Second Circuit Clarifies That A District Court Must Stay, And May Not Dismiss, Arbitrable Claims Pending Arbitration

​When a trial court determines that all of the claims before it must be arbitrated, does the court have discretion to dismiss the case or must it stay the case pending arbitration if one party has requested a stay? Widening a split among the Circuits, the U.S. Court of Appeals for the Second Circuit ruled on July 28, 2015 that Section 3 of the Federal Arbitration Act (also known as the "FAA") imposes a mandatory stay when all claims have been referred to arbitration and a party has requested a stay. Katz v. Cellco P'ship, No. 14-138, 2015 U.S. App. LEXIS 13055 (2nd. Cir. July 28, 2015). The Second Circuit's opinion, which overturned a ruling by Southern District Judge Briccetti dismissing the case, marks an important clarification of the law for practitioners in the Second Circuit, and underscores the disparate approaches to this issue among the Circuits.

The Facts of the Case

In Katz, the plaintiff sued Verizon on behalf of a putative class of New York-area Verizon telephone subscribers, asserting breach of contract and consumer fraud claims arising out of a rate increase purportedly concealed as a monthly administrative charge. Katz's contract with Verizon incorporated the company's customer agreement, which contained a clause referring all disputes arising out of the agreement or Verizon's wireless services to arbitration. Verizon moved to compel arbitration and stay district court proceeding pending arbitration pursuant to Sections 3 and 4 of the FAA. Katz argued that if the court compelled arbitration, the action should be dismissed, not stayed.

The District Court ruled that all of Katz's claims were arbitrable and dismissed the case. In so doing, the court noted that district courts in the Second Circuit were divided on whether a court has discretion to dismiss upon compelling arbitration, but stated that it agreed that dismissal was the proper remedy when all claims in a lawsuit are arbitrable. See Katz v. Cellco P'ship, No. 12-cv-9193, 2013 U.S. Dist. LEXIS 176784, at *42 (S.D.N.Y. Dec. 12, 2013). Both parties appealed, with Verizon seeking reversal of the District Court's decision to dismiss, rather than stay, the proceeding.

The Second Circuit's Ruling

In an opinion by Judge Wesley, the Second Circuit affirmed the ruling compelling arbitration, but reversed the District Court's dismissal of the action, resolving a split among district courts in the Circuit as to whether a stay or dismissal is appropriate where all claims have...