Katz v. Cellco Partnership, dba Verizon Wireless, Nos. 14-138 (Lead), 14-291 (2d Cir. July 28, 2015) [click for opinion]

Plaintiff Michael Katz asserted 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 contract, 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 attempting to invalidate the arbitration agreement. Plaintiff conceded in his motion that his state law claims were covered by the arbitration agreement. Plaintiff further argued that, should arbitration be compelled, the case should be dismissed instead of stayed. Defendant responded with a motion to compel arbitration and to stay the proceedings.

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, but dismissed, rather than stayed, the proceedings.

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. It noted that the Supreme Court had not yet addressed the issue, despite a circuit split. The court analyzed the text, structure, and underlying policy of the FAA.

First, the court 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.

The court further reasoned that a mandatory stay “comports with the FAA’s statutory scheme and pro-arbitration policy.” As a first example, the court explained that 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. Second, the court explained that 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, and not 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.

Nick Kennedy of the Dallas office contributed to this summary.