Article: Landmark Revisions to the AAA’s Commercial Arbitration Rules

The American Arbitration Association’s Rules are among the most widely used rules in the United States. Fred G. Bennett, a partner with Quinn Emanuel’s Los Angeles office and the chair of the U.S. Arbitration Practice, was head of the AAA task force that, working with AAA executives, recently developed significant revisions to the rules. The task force’s project was an ambitious, multi-year drafting effort based on input from the most eminent arbitration practitioners and arbitrators in the country. Reflecting this process, the revisions to the Rules were aimed at addressing the interviewees’ requests for a more streamlined, cost-effective, and structured process. The revised Rules encourage a process that keeps the ball rolling—focusing the parties on the issues that matter to resolve a dispute in an economical and expeditious manner. Good-faith engagement is a central theme to the revisions. In this article, we discuss the more notable changes and how they might impact parties utilizing the revised Rules.

Early Engagement of Participants

A major objective of the new rules is to engage the parties, their counsel, and the tribunal early in the arbitration process in order to expedite the entire proceeding. The revised Rules add a number of default rules and procedures designed to get the ball rolling by getting the parties to give serious thought, early in the arbitration process, to substantive issues that may drive the arbitration. These revisions eliminate “dead zones” of ambiguity or confusion on the part of the parties as to what to do next, particularly in the early stages of an arbitral proceeding.

R-21 permits, at the discretion of the arbitrator “depending on the size and complexity of the arbitration,” a preliminary hearing that “should be scheduled as soon as practicable” after the arbitrator is appointed. Significantly, the rule encourages the parties themselves to participate in the hearing. The preliminary hearing is essentially intended to establish the parameters of the contemplated proceeding, and the procedure envisioned by the revised Rules is something very different from the sort of scheduling order entered in federal court. Indeed, the protocols established under the Rules’ Preliminary Hearing Procedures (numbered P-1 and P-2) expressly warn against “importing procedures from court systems” that might be inappropriate for arbitration.

The checklist of items in P-2 include a range of topics that require each party to develop a strategy and schedule for the arbitration in preparation for the conference, including, notably: the possibility of mediation; potential amendments; applicable procedural and substantive rules; the possibility of disposing of threshold and/or dispositive issues; possible bifurcation of the hearing; procedures for the hearing itself; and a schedule that includes both pre-hearing and hearing dates. P-2 also mandates that the tribunal issue a written order memorializing the decisions reached during the hearing.

In addition to the preliminary hearing, certain rules have been revised or added to assure the efficient administration of the case before the arbitrator(s) is appointed. Rule 11 is an example. The former rule—Rule 10—laid out an initial procedure for the parties to determine the arbitration venue, either by agreement, or by a request from one party that was not timely objected to by the other. Revised R-11 adds certainty to resolution of the venue issue by eliminating this “consent by silence” provision, and vesting the AAA with authority to determine the proper venue—in accordance with express guidelines—if the parties cannot agree. The AAA’s involvement in the process is designed not only to achieve a fair result, but in a manner that will avoid stalling the arbitration on a threshold issue.

R-12 revises the procedures for appointing arbitrators from an AAA-generated roster. The rule clarifies that the parties do not have to exchange their lists, and that the failure to return a list impacts only the party that failed to respond, by waiving any of its objections to the neutrals on the list. R-43 authorizes use of electronic mail to deliver notices to parties without having to obtain advance permission from the parties and the tribunal. These revisions, while simple and relatively minor, are in line with the core theme of the new Rules generally—moving the arbitration forward to an expeditious resolution.

More Streamlined Discovery Process

The new rules make changes that clearly articulate the parameters of discovery in arbitration, as well as the methodology for assuring a full and fair exchange of relevant information, particularly electronically stored information. Parties often agree to arbitrate in anticipation of avoiding the expense and burden of expansive discovery in judicial proceedings. The revised Rules contain clearer guidelines concerning the respective responsibilities of the tribunals and parties. They are intended to incentivize parties to focus discovery on the merits of a dispute, and expedite the process through party cooperation and enhanced discovery powers of the arbitrator where necessary.

Under R-22, the tribunal now possesses greater control over the pre-hearing exchange of information in order to promote efficient dispute resolution. These powers include the authority to require the exchange of materials that each party intends to rely upon, to order the parties to update document exchanges, and to require parties to provide documents in their possession or control that are “[r]elevant and material to the outcome of disputed issues” (so long as those materials are not readily available to the opposing party otherwise). This “relevant and material” standard essentially prescribes the recommended limits of discovery—and, importantly, is narrower than the “reasonably calculated to lead to admissible evidence” standard for discovery in federal courts and many state courts. Thus, parties are disincentivized from engaging in fishing expeditions or otherwise wasteful discovery efforts.

R-23 grants the tribunal tools to keep discovery proceedings focused. For example, where necessary the tribunal may create search parameters for electronic data, and allocate discovery costs. This allows the tribunal to play a more intimate, active role in ensuring the fair and expeditious exchange of information during the discovery period. R-23 expressly authorizes the arbitrator to issue enforcement orders for willful non-compliance, including the ability to draw adverse inferences and issue an interim award of costs.

The difference in the discovery contemplated by the revised Rules is highlighted by the revised Procedures for Large, Complex Commercial Disputes. This is a special section of the Rules (now numbered L-1 through L-3) that applies, unless the parties otherwise agree, to all arbitrations involving a claim of at least $500,000. Under the old version of L-3 (previously numbered as L-4), depositions and interrogatories were allowed “upon good cause shown” against persons who had information “necessary to determination of the matter.” The new L-3 incorporates the “relevant and material to the outcome of the case” standard of R-22 and R-23, and directs the tribunal to permit depositions only in “exceptional cases” upon a showing of good cause.

Moreover, the tribunal may allocate the cost of taking the deposition. By eliminating one form of discovery altogether (interrogatories) and stating that another (depositions) should be “exceptional” and subject to cost-shifting, these revisions disincentivize wasteful discovery campaigns. The revised Rules even attempt to protect the parties from exercising complete control over the discovery process. Whereas under the old version of L-3, parties could “conduct such discovery as agreed,” under the new version the parties “shall address” discovery issues in accordance with R-22.

Quasi-Mandatory Mediation

The Rules now mandate, under R-9, that parties “shall” mediate any dispute that involves a claim or counterclaim that exceeds $75,000. Any party may opt out by providing notice to the AAA and the other parties. But by requiring affirmative action to avoid a mediation, the new rules basically incorporate the mediation process into every AAA arbitration. The rules provide great flexibility to the mediation process—it may be scheduled at any time during the arbitration, provided only that it “shall not serve to delay the arbitration proceedings.” This seemingly minor administrative footnote has more substantial practical implications—unlike a pre-merits mediation, a concurrent mediation disincentivizes bad-faith use of mediation by a party to drag its heels and delay dispute resolution.

Additional Tools to Discipline Uncooperative Parties

While mandatory mediation under R-9 seeks to gently foster a more cooperative atmosphere, other portions of the revised Rules take a more muscular stance in addressing the problem of uncooperative parties. Prior to the revised Rules, a tribunal’s authority to enforce its orders and deal with uncooperative parties was implied, but not comprehensively articulated in the rules. As a result, arbitrators sometimes were uncertain as to how far their powers truly extended, and tended to go no further than allocating costs and fees at the end of the arbitral process. The revised Rules now provide a comprehensive set of enforcement tools for the tribunal to use.

Under the new R-58, a tribunal may sanction a party, upon the request of a litigant, when the party fails to comply with either its obligations under the Rules or under an order issued by the tribunal. However, reflecting a concern for the potential influence of sanctions on the substantive proceedings of an arbitration, R-58 imposes a series of procedural protections for parties subject to a sanction request. The party must receive an opportunity to respond to the request prior to the tribunal making any sanctions determination. Importantly, any sanctions order that “limits any party’s participation in the arbitration or results in an adverse determination of an issue or issues” must be preceded by submission of evidence and legal argument by the parties. Any such order also must be explained by the tribunal in writing, thus creating a record of any sanctions that may significantly affect the course of the arbitration. Finally, R-58 expressly forbids the tribunal from entering a default award as a sanction.

At the same time, R-57 disincentivizes a common tactic used by parties attempting to avoid arbitration—the outright refusal to pay arbitration fees and expenses as they are incurred. This may occur, for example, when a respondent asserts counterclaims and thus both parties are invoiced for administrative fees. Under both the old and revised R-57, any party may advance the fees and charges owed by a nonpaying party in order to allow the arbitration proceeding to continue. However, under the revised rule, a party may request that the tribunal “take specific measures relating to a party’s non-payment,” which expressly include “limiting a party’s ability to assert or pursue their claim.” As with new R-58, R-57 now provides protection to the “sanctioned” party—a party subject to a request for such relief under R-57 must receive an opportunity to respond. Any order by the tribunal that “limits any party’s participation in the arbitration” requires the party “who has made appropriate payments” to submit such evidence that the tribunal requires.

Additional Flexibility to Ensure a Fair Hearing of Evidence

Revised R-35 (formerly R-32) has been revised to promote more efficient arbitration proceedings and provide more flexibility in the presentation of evidence. R-35 underscores the increasingly common practice of the use of written witness statements in arbitration proceedings, as reflected by the change in phrasing from “affidavit” in the old R-32 to “written statement” in R-35. To help ensure the full presentation of all relevant evidence at the hearing, R-35 expressly authorizes the use of hearings conducted by “electronic or other means” (e.g., telephonic or video hearings), as well as the temporary relocation of a hearing to a venue where a witness who has “essential” testimony may be subpoenaed to testify before the tribunal. And to encourage parties to make witnesses available and to provide the tribunal with an additional tool to enforce compliance with its orders, the tribunal is expressly authorized to ignore the witness’ statement or report should the witness fail to appear for examination following the tribunal’s request.

Emergency Relief Prior to the Appointment of the Arbitral Panel

A number of the revisions to the Rules that were implemented provide parties with options for emergency relief. These changes range from minor tweaks, such as increasing the ceiling on a documents-only proceeding from $10,000 to $25,000 under the Rules’ Expedited Procedures (E-6), to major additions, such as the formal incorporation of measures for obtaining emergency relief into the main body of the Rules (R-38).

The AAA’s Rules previously made available the emergency relief now embodied by R-38, in substantial part, in its Optional Rules of Emergency Measures, as well as in the AAA’s International Rules. The new R-38 fully codifies emergency relief into the main body of the Commercial Arbitration Rules. In practicality, this means any arbitration clause entered into after the effective date of the new Rules incorporates emergency relief as a matter of course, without any need for the clause to expressly incorporate relevant rules.

Care should be taken to distinguish emergency relief from interim measures. R-37 authorizes the tribunal to grant injunctions and other relief it “deems necessary,” and was present in the old Rules. R-38, in contrast, provides for procedures for the appointment of an emergency arbitrator, on an expedited basis, to consider and grant a request for temporary relief pending the appointment of the tribunal. Under R-38, a single emergency arbitrator will be appointed within one business day of a party’s request for emergency relief. The requesting party must explain both why it is entitled to its requested relief and why that relief is needed on an emergency basis.

R-38 applies the familiar standards for injunctive relief in courts to emergency relief procedures. Relief is authorized if “immediate and irreparable loss or damage shall result” otherwise. R-38 does not permit ex parte applications. The requesting party must notify all other parties of its request. Upon appointment, the emergency arbitrator will establish an appropriate schedule, which must permit a “reasonable opportunity to all parties to be heard.” However, in accordance with the Rules’ emphasis on flexibility, telephonic and video hearings are permitted. And importantly, the Rules expressly state that a request for interim measures to a judicial authority is not “incompatible” with R-38 and is not a waiver of the requesting party’s right to arbitrate.

Dispositive Motions

The new rules also address the use of dispositive motions in AAA proceedings. R-33 articulates a threshold for a party being allowed to bring a dispositive motion in an arbitration proceeding. Under the rule, dispositive motions are allowed only if the moving party can demonstrate that the “motion is likely to succeed and dispose of or narrow the issues in the case.” This heightened standard (not applicable to judicial proceedings) avoids the parties wasting time and expense—and the arbitration process being disrupted—by motions to dismiss, summary judgment papers, or other dispositive motions that have little chance of succeeding on the merits.

Conclusion

The first revisions to the AAA Commercial Rules in over a decade are a true landmark in U.S. arbitration practice. As explained above, the revisions are substantive. In combination, they were designed to proactively distance an arbitration from litigation processes that have crept into arbitration proceedings over the years, threatening the AAA’s reputation as the nation’s premier source of time- and cost-efficient alternatives to litigation. It thus behooves any serious arbitration practitioner—particularly one who perceives arbitration essentially as “litigation in a conference room”—to study and internalize the new revisions before embarking on a new arbitration that will be governed by them.