USA: Second Circuit requires stay rather than dismissal after compelling arbitration

In a July 28, 2015 decision in Katz v. Cellco Partnership, dba Verizon Wireless, 794 F.3d 341 (2d Cir. 2015), the U.S. Court of Appeals for the Second Circuit confirmed that a court should stay, rather than dismiss, a proceeding upon a party’s request after granting a motion to compel arbitration.

Plaintiff Michael Katz brought suit in the U.S. District Court for the Southern District of New York asserting state law claims for breach of contract and consumer fraud against Verizon Wireless on behalf of a putative class of New York-area Verizon cell phone subscribers. Plaintiff claimed that Defendant made deceptive representations regarding a monthly administrative charge that he claimed was actually a concealed rate increase. Seeking to avoid the arbitration clause in his wireless customer agreement, Plaintiff also sought a declaratory judgment that the application of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”) to his state law claims was unconstitutional.

Plaintiff moved for partial summary judgment on his declaratory judgment claim on the constitutionality of the arbitration agreement. Defendant responded with a motion to compel arbitration and to stay the proceedings. Plaintiff argued that, should the court decide to compel arbitration, the case should be dismissed instead of stayed. The district court denied Plaintiff’s motion for declaratory judgment and confirmed that application of the FAA to Plaintiff’s claims was constitutional. It granted Defendant’s motion to compel arbitration as to all claims, but dismissed the proceedings with prejudice, rather than entering a stay.

On appeal, the Second Circuit first adopted the district court’s finding of constitutionality and affirmed without analysis the denial of Plaintiff’s motion for declaratory judgment. It also affirmed the grant of the motion to compel arbitration. Next, the court weighed what it deemed the “unsettled” question of whether the case should have been stayed or dismissed entirely. Noting that the Supreme Court had not yet addressed the issue, despite a circuit split, the Second Circuit proceeded to analyze the text, structure, and underlying policy of the FAA.

First, the Second Circuit recognized that the language of Section 3 of the FAA was mandatory. Specifically, that section provides that a court “shall upon application of one of the parties stay the trial of the action until such arbitration has been had . . . .” The court reasoned that nothing else in the FAA rendered this plain language discretionary.

Second, the Second Circuit reasoned that a mandatory stay “comports with the FAA’s statutory scheme and pro-arbitration policy.” As one example, the FAA prohibits appeals from an order compelling arbitration. Dismissing a case upon compelling arbitration would create a final order that was appealable, and conflict with this rule. Moreover, a stay effectuates the policy of moving parties into arbitration and out of court quickly by “preclud[ing] judicial interference until there is a final award.”

Finally, the court concluded that the district court’s inherent authority to manage its docket efficiently did not justify dismissal instead of a stay. Such authority cannot trump the FAA’s explicit statutory mandate.

Accordingly, the court concluded that a stay rather than dismissal is required when a matter is referred to arbitration and a stay is requested. The district court’s opinion was thus reversed and remanded.

A version of this post originally appeared in the September 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.