The Supreme Court issued a decision today in a case named Smith, et al. v. Spizzirri, et al., that has significant import for the franchise community. Many, if not the vast majority of, franchise agreements contain clauses requiring the arbitration of disputes. Franchise companies choose arbitration because they consider it to be more convenient, to yield consistent results, and to be cost effective.

Despite these advantages to arbitration, there remained some significant questions regarding what happens when a party tried to first bring its claims in federal district court as opposed to arbitration. In particular, some district courts dismissed the court case when enforcing arbitration clauses while others stayed the court case, meaning the case was not active, but still pending. There were disagreements among lower courts respecting the correct choice.

Today’s decision resolved the dismiss versus stay clash and clarified several other points. In fact, there are three key takeaways in Smith v. Spizzirri:

  • “Shall” means shall. That is, when a district court decides that any issue in a court case is subject to arbitration and any party requests a stay, Section 3 of the Federal Arbitration Act (“FAA”) requires the district court to stay – not dismiss – the case until the arbitration is complete. Justice Sotomayor, writing for a unanimous Supreme Court, stated that Section 3 “creates an obligation impervious to judicial discretion.”
  • Immediate appeal rights apply only in certain circumstances. The Supreme Court concluded that Section 16 of the FAA authorizes an immediate appeal only when a motion to compel arbitration is denied, and not when arbitration is compelled. However, if a district court dismisses a suit subject to arbitration, that dismissal triggers the right to an immediate appeal.
  • District Courts retain “supervisory role”. The Court also confirmed that the district courts retain “supervisory role” jurisdiction even after sending a court case to arbitration, including assistance in the appointment of an arbitrator, if necessary, enforcing subpoenas issued by arbitrators, and facilitating recovery on arbitral awards.

While this decision clarifies the rules before the federal district courts, in should be noted that state rules remain all over the place. Nonetheless, the Supreme Court’s decision clarifying (a) that cases sent by federal judges to arbitration should be stayed not dismissed, (b) immediate appeal rights, and (c) the supervisory role of district court judges when cases are ordered to arbitration should be welcomed by all.