Fifth Circuit Rules that the Arbitrators -Not the Courts- Must Decide Who Pays the AAA Arbitration Fees

The United States Court of Appeals for the Fifth Circuit held that the payment of a deposit for an arbitration was a procedural matter for the arbitrators to decide.

In Dealer Computers Svc v. Old Colony Motors, No. 09-20049 (5th Cir. Nov. 19, 2009) Old Colony Motors, Inc. (Old Colony) contracted with Dealer Services, Inc. (Dealer Services) for the purchase and maintenance of computer hardware and software for Old Colony’s dealership. Old Colony was required to buy the hardware necessary to run Dealer Services upgrades. In 2006, Dealer Services informed Old Colony that it would no longer support their current computer system without the required upgrades. Old Colony responded that it could not afford to pay for the mandatory upgrades.

In 2007, Dealer Services filed an arbitration demand for almost $500,000 plus attorney fees and costs. The parties had agreed to arbitrate their disputes before the American Association of Arbitration (AAA) following the AAA Commercial Arbitration Rules. Because Old Colony could not pay its $26,900 deposit for the final arbitration hearing, the arbitrators asked Dealer Computer Services (the complainant) to pay the money for Old Colony. Dealer Services refused to pay and sued Old Colony in district court. The district court ordered Old Colony to pay.

The issue decided by the Fifth Circuit was whether the district court erred by ordering Old Colony (the respondent) to pay the deposit to cover the arbitration fees. First, the court highlighted the test to determine whether a court should compel arbitration:

1. Whether the parties agreed to arbitrate: (a) whether a valid agreement to arbitrate exists, and (b) whether the dispute falls within that agreement; and
2. Whether federal statute or policy renders the claims nonarbitrable.

Next, the court noted that the only question was whether the dispute falls within the arbitration agreement. Citing Howsam v. Dean Witter Reynolds, Inc., 123 S. Ct. 588, 592 (2002) the court said that “absent an agreement to the contrary, the parties intend that the arbitrator, not the courts, should decide certain procedural questions which grow out of the dispute and bear on its final disposition.” The court also noted that the AAA Rules allow the arbitrators discretion to order either party to pay the fees.

Accordingly, the Fifth Circuit concluded that payment of the AAA fees was a procedural issue and thus one for the arbitrators to decide.

[Ed. note: find Professor Alan Scott Rau’s commentary about this case here.]

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