An important difference between arbitration and litigation is filing and arbitrator’s fees. In employment cases, the American Arbitration Association’s (AAA) Employment Rules require the employer to pay the lion’s share of filing and arbitrator’s fees unless the arbitrator shifts them to the employee at the end of the case. But what happens if the arbitration agreement designates AAA as the arbitration provider but still requires equal splitting of filing and arbitrator’s fees? Is the court bound by the arbitration agreement or AAA rules?
The Second Circuit recently addressed this issue in Brown v. Peregrine Enterprises, Inc., ___ F.4th ___ (2nd Cir. 2023) (December 20, 2023). The Brown plaintiffs were 18 dancers who worked at a Manhattan strip club. They filed a lawsuit alleging the club violated the Fair Labor Standards Act (FLSA), presumably by not paying them minimum wages or overtime. Plaintiffs had signed arbitration agreements that provided the arbitration would be administered by the AAA. Based on those agreements, the trial court stayed the lawsuit pending the outcome of the arbitrations.
However, contrary to AAA rules, the arbitration agreements required plaintiffs to equally split the filing and arbitrator's fees with the employer. AAA rules, on the other hand, required the club, as employer, to pay the bulk of the fees. When the employer refused to do so, based on the agreements, AAA closed its file and notified the club it would no longer administer its employment cases. Plaintiffs then returned to the trial court, which lifted the stay to allow the litigation to proceed. The club appealed.
The Second Circuit reversed and vacated the trial court’s decision based on the text of the agreements. The Court concluded the agreements were clear and, by their terms, required the equal split regardless of AAA rules. The Court also held the club had not waived arbitration by declining to follow AAA’s rules. Nor was there a basis for the trial court to lift the litigation stay or to appoint a substitute arbitrator under Section 5 of the FAA. Instead, the Court suggested it was the trial court should enter an order compelling the parties to proceed consistent with the agreements. If the AAA, which was not a party to the case (and, therefore, not subject to the court’s orders), declined to administer the arbitration, then the trial court might consider appointing a substitute arbitrator.