outcome in Smith v. Spizzirri (see 2402200002). The SiriusXM plaintiff-appellants are challenging the district court decision ordering their claims to arbitration. The cross-appeal is challenging the district court's ruling to dismiss, rather than stay the case, pending the outcome of the arbitration, enabling the plaintiffs to immediately appeal to the 9th Circuit.

In the modern marketplace, consumer and employment contracts, and the arbitration agreements contained within them, are almost universally “contracts of adhesion,” said the American Association for Justice amicus brief. They are drafted entirely by corporations who present them to customers and workers on a take-it-or-leave-it basis with no opportunity to alter or negotiate their terms, it said. Some corporations take advantage of this power imbalance to “game” the arbitration to gain unfair advantages, it said.

The FAA provides a “solid textual basis” for district courts to play a role in ensuring that corporations “construct and perform their adhesive arbitration agreements in good faith,” said the brief. That all of a plaintiff’s claims have been referred to arbitration doesn’t mean “there is no further role for the district court,” it said.

If, for example, it’s clear to the district court that the arbitration won’t actually take place due to the unfair conditions imposed by the corporation’s adhesive arbitration agreement, the court “should recognize that its order compelling arbitration effectively ends the action and is, as a practical matter, a final order,” said the brief. Entry of a dismissal “enables the individual to obtain their only opportunity to test the validity of those conditions by appellate judicial review,” it said.

District courts that order arbitration under the FAA “should stay judicial proceedings to retain jurisdiction to oversee the arbitration,” said the brief. They should dismiss the action where it’s clear the arbitration won’t occur, allowing for immediate appellate judicial review, it said.

Adhesive arbitration agreements “are essentially contracts between hens and foxes,” said the brief. Foxes aren’t “reliable guardians of their own compliance with settled principles of good faith in the creation and performance of contracts,” it said. When district courts grant orders compelling arbitration, “they must be mindful of this power imbalance and preserve the judiciary’s role in preventing abusive gamesmanship,” it said.

The FAA provides the basis for courts both to protect the rights of weaker parties to arbitration agreements and to further the statute's objectives, said the brief. The question that’s “squarely presented” in Smith v. Spizzirri is how the district court is to determine in a particular case whether an order compelling arbitration should be accompanied by an “interlocutory stay of the action,” or a final order of dismissal, it said. The association submits “that the answer is clear,” it said.

District courts “should act to preserve the availability of judicial protection” of the rights of the weaker party by remedying the bad-faith failure of the dominant party to proceed with the arbitration, said the brief. That will also afford “appellate review of conditions imposed on the weaker party for the purpose of preventing a fair arbitration altogether,” it said.