Court Defers To Arbitration Administrator To Determine Applicable Rules

A California District Court has provided an imprimatur to the American Arbitration Association to determine, in the absence of a contract directive, which of its rules apply to arbitration matters it administers. In Hagan v. Park Miller LLC individual investors brought an arbitration against their investment adviser pursuant to an agreement which provided for arbitration in accordance with AAA rules.

AAA determined its consumer rules, not its commercial rules, were applicable, a determination with practical impact since the consumer rules (in accordance with applicable California law) required the investment adviser to front all arbitration fees. Responding to the investment manager’s claim that the AAA should be directed to apply its commercial rules, the court held as follows:

“Park Miller’s argument that the Court must order the AAA to follow its commercial rules is meritless. The parties’ Agreement is silent as to whether AAA commercial or consumer rules apply in arbitration. But the Agreement unequivocally states that AAA rules apply… Those rules give the AAA the ‘initial authority’ to decide whether its consumer rules apply. If a party ‘disagrees with the AAA’s decision,’ the party can submit an ‘objection,’ as Park Miller did. But ‘the arbitrator shall have the authority to make the final decision on which AAA rules will apply.’

“Thus, it is for the AAA, not the Court, to decide whether the AAA consumer or commercial rules apply. And the AAA has decided to apply its consumer rules. Even if Park Miller is ight that the AAA erred in this decision, Park Miller breached its arbitration agreement by refusing to abide by the AAA’s decision. Neither the parties’ agreement nor any other authority cited by Park Miller empowers the Court to second-guess the AAA’s decision or otherwise short-circuit the arbitration process. Park Miller must submit to arbitration and abide by the AAA’s determinations regarding which AAA rules to apply.”

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