Whether to select arbitration as a dispute resolution mechanism is an important decision when entering into a contract. Deciding whether arbitration should be administered by an organization such as the American Arbitration Association (AAA), Judicial Arbitration and Mediation Services (JAMS), or their foreign counterparts, such as the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR), the London Court of International Arbitration (LCIA), etc., is equally important. One might think if the parties agreed to arbitrate, and further agreed on the governing rules of the selected organization, the arbitration will proceed should a dispute arise from the parties’ contract. A ., No. 24-2806 (7th Cir. May 1, 2026) shows that the foregoing conclusion really depends on the rules of the selected arbitral organization. Oftentimes, parties ask if there is a material difference between the rules of various arbitral organizations. The Bernal decision stresses one really needs to know the rules of the arbitral organization before making a selection; otherwise, the selection of the arbitration itself might be hollow, and the allegedly aggrieved party will find itself in no man’s land (neither able to bring a claim in court nor allowed to proceed in arbitration as selected).
In Bernal, individual plaintiffs purchased products online from Kohl’s website between 2020 and 2022 and had to accept Kohl’s Terms and Conditions, which incorporated an arbitration clause, stating “any dispute, controversy, or claim arising out of, or relating to … purchases … shall be resolved only by … final and binding, bilateral arbitration” conducted by the [AAA] under its rules, including the AAA’s Consumer Arbitration Rules as applicable.” Plaintiffs (and over 44,000 other claimants represented by the same counsel) alleged Kohl’s marketing practices violated California’s consumer protection laws and served Kohl’s with notices of dispute in December 2022. While the claimants and Kohl’s were engaged in mandatory pre-arbitration settlement discussions in early 2023, Kohl’s modified its Terms and Conditions, which purportedly applied to claims arising prior to 2023. The modified terms called for arbitration before the National Arbitration and Mediation tribunal and its rules. In response to Kohl’s modification of its Terms and Conditions (and in accordance with the arbitration clause in the Terms and Conditions in effect at the time of claimants’ purchases), claimants filed their formal individual arbitration demands on Kohl’s and sent a copy of the demand and underlying arbitration agreement to the AAA, as well as paid all applicable AAA filing fees (in this instance hundreds of thousands of dollars in total). The AAA accepted the cases and asked Kohl’s to comply with the Consumer Arbitration Rules.
Specifically, the AAA’s Consumer Arbitration Rule 12 provides that a company identifying the AAA as the arbitral forum must register its arbitration agreement with the AAA and pay a nonrefundable fee. Furthermore, Rule 12 states the AAA “will decline to administer consumer arbitrations” if a company does not register its arbitration agreement with the AAA and pay the related fees. Finally, Rule 12 states that if the AAA declines to administer the arbitration due to the company’s non-compliance with Rule 12, the parties can submit their dispute to an appropriate court.
After the AAA accepted the cases and asked Kohl’s to register its agreement, Kohl’s failed to do so. As a result, and in line with Rule 12, the AAA declined to arbitrate the claims, closed its files, and refunded the fees claimants paid.
Plaintiffs then filed in federal court a motion to compel arbitration, arguing they were aggrieved by Kohl’s failure to arbitrate under a written arbitration agreement. See 9 U.S.C. §4. The district court denied the petition, relying on Wallrich v. Samsung Electronics America, Inc., 106 F.4th 609 (7th Cir. 2024), and held the court lacked authority to disturb the AAA’s decision to terminate the proceeding because the parties chose the process in their agreement. On appeal, a panel of the Seventh Circuit judges (Michael Scudder, Doris Pryor and Joshua Kolar) affirmed in a 2-1 decision, with Judge Kolar dissenting.
The Seventh Circuit relied on the Supreme Court’s decision in BG Grp. v. Republic of Argentina, 572 U.S. 25, 33 (2014), for a proposition that, unless otherwise stated in the parties’ agreement, the court presumes “parties intended arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration.” And the Seventh Circuit pointed out a party aggrieved by the failure of another to arbitrate must: show existence of an enforceable written arbitration agreement; that a dispute falls within the agreement’s scope; and a “refusal to arbitrate.” 9 U.S.C. §4. The Court reasoned Kohl’s failure to register its agreement in line with AAA rules did not amount to refusal to arbitrate. Rather, the arbitration proceeded in accordance with the process selected by the parties, namely the AAA applying the Consumer Arbitration Rules and then declining to advance the case because Kohl’s did not comply with the Rules. The AAA’s decision to apply the registration requirement was a “forum-specific procedural gateway” that the parties left for the arbitrators to decide. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002). The Seventh Circuit also relied heavily on its 2024 Wallrich decision. In that case, a respondent in the arbitration refused to pay AAA-required fees, and the claimant refused to advance the fees on the respondent’s behalf. The AAA closed the arbitration as a result of non-payment. The district court granted claimant’s motion to compel arbitration, but the Seventh Circuit reversed, reasoning the parties “proceeded through arbitration in accordance with [the rules they selected] and their consequences.” Thus, the Seventh Circuit concluded, “Kohl’s failure to register its agreement with the AAA was properly before the AAA to consider in line with its rules,” which it did, and there was “nothing for the district court to compel under the Federal Arbitration Act.”
Judge Kolar dissented, arguing the AAA arbitration did not start, and the AAA never administered the arbitration, contrary to the parties’ selection to do so. Judge Kolar also distinguished Wallrich and other cases where arbitration proceedings were terminated for non-payment of fees because parties had an opportunity to proceed with arbitration by advancing the fees on behalf of the counterparties and then recouping the same. In Bernal, however, claimants could not register the agreement on Kohl’s behalf. Judge Kolar also distinguished Hernandez v. MicroBilt Corp., 88 F.4th 215 (3d Cir. 2023), on which the majority relied, because in that case the non-compliant party sought to compel arbitration, unlike the claimants in Bernal. Judge Kolar concluded the majority created a “get-out-of-arbitration-free option” for a party that does not want to comply with an arbitral rule, and the administrator of the arbitration exercises its discretion to close the file and not proceed with the arbitration.
Parties, especially those located in the states over which the Seventh Circuit has jurisdiction (Illinois, Indiana, and Wisconsin), should carefully review rules of the organizations they identify in their agreements to administer arbitrations to ensure the rules may not present a “get-out-of-arbitration-free option.” For many contracts, a non-administered (or ad hoc) arbitration can serve the intended purpose of a streamlined dispute resolution mechanism, and the parties can choose the procedural rules (or write their own) to receive their bargained-for process. Of course, that should be done at the contract drafting stage, as it is unlikely adversaries will agree to the process once a dispute has arisen.
