On January 12, 2024, the U.S. Supreme Court granted certiorari in Smith, et al. v. Spizzirri, et al., No. 22-1218 to consider whether a district court must stay a case 鈥� rather than dismiss it 鈥� when presented with an enforceable arbitration agreement. The Court鈥檚 review will likely resolve a split among the U.S. Circuit Courts of Appeal on this issue.

In Spizzirri, a group of delivery driver plaintiffs sued their employer in an Arizona state court, alleging numerous violations of state and federal employment laws. After the defendant removed the case to federal court, it sought to compel arbitration and dismiss the lawsuit altogether. The parties ultimately agreed that all claims under the lawsuit were subject to arbitration. Plaintiffs, however, strongly opposed dismissal of their suit and argued that the matter must be stayed according to the plain language of Section 3 of the Federal Arbitration Act (FAA). Section 3 provides that, if an issue is subject to arbitration, the court 鈥渟hall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement . . . 鈥� 9 U.S.C.A. 搂 3 (emphasis added). Despite this language, the District Court for the District of Arizona dismissed the Plaintiffs鈥� lawsuit.

On appeal, a panel for the Ninth Circuit considered 鈥渨hether the [FAA] requires a district court to stay a lawsuit pending arbitration, or whether a district court has discretion to dismiss when all claims are subject to arbitration鈥� and affirmed the dismissal. The Ninth Circuit evaluated the split in authority within the Circuit Courts of Appeal. The First, Fifth, and Eighth Circuits follow the minority view and have ruled that the FAA affords district courts the discretion to dismiss, rather than stay, lawsuits pending arbitration. The majority approach, followed by the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits, requires district courts to stay a case when presented with a valid arbitration agreement. The Ninth Circuit ultimately sided with the minority view.

The Supreme Court鈥檚 decision will impact strategic choices and procedures surrounding arbitration. When a case is stayed pending arbitration, rather than dismissed, there is no immediate right to appeal the order compelling arbitration. Unless a discretionary appeal is permitted, the party seeking to challenge the order compelling arbitration generally must wait until the arbitration is resolved. In contrast, a dismissal is a final decision subject to immediate appeal. As some appellate courts have recognized, a stay (compared to a dismissal) more effectively transitions arbitrable claims out of federal litigation. An immediate appeal, when exercised, can delay arbitration, increase litigation costs, and promote gamesmanship. These run counter to the legislative purpose of the FAA, which was enacted in response to the delay and expense of litigation. A dismissal also divests federal courts of jurisdiction to confirm or vacate an award, forcing prevailing parties to instead pursue enforcement in state courts, which can be tedious and require additional costs that would otherwise be avoided.

With this granting of cert in Spizzirri, the Supreme Court signals its continued interest in arbitration-related issues. Spizzirri marks the thirdFAA-related case the Supreme Court will hear this term alone, with the Court having considered several petitions for arbitration-related issues over the past several years. This term, the Supreme Court will also evaluate the FAA鈥檚 exemption for transportation workers in Bissonnette v. LePage Bakeries Park St., LLC, and whether a court or an arbitrator should decide certain arbitration issues in Coinbase, Inc. v. Suski. Oral arguments in Spizzirri are scheduled for April 22, 2024. Subscribe to 麻豆直播鈥檚 Consumer Class Defense Counsel blog to stay current on these and related developments impacting arbitration considerations.

On December 5, 2023, the Ninth Circuit in Bielski, et al. v. Coinbase, Inc., No. 22-15566 (9th Cir. 2023) concluded that federal courts can look to the parties鈥� agreement as a whole when determining whether the delegation provision of an arbitration agreement is enforceable and held that the at-issue delegation provision was not unconscionable.

Abraham Bielski filed a putative class action against Coinbase in the U.S. District Court for the Northern District of California under the Electronic Funds Transfer Act, 15 U.S.C. 搂搂 1693鈥�1693r, and Regulation E, 12 C.F.R. 搂搂 1005.1鈥�1005.20, alleging that Coinbase failed to investigate the unauthorized transfer of funds and replaced funds fraudulently taken from users鈥� accounts. Coinbase moved to compel arbitration based on its user agreement, which contained an arbitration agreement with a delegation provision. The latter delegated to the arbitrator any dispute arising out of the agreement. Bielski argued that the delegation provision and the arbitration agreement were unenforceable. The district court agreed, denying the motion to compel arbitration and finding both the delegation provision and the arbitration agreement unconscionable and inseverable.

The Ninth Circuit reversed the district court鈥檚 denial of Coinbase鈥檚 motion to compel arbitration, holding that the district court erred in concluding the delegation provision was unconscionable. Notably, the Ninth Circuit utilized a three-prong analysis as a matter of first impression, as the Court had not previously set forth what a party must do to specifically challenge a delegation provision and what a court may consider when evaluating the enforceability of a delegation provision. Finally, the Court applied those standards to evaluate the enforceability of Coinbase鈥檚 delegation provision.

As a threshold issue, the Ninth Circuit concluded that, where a party specifically challenges the delegation provision, the district court must consider the challenge before ordering compliance. A party resisting arbitration must state that it is challenging the delegation provision and make specific arguments attacking the provision. Agreeing with the Third and Fourth Circuits, the panel held that a party may use the same arguments to challenge both the delegation provision and the arbitration agreement, provided the party articulates why the argument invalidates each specific provision. Because Bielski specifically challenged the delegation provision, the district court correctly considered that challenge.

Next, the panel held that, in evaluating an unconscionability challenge to a delegation provision under California law, a court must be able to interpret that provision in the context of the arbitration agreement as a whole. This may require examining the underlying agreement. The panel determined that the district court correctly considered the whole context surrounding the delegation provision in its analysis of the provision鈥檚 validity.

Finally, and critically, the panel held that the delegation provision in context was not unconscionable. Bielski argued the provision was unconscionable because it was an adhesion contract, lacked mutuality, and imposed one-sided, onerous pre-arbitration procedures on users. The Ninth Circuit disagreed and reversed, finding that 鈥� although Bielski established a low level of procedural and substantive unconscionability 鈥� there was nothing in the delegation provision that was 鈥渙verly harsh, unduly oppressive, or unfairly one-sided鈥� 鈥渢o tip the scales to render the provision unconscionable.鈥�

The Ninth Circuit鈥檚 opinion in Bielski finally makes clear what a party must do to challenge a delegation provision and what a court may consider when evaluating such a challenge. But it also offers helpful insight for drafters of delegation and arbitration provisions: a party may assert the same or substantially similar arguments in challenging delegation and an arbitration agreement as a whole, so it is important to make sure that both are written in plain, concise, and inconspicuous terms. Drafters should also be conscious of the fact that, if a delegation provision refers to specifically defined terms or to the arbitration agreement as a whole, the court will need to look outside of the delegation provision itself and examine the question of unconscionability in the greater context of the entire arbitration agreement, including assessing whether or not other provisions of the arbitration agreement serve to render the delegation provision procedurally and/or substantively unconscionable. Although arbitration agreements are often fiercely contested in putative consumer class actions, reasoned practices for ensuring the enforceability of arbitration provisions generally will also serve to inform the enforceability of any related delegation provisions and may potentially help insulate the delegation provision from a successful challenge.