Justices’ Latest Arbitration Case Threatens Litigation Strategy

An appellate strategy to keep employment disputes in court is in jeopardy now that the US Supreme Court is poised to decide whether federal judges can dismiss or instead must pause cases that they send to arbitration.

The justices’ recent move to review this question ultimately could resolve a split among 10 federal appellate courts, four of which allow dismissal of lawsuits when the underlying allegations are subject to mandatory arbitration. The other six appeals courts stay cases until the outcome of private dispute resolution proceedings.

The dispute at the heart of the case involves allegations of worker misclassification and wage-and-hour violations that a group of delivery drivers lodged against delivery service company IntelliQuick Delivery Inc. The US Court of Appeals for the Ninth Circuit last March held that dismissal of the case in favor of arbitration was proper, rather than simply putting it on hold.

A Supreme Court decision overturning that ruling would disadvantage workers who are attacking the enforceability of arbitration agreements, employment attorneys said.

When a court sends a case to arbitration, a plaintiff whose case is dismissed would be able file an immediate appeal to keep the case in court, said Patrick Bannon, a partner at management-side firm Seyfarth Shaw LLP.

“If you’re an opponent of arbitration and think it’s unfair and employers shouldn’t be able to force people out of court, then you do want the court to be able to dismiss,” Bannon said. “Because the appellate court would decide whether the case really should be arbitrated or not,” the arbitrator won’t step in until the threshold question is resolved, he said.

But plaintiffs’ attorney Aashish Desai, managing partner at Desai Law Firm P.C., has misgivings about using a dismissal order to file an immediate appeal.

If a worker at the district court level unsuccessfully challenged a motion to compel arbitration, they could still “have a shot” in reaching a settlement in the underlying case at arbitration, he said.

“Appealing for 18 months and getting the same answer that the district court gave you doesn’t help or move the needle at all,” Desai said. “I’m not going to appeal an order I can’t win.”

Textualism Rules

Section 3 of the Federal Arbitration Act, which governs the enforcement of arbitration agreements, says that a court referring a case to arbitration “shall on application of one of the parties stay the trial of the action until such arbitration has been had.”

In the case the Supreme Court took up, IntelliQuick and the drivers all agreed that the case is subject to arbitration. But they disagreed over whether the district court has the discretion to dismiss or stay the drivers’ allegations that the company improperly classified them as independent contractors who aren’t entitled to minimum wage, overtime, and paid sick leave under federal and Arizona state law.

The drivers insisted in their high court petition that the case must be placed on hold as the FAA requires. The company didn’t dispute the law’s mandate, but maintained that Ninth Circuit precedent gives judges the discretion to grant a dismissal instead.

Both worker- and management-side attorneys predict the Supreme Court will rule in favor of a stay because doing so would be in line with the plain text of the law, which generally favors arbitration.

Moreover, the court is dominated by justices who adhere to textualism, a method of statutory interpretation that relies on the text of a law over other tools like legislative history, they said.

The justices will follow the “literal text of Section 3 that you have to stay pending arbitration,” Desai said.

The court’s majority is pro-arbitration, and it has a great tendency of “wanting arbitration to be a real alternative to litigation,” he said.

Judicial Burden

Ryan Baker, a partner at Waymaker LLP who represents both plaintiffs and defendants, said this case “is a battle between making remedies available to litigants versus the administrative cost or burden on the judicial system.”

A stay pending arbitration can benefit both workers and employers because it allows them to file status reports to update the presiding judge on the progress of the out-of-court proceeding and to potentially resolve any problems with arbitration that may arise, he said.

“But it may make sense” in some cases for claims subject to arbitration to be dismissed in their entirety. For example, filing status reports can stretch judicial resources, and both parties would incur additional legal expenses, Baker said.

“It can be a waste of the court’s time,” he said. “The whole point of arbitration is to be out of court.”

The case is Smith v. Spizzirri, U.S., No. 22-1218.