On September 1, 2022, amendments to the American Arbitration Association’s (AAA) Commercial Arbitration Rules and Mediation Procedures went into effect. The amendments are significant but they are not retroactive. Thus the “old” rules (the 2013 AAA Commercial Rules) apply to cases filed before September 1, 2022 unless, as provided in Rule R-1(a), with the consent of the arbitrator, parties in existing cases agree to apply any of the amendments. And as we discuss below, there may be reasons to consider the changes.
Consolidation and Joinder
Following the Supreme Court’s approval of arbitration clauses that prohibit class actions, and with the meteoric rise in online consumer arbitration agreements, it was only a matter of time before claimant lawyers initiated “mass actions” in arbitration—small claims brought by hundreds of claimants. In part in response to this trend, new Rule 8 now expressly provides that “[t]wo or more arbitrations may be consolidated if all parties to the arbitrations to be consolidated so agree.” When the same lawyer represents multiple claimants in separate arbitrations against the same respondent, agreement among the parties is likely unless there are tactical reasons not to do so (a topic worth discussing but not our focus here).
If there is no agreement, a party may still request consolidation of two or more arbitrations. The process is straightforward. The requesting party must file a written request with the AAA and serve it on all other parties. The request must be made within 90 days of the date the AAA determines that all administrative filings are satisfied “for the last-filed case.” The arbitrator in the first-filed case, however, can extend this time limit “upon a showing of good cause.” Responses to the request to consolidate must be made “within 10 calendar days after the AAA sends notice of the receipt of the request.”
You have probably already said to yourself, “Who decides?” Rule 8(a)(iii) provides the answer. At its discretion, the AAA may direct that the arbitrator appointed in the first-filed case decides, or it may appoint a consolidation arbitrator for the sole purpose of deciding the consolidation request. In the latter case, under Rule 8(a)(v), the consolidation arbitrator has no further power to act and is removed from the matter after deciding the consolidation request, unless the parties agree otherwise.
If you are familiar with multi-district litigation in federal court, you will also be readily familiar with Rule 8(a)(iv), which provides that the consolidation may be ordered “for all purposes or for such limited purposes and under such conditions as the arbitrator may direct.”
And somewhat similar to the considerations applied by the Multidistrict Panel in federal court, Rule 8(a)(vi) provides that the arbitrator making the consolidation decision “shall take into account all relevant circumstances” including, unsurprisingly, the following:
· The terms and compatibility of the agreements to arbitrate,
· Applicable law,
· The timeliness of the request to consolidate and the progress already made in the arbitrations,
· Whether the arbitrations raise common issues of law and/or fact, and
· Whether consolidation of the arbitrations would serve the interests of justice and efficiency.
The joinder provisions recognize that many business transactions today involve multiple parties. Project financing arrangements may involve multiple lenders. Construction projects will involve multiple contractors and subcontractors. A financial arrangement may require a guarantor. Thus, Rule 8(b) now allows for joinder of parties to an arbitration. Rule 8(b)(i) allows for joinder if all parties to the arbitration and the party or parties proposed to be joined agree.
And if there is no consent to joinder? Like the consolidation rule, requests for joinder must be made to the AAA in writing within 90 days of a determination by the AAA that administrative filing requirements have been satisfied. Again, the arbitrator may extend this deadline upon a showing of good cause. Rule 8(b)(iii) provides that if existing parties and the party or parties proposed to be joined cannot agree to joinder, the arbitrator decides the issue. If an arbitrator has not yet been appointed, the AAA may appoint the joinder arbitrator who is removed from the case after the joinder decision unless the parties agree otherwise.
Rule 8(b)(iv) requires the party requesting joinder to provide the names and contact information of proposed joinder parties and, if known, their representatives (i.e., counsel) and the “supporting reasons for such request, including applicable law.” Rule 8(b)(iv) also requires (1) that the party proposed to be joined be served with the request at the same time that it is filed with the AAA, and (2) that the party proposed to be joined respond within 14 days after the AAA sends notice of receipt of the request for joinder.
Rule 8(b)(iv) is otherwise silent on standards that the arbitrator should consider in evaluating a request to order joinder of a party that refuses to consent to joinder. The continuing convergence of rules of civil procedure and arbitration rules will likely be manifested here. Fed. R. Civ P. 19 addresses joinder of parties. They must be joined (1) if complete relief cannot otherwise be accorded existing parties, or (2) a person’s ability to protect an interest relating to the subject of the action is impaired or impeded without joinder or without joinder, it would leave an existing party subject to a substantial risk of incurring double, multiple or inconsistent obligations. You can expect that arbitrators making joinder determinations will evaluate factors like these. See, e.g., Gramercy Fin. Group LLC v. Helie, 02 Civ 6017(RO), 2003 U.S. Dist. Lexis 5038 (S.D.N.Y. Mar. 31, 2003) (the court ordered joinder of two parties because their presence was required to determine plaintiff’s interest in a joint venture and then stayed the proceedings and compelled arbitration of the dispute under an agreement signed by plaintiff and defendant).
If you are wondering about filing requirements with respect to new parties, Rule 8(b)(v) requires the requesting party to comply with Rule 4(a), which addresses those requirements. They include filing a Demand for Arbitration, payment of the administrative filing fee, and filing any applicable arbitration agreement.
New Dollar Thresholds for Expedited Arbitration and Large, Complex Commercial Disputes
The AAA Commercial Rules provide for Expedited Procedures for small claims. These procedures appear in Procedures E-1 through E-10 of the Commercial Rules. What is a small claim? Previously, it was $75,000 “in which no disclosed claim or counterclaim” exceeds this amount, exclusive of interest, attorneys’ fees, and arbitration fees. The new threshold is $100,000.
The AAA Commercial Rules also contain Procedures L-1 through L-3 (governing the administrative conference with the AAA, the number of arbitrators, and the management of the proceeding) for cases in which the disclosed claim or counterclaim of any party is at least $1 million (it was $500,000), again exclusive of claimed interest, attorneys’ fees, and arbitration fees and costs. Rule R-1(c).
Parties can, however, agree to use either set of Procedures irrespective of the amount in controversy.
The combination of these two provisions means that unless there is agreement otherwise, the AAA Commercial Rules apply to claims or counterclaims between $100,000 and $1 million.
There is one other dollar threshold change. Where parties to a Large Complex Commercial Dispute do not agree on the number of arbitrators, Procedure L-2(a) now provides that the dispute will be heard by three arbitrators if a claim or counterclaim involves at least $3 million. The prior threshold was $1 million.
Technology Amendments
In a post-COVID world where arbitrators and arbitrants are accustomed to virtual conferences and hearings, it is no surprise that the AAA has amended the Rules to reflect the rapid adoption of this technology. Several amendments now expressly provide for the use of “video, audio, or other electronic means when appropriate” as a method for conducting preliminary hearings (R-22) and final hearings under both the Commercial Rules (R-25) and Expedited Procedures (E-7).
You may be asking yourself whether a hybrid hearing—where some witnesses testify in person and some witnesses present evidence virtually—is permissible. The answer is yes. Rule 33(c) permits the arbitrator to allow “some or all of the presentation of evidence by alternative means including video, audio or other electronic means other than an in-person presentation.” Rule 33(c) adds that there must be an opportunity for cross-examination. Whether Rule 33(c)—and the parties’ adoption of this provision by virtue of their agreement to use the AAA Commercial Rules—will overcome decisions like Judge Rakoff’s in Broumand v. Joseph, 522 F. Supp. 3d 8 (S.D.N.Y. 2021) (because Section 7 of the Federal Arbitration Act allows arbitrators to subpoena persons “to attend before them,” a subpoena to a witness to appear via videoconference is not enforceable) remains to be seen. No change, however, was made to former Rule R-11, now Rule R-12, which gives an arbitrator authority, in the arbitrator’s sole discretion, to “conduct special hearings for document production purposes or otherwise at” locations other than the situs of the arbitration, “if reasonably necessary and beneficial to the process.”
The new Rules also add privacy, cybersecurity and data protection to the list of issues to be discussed in preliminary hearings, (P-2(a)(vi)), and, while not incorporated in the Rules themselves, the AAA has created a “Best Practices Guide for Maintaining Cybersecurity and Privacy,” included with every case initiation, and a “Cybersecurity Checklist,” available as a reference tool. Additionally, the 2022 Rules now provide that an award may be executed with an electronic or digital signature when not in conflict with applicable law. (R-48). Finally, minor changes have been made to the terminology in R-29 to reflect that a record of the proceedings can be created by transcription, as opposed to the former rule that specified the creation of a stenographic record. To accommodate alternative means of creating an official record of proceedings, the advance notice period (by which parties must notify the arbitrator and parties of a transcription-service arrangement) has been increased from three days to seven days. (R-29(a)).
Third-Party Funding
Recognizing the increasing role that funders play in financing arbitration, and the need for arbitrators to make appropriate disclosures, the Preliminary Hearing Checklist now includes as a potential topic the existence and identity of sources of third-party funding. Specifically, P-2(xii) provides for the arbitrator to exercise his or her discretion to consider whether the parties (a) shall disclose whether a non-party such as a third-party funder or insurer “has undertaken to pay or to contribute to the cost of a party’s participation in the arbitration, and (b) if so, to identify the person or entity concerned and to describe the nature of the undertaking,” or whether such a non-party or a parent company or ultimate beneficial owner, “has an economic interest in the outcome of the arbitration, and if so, to identify the person or entity concerned and to describe the nature of the interest.”
Administrative Review Council
The reference to this body is new in the September 1, 2022 Rules. Under revised Rule R-2(d), for cases proceeding under the Procedures for Large, Complex Commercial Disputes and for other cases where the AAA “in its sole discretion” deems it appropriate, the AAA may act “through its Administrative Review Council” to take the following administrative actions: (i) determine challenges to the appointment or continuing service of an arbitrator, (ii) make an initial determination as to the locale of the arbitration, subject to the power of the arbitrator to make a final determination, or (iii) decide whether a party has met the administrative requirements to file an arbitration under these Rules.” This explicit authority provides guidance to parties who have wondered how to proceed when confronting these questions.
Standards of Conduct for Parties and Representatives
In another important change, Rule R-2(c) now makes it part of an arbitration party’s obligation that the party and their representatives “conduct themselves in accordance with the AAA’s Standards of Conduct for Parties and Representatives” when utilizing AAA’s services. “Failure to do so may result in the AAA’s declining to further administer a particular case or caseload.” The Standards are similar to civility standards adopted by several courts throughout the country.
Appointment and Number of Arbitrators
Parties involved in AAA arbitrations are familiar with the appointment process where no prior appointment of the panel has been made, and the parties have not provided for any appointment procedure. The AAA will send the parties a list of arbitrators (usually 10), and the parties then strike names on the list they find unacceptable and prioritize the remaining names on the list. But what happens if the parties strike all of the names on the list? Again and again? The risk of mischief here is palpable.
A change to Rule 13(b) addresses this risk. A sentence has been added that allows the AAA to exercise its discretion to limit the number of strikes permitted to parties.
Rule 17(a) has been amended to provide that parties may agree on a number of arbitrators irrespective of any number set forth in the arbitration agreement. In addition, Rule 17(b) now provides that the use of plural or singular forms of the word “arbitrator” in an arbitration agreement, in the absence of a specific number, “shall not be deemed by the AAA to reflect an agreement as to the number of arbitrators.”
Dispositive Motions
Prior Rule R-33 allowed the arbitrator to consider a dispositive motion if the arbitrator determined that the moving party “has shown that the motion is likely to succeed and to dispose of or narrow the issues in the case.” This text is now in Rule 34(a). Rule 34(b) and (c) are new. Rule 34(b) requires the arbitrator to consider the “time and cost associated with the briefing of a dispositive motion in deciding whether to allow any such motion.” And Rule 34(c) provides that “[f]ees, expenses and compensation associated with a motion or an application to make a motion may be assessed as provided in Rule R-49(c).” Rule 49(c) addresses the allocation of the AAA’s administrative fees, the expenses of the arbitration and compensation of the arbitrators.
Emergency Measures of Protection
Under former Rule R-38, the 2013 AAA Rules provided for appointment of an Emergency Arbitrator where a party is in need of relief before the arbitration panel is constituted. There are two changes to what is now Rule R-39. First, Rule 39(a) now provides that the rule is not applicable to cases administered pursuant to the Expedited Procedures. Second, a sentence has been added to Rule 39(i), which addresses the emergency arbitrator’s ability to “initially” apportion the costs associated with an application for emergency relief. Now, in apportioning costs, the emergency arbitrator “may take into consideration whether the request for emergency relief was made in good faith.” This sentence raises the stakes for parties who pursue claims for emergency relief that fall into the gamesmanship category.
Express Limitations on Discovery Under the Expedited Procedures
The 2022 amendments expand the scope of Expedited Procedure E-5. Former Procedure E-5 is now E-5(a) and it still provides that copies of exhibits have to be exchanged two days in advance of the hearing and disputes concerning the exchange are resolved by the arbitrator. Procedure E-5(b) now adds that no other discovery is permitted except as allowed by the arbitrator “for good cause shown.” If the arbitrator allows for additional discovery, “the AAA, in consultation with the arbitrator, may remove the case from the Expedited Procedures.” Procedure E-5(c) prohibits any motion practice under the Expedited Procedures “except as allowed by the arbitrator for good cause shown.”
Limitations on a Party That Fails to Pay Administrative Fees or Deposits for Arbitrator Compensation
Rule 59 addresses parties who fail to pay the AAA’s administrative fees or required deposits to cover the compensation of the arbitration panel. One additional measure has been added to the arsenal of the arbitrators confronted with such a party. Although both the current and prior version of the rule do not provide an exclusive list of measures that may be adopted and both contain the proviso “to the extent the law allows,” Rule R-59(a)(ii) now expressly allows the arbitrator to prohibit the non-paying party from filing any motion.
Confidentiality
Parties understand that arbitration is private. But parties frequently do not realize that arbitration is not confidential unless the parties have agreed to make it confidential. Confidentiality is now codified in Rule 45 of the September 1, 2022 AAA Commercial Rules.
Rule 45(a) provides that “unless otherwise required by applicable law, court order or the parties’ agreement, the AAA and the arbitrator shall keep confidential all matters relating to the arbitration or the award.”
Rule 45(b) now expressly provides that “[u]pon agreement of the parties or the request of any party, the arbitrator may make orders concerning the confidentiality of the arbitration proceedings or of any other matters in connection with the arbitration and may take measures for protecting trade secrets and confidential information.” Prior Rule 23(a) now appears as Rule 24(a) and it still gives the arbitrator the power to condition exchanges or production of confidential documents and information, and the admission of confidential evidence at the hearing, on “appropriate orders to preserve such confidentiality.” Some may regard these provisions as redundant, but Rule 45(b) serves a good purpose in providing at the outset of the arbitration for a confidentiality order that governs the entire proceeding.
Closing of the Hearing
As persons experienced with the AAA Rules know, the closing of the hearing starts the clock for production of the final award. However, as is also well known, the date that the hearing is closed is sometimes not easily fixed, especially when the parties are awaiting receipt of hearing transcripts. Rule 40(b) acknowledges this fact and now provides that if documents or responses are to be filed or if briefs are to be filed, the hearing “shall be declared closed as of the date the arbitrator is satisfied that the record is complete.” However, the arbitrator’s discretion is not unlimited. Rule 40(b) also now adds that the date of closing of the hearings “shall occur no later than seven calendar days from the date of receipt of the last such submissions or hearing transcript.”
Modification of the Award
Old Rule R-50 has been replaced by Rule R-52(a), but the text has not changed. Both the old rule and Rule 52(a) provide that parties are permitted to request the arbitrator “through the AAA” to “interpret the award.” The time limit for making the request (for clerical, typographical or computational errors, which are still included in Rule 52(a)) remains 20 days. The prior caveat also remains in Rule 52(a): “The arbitrator is not empowered to re-determine the merits of any claim already decided.” Finally, the other parties are still given 10 calendar days to respond to the request and the arbitrator still must dispose of the request within 20 calendar days after transmittal by the AAA to the arbitrator of the request and any responses to the request.
What is new is Rule 52(b). It provides that “[i]f the arbitrator has established a different schedule for such requests, responses and disposition, the arbitrator’s schedule will supersede the deadlines set forth in this Rule.”
Locale of the Arbitration
The first paragraph of old Rule R-11 has been moved into the first paragraph of Rule R-12 (“When the parties’ arbitration agreement requires a specific locale, absent the parties’ agreement to change it, or a determination by the arbitrator that applicable law requires a different locale, the locale shall be that specified in the arbitration agreement”). And new Rule R-12(c) now addresses what happens if an arbitration agreement specifies multiple locations: the “filing party may select any of the specified locales at the time of filing, subject to the power of the arbitrator to finally determine the locale.”
Time for a Check-Up?
Several domestic and international arbitral administrative bodies have modified their rules in the past two years. It is always prudent to perform a check-up periodically on arbitration clauses used in your agreements.
