On July 28, 2015, in Katz v. Cellco P'ship, the US Court of Appeals for the Second Circuit held that the Federal Arbitration Act (FAA) mandates a stay of proceedings, instead of a discretionary dismissal, when claims are referred to arbitration (794 F.3d 341 (2d Cir. 2015)).

Katz sued Verizon for breach of contract and consumer fraud claims on behalf of a putative class of New York-area Verizon subscribers. His contract with Verizon included an arbitration clause that invoked the FAA and required arbitration of disputes arising from the agreement or from Verizon's wireless services.

Verizon moved to compel arbitration and stay the proceedings. Katz argued, in contrast, that the action should be dismissed if arbitration was compelled. The district court ruled that Katz's claims were arbitrable and dismissed the action. The court noted that whether district courts have discretion to dismiss the action is an open question in the Second Circuit.

The Second Circuit agreed with the district court as to the arbitrability of Katz's claims, but reversed the district court's dismissal of the action. In settling the question of whether district courts have the discretion to dismiss an action after claims have been referred to arbitration or whether they must stay the proceedings, the Second Circuit joined the US Courts of Appeals for the Third, Seventh, Tenth and Eleventh Circuits in holding that a stay must be entered after claims are referred to arbitration. By contrast, the US Courts of Appeals for the First, Fifth and Ninth Circuits have suggested that district courts have discretion to dismiss.

In its analysis, the Second Circuit looked at the plain language of the FAA, which states that courts "shall" stay the proceedings pending arbitration. Additionally, the court found that allowing courts the discretion to dismiss an action would grant appellate rights proscribed by Congress. The FAA explicitly denies the right to an immediate appeal from an interlocutory order that compels arbitration or stays proceedings, but the dismissal of an arbitrable matter effectively converts an otherwise unappealable interlocutory stay order into an appealable final dismissal order. The court also noted that efficient docket management is not a valid reason to trump the statutory mandate in the FAA. Finding that the FAA requires a stay of proceedings when all the claims have been referred to arbitration and a stay has been requested, the Second Circuit affirmed in part and vacated and remanded in part for further proceedings in the district court.

Counsel should keep in mind that the district court does not have the discretion to dismiss a case that has been referred to arbitration in the Second Circuit.