Weighing in on an issue that has divided the federal courts of appeals, the Second Circuit has held that under the Federal Arbitration Act (FAA), a court that grants a motion to compel arbitration of all claims must stay the action pending the completion of arbitration rather than dismissing it. The decision is important because a stay prevents the party opposing arbitration from immediately appealing the grant of the motion to compel.

The defendant in Katz v. Cellco Partnership filed a motion to compel arbitration and to stay litigation in response to a class action complaint filed by the plaintiff. The district court granted the motion, compelling arbitration of all claims, but dismissed the action rather than staying it. On appeal, the Second Circuit affirmed the order compelling arbitration, holding that the district court properly rejected the plaintiff’s argument that compelling arbitration of his state law claims pursuant to the FAA was an improper delegation of Article III power to a non-Article III forum in violation of the U.S. Constitution. Among other things, the court concluded, the plaintiff waived his personal right to an Article III forum by agreeing to arbitrate. However, the Second Circuit vacated the district court’s dismissal of the action, holding that the FAA requires a stay of proceedings when all claims are referred to arbitration and a stay has been requested.

The Second Circuit acknowledged that the “Courts of Appeals are about evenly divided” on the issue and that the Supreme Court has not decided it. It observed that the Third, Seventh, 10th and 11th Circuits have held or implied that a stay must be entered, while the First, Fifth and Ninth Circuits have indicated that district courts enjoy the discretion to dismiss the action. The Second Circuit concluded that a stay of the action rather than a dismissal is more consistent with the language of the FAA (which provides that a court “shall” stay the action) and with the FAA’s pro-arbitration policy of moving the parties out of court and into arbitration as quickly and easily as possible. Under the FAA, a stay enables parties to proceed to arbitration directly, whereas a dismissal allows the party opposing arbitration to file an immediate appeal, thereby “provoking additional litigation,” delaying the arbitration. 

Courts that permit dismissal of a wholly arbitrable matter do so based on the rationale that dismissal promotes efficient docket management. Nevertheless, the Second Circuit concluded, courts’ inherent authority to manage their own dockets is outweighed by “the text, structure, and underlying policy of the FAA” which “mandate a stay of proceedings when all of the claims in an action have been referred to arbitration and a stay requested.”

The Second Circuit’s decision underscores the need for practitioners to ascertain the law applicable in the jurisdiction in which the motion to compel arbitration is filed, since whether an action is stayed or dismissed can have significant practical and strategic consequences which should be analyzed before the motion is even filed.

Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com.

Copyright © 2015 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.





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