Plaintiff Goes Back to Court After AAA Rejects Arbitration

Dec 14, 2023 Newark, NJ

Earlier this week, the 3^rd Circuit issued a precedential opinion in Hernandez v. Microbilt Corporation, in which the plaintiff was permitted to go back to Court after the AAA declined to administer the arbitration.

The case involved alleged violations of the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. The consumer contract entered between the parties contained an arbitration provision. That arbitration provision specified that the AAA Consumer Arbitration Rules would apply. The parties agreed that the two threshold validity requirements for arbitration had been met: (1) there was an agreement to arbitrate, and (2) the dispute was covered by the scope of the arbitration agreement.

However, once the demand for arbitration was filed, the AAA administrator determined that the arbitration agreement itself failed to comply with AAA’s Consumer Arbitration Due Process Protocol (“ADPP”) because it contained a limitation on damages provision. Specifically, the ADPP provides that the arbitrator must have the authority to grant the claimant the same relief that would be available in court under law or in equity. AAA advised MicroBilt that it must waive the damages limitation to proceed with arbitration. MicroBilt declined to do so.

As such, AAA invoked its authority under Consumer Rule 1(d) to “decline to administer an arbitration.” When Microsoft sought to nonetheless keep the case in arbitration, the Court rejected MicroBilt’s arguments. Notably, this included rejection of MicroBilt’s severability argument “because the AAA’s decision [to decline to administer the arbitration] did not turn on whether ‘any part of the contract was legally enforceable.’ J.A.30, And even if the damages limitation were invalid our authority under § 4 would not change. The plain terms of Rule 1(d) permitted Hernandez to return to court after the AAA dismissed her case, regardless of the damages limitation’s validity.” In this case, the Court declined to interfere with AAA’s decision and allowed the Plaintiff to return to Court.

In practice, oftentimes disputes arise which are subject to arbitration. Parties attempt to navigate various arbitral forums, ungoverned by the rules of court, but oft viewed as a more expeditious alternative to litigation. This alternative forum gives rise to many procedural nuances and uncertainties, such as what happens if one of the parties refuses to pay for arbitration, or what happens if the arbitration is rejected by the forum called for in the contract. Many times, practitioners incorporate severability clauses into arbitration agreements to preemptively deal with potential pitfalls, possibly unenforceable provisions, and relatedly uncertainties. In this case, the severability clause did not save the arbitration agreement nor provide cover from uncertainty. Rather, the 3^rd Circuit clarified and answered the question, “What happens if the arbitration forum selected declines the arbitration?” The answer here is – the case goes back to Court.

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Plaintiff Goes Back to Court After AAA Rejects Arbitration

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