Introduction
From time-to-time, arbitration providers may decline to administer an arbitration. What happens then according to Federal Arbitration Act “FAA”) Section 3 and Section 4? Must the parties arbitrate before an alternative provider or can a party insist on litigating the dispute in court?
If FAA Section 3 and Section 4, as applied to the parties’ agreement and the facts, authorize an order compelling arbitration and staying litigation, arbitration will (or at least should) ordinarily proceed. But as the U.S. Court of Appeals for the Eleventh Circuit’s decision in Merritt Island Woodwerx, LLC v. Space Coast Credit Union, No. 24-10019, slip op. (11th Cir. May 21, 2025) shows, if arbitration cannot be compelled, and litigation stayed—and the agreement can be legitimately construed as not to require further arbitration—then one or more parties can insist on Court resolution of their dispute, including, in an appropriate case, by jury trial.
That’s a big “if,” and an equally big “and,” but if all conditions are satisfied, then an arbitration opponent may have a solid basis for seeking judicial resolution of its dispute. That is ordinarily a big win, and one that is not otherwise easy to come by.
Understanding Merritt Island Woodwerx—and cases of like ilk—can help you identify opportunities to argue that a provider’s decision to proceed no further means arbitration proceed no further. Successfully taking advantage of those opportunities is the key, but if you do not spot them at the outset, then you may lose them.
If you’re an arbitration proponent, then understanding Merritt Island Woodwerx—and how to avoid or mitigate its consequences—is equally important. The stakes are big: loss of arbitration rights a arbitration proponent had or should have can be an expensive and unwelcome proposition.
Background: What Transpired in Merritt Island Woodwerx?
The dispute was between a credit union (the “Arbitration Proponent”) and the plaintiffs (the “Plaintiffs” or “Arbitration Opponents”). Each Plaintiff had opened up a checking account with the Arbitration Proponent, and entered into a Master Services Agreement (the “MSA”) with it. The Arbitration Opponents claimed that the Arbitration Proponent had improperly charged them for various fees in breach of the MSA, which contained an arbitration agreement (the “Arbitration Agreement”).
The Arbitration Agreement provided for American Arbitration Association (“AAA”) administered arbitration and incorporated by reference the AAA’s Consumer Arbitration Rules. The Arbitration Agreement also contained a so-called “substitute-forum clause” (the “Substitute Forum Clause”): “[i]f [the] AAA is unavailable to resolve the Claims, and if you and we do not agree on a substitute forum, then you can select the forum for the resolution of the Claims.” Slip op. at 3.
Rule 12 of the AAA Consumer Arbitration Rules requires a business desiring AAA administration of a consumer arbitration to notify the AAA, submit for “administrative compliance review” its arbitration provision, and to pay an “associated fee.” Slip op. at 3 (citation to AAA rules omitted). Where the AAA determines that an arbitration provision complies substantially with “due process safeguards,” it may “agree to administer arbitrations under the clause and include the provision in its public database.” Slip op. at 3 (citation omitted).
On March 27, 2023, before commencing its class action lawsuit against the Arbitration Proponent, one of the Arbitration Opponents, Merritt Island Woodwerx, LLC (“Woodwerx”), demanded AAA arbitration of its claim for checking account fees charged by the Arbitration Proponent. But on April 20, 2023, the AAA declined “‘to administer this claim and any other claim between [the Arbitration Proponent] and its consumers at this time.’” Slip op. at 3-4 (quoting AAA correspondence).
The declination letter said the Arbitration Proponent did not submit its arbitration agreement for compliance review as required by the AAA Consumer Rules. The letter said “Consumer Rule 1(d) provides that ‘either party may choose to submit its dispute to the appropriate court for resolution, should the AAA decline to administer an arbitration.’” Slip op. at 4 (quoting AAA Consumer Rule 1(d)). “‘[I]f[,]’” continued the letter, “‘[the Arbitration Proponent] wishes for the AAA to consider accepting consumer disputes going forward, [it] must, at a minimum, register its clause on the Consumer Clause Registry on [the AAA’s] website[.]’” Slip op. at 4 (quoting AAA correspondence; some bracketed text in original). The Arbitration Proponent responded on April 25, 2023, explaining that it wanted to arbitrate and inquiring about the “reasons for the AAA’s declination.” Slip op. at 4.
On June 7, 2023, after the AAA’s declination letter, and the Arbitration Proponent’s follow-up letter to the AAA, the Arbitration Opponents filed a class action lawsuit against the Arbitration Proponent. Each Arbitration Proponent represented a putative class of similarly situated plaintiffs seeking relief for the Arbitration Opponent’s alleged breach of the MSA. Faced with the class action litigation, the Arbitration Proponent belatedly filed its arbitration agreement with the AAA and paid the AAA’s compliance review fee.
Apparently believing that it had dotted its “i’s” and crossed its “t’s,” the Arbitration Proponent moved to compel arbitration. But the district court said no, concluding the Arbitration Proponent had “failed to perform its contractual obligations under the [A]rbitration [A]greement.” Slip op. at 4.
The Arbitration Proponent, said the Court, “had failed to take the steps necessary for the AAA arbitration until over a month after the AAA had declined [Arbitration Proponent] Woodwerx’s arbitration demand.” Slip op. at 4. That delay, said the Court, resulted in the Arbitration Proponent’s waiver of its right to arbitrate. Slip op. at 4.
Four days after entry of the order denying the motion to compel, the Eleventh Circuit decided Bedgood v. Wyndham Vacation Resorts, Inc., 88 F.4th 1355 (11th Cir. 2023), which Merritt Island Woodwerx described as “a very similar case that resolves this appeal.” Slip op. at 2. Bedgood was a dispute between timeshare purchasers who had entered purchase agreements with a hotel company and related entities (the “Hotel Defendants”). Slip op. at 5 (citations omitted). The timeshare purchasers demanded arbitration pursuant to the purchase agreements, which contained arbitration agreements providing for AAA-administered arbitration. The AAA dismissed the petitions to arbitrate because the Hotel Defendants did not comply with AAA policies. Slip op. at 5 (citations omitted).
The timeshare owners accordingly commenced an action in federal district court, which prompted the Hotel Defendants to move to stay litigation and compel arbitration. The Hotel Defendants did not attempt to purge its noncompliance with AAA policies, even after the timeshare purchasers commenced the litigation and the hotel defendants moved to compel arbitration and stay litigation. Slip op. at 5 (citations omitted).
The Eleventh Circuit held in Bedgood that the Hotel defendants’ failure to comply with the rules of its chosen arbitral forum renders the remedies specified in [FAA] Sections 3 and 4 unavailable to it and, accordingly, that the plaintiffs who have contracts with [the Hotel Defendants] . . . may proceed to litigation.’” Slip op. at 5 (quoting Bedgood, 88 F.4th at 1362-63).
Ten days after Bedgood, the Arbitration Proponent appealed the denial of the motion to compel arbitration to the U.S. Court of Appeals for the Eleventh Circuit. Relying heavily on Bedgood, the Court affirmed the district court’s order denying the motion to compel arbitration. Slip op. at 5, 15.
Analysis: What Section 3 and Section 4 Issues did the Arbitration Proponent Raise on Appeal and How did the Court Resolve Them?
The Merritt Island Woodwerx Arbitration Proponent argued for reversal on four grounds. First, it claimed that the arbitration agreement, including the Substitute Forum Clause, obligated the Arbitration Opponents to arbitrate and to refrain from litigating the dispute, the AAA’s declination notwithstanding. Slip op. at 6.
Second, the Arbitration Proponent contended that, as respects Arbitration Opponent Woodwerx, the district court erred by holding that the Arbitration Proponent was, within the meaning of FAA Section 3, “in default” in proceeding to arbitration. Slip op. at 6. (Readers may recall that FAA Section 3 authorizes, in appropriate cases, and mandates when requested, a stay of litigation pending arbitration “providing the applicant for the stay is not in default in proceeding with such arbitration.” 9 U.S.C. § 3. See, e.g., here.)
Third, as respects the other Arbitration Opponent (True Touch Services, LLC (“True Touch”), the Arbitration Proponent argued that the district court “incorrectly determined that True Touch’s perceived futility excused it from needing to attempt arbitration before suing given that Woodwerx had already tried unsuccessfully to arbitrate.” Slip op. at 6.
Fourth, the Arbitration Proponent asserted that the district court erred by finding that neither Arbitration Proponent was entitled to an order directing arbitration.
The Court rejected each of these arguments.
The Parties were Contractually Obligated to Arbitrate
The Arbitration Proponent contended that the Arbitration Opponents had to arbitrate based on the Substitute Forum Clause, even though the AAA declined to administer the arbitration. Slip op. at 6. The Court construed this challenge as one seeking a Section 3 stay of litigation and a Section 4 order compelling arbitration as allegedly required by the Substitute-Forum Clause.
Contrary to the Arbitration Proponent’s contention, the “plain text” of the Substitute-Forum Clause did not require a substitute arbitration forum but authorized a party to select a judicial forum as the alternative forum. Slip op. at 7. The Substitute Forum Clause stated: “[i]f the AAA is unavailable to resolve the Claims, and if you and we do not agree on a substitute forum, then you can select the forum for the resolution of the Claims.” Slip op. at 7 (quoting Substitute-Forum Clause).
Noting that the paragraph containing the Substitute-Forum Clause is entitled “Selection of Arbitrator,” the Court said that heading referred to “earlier lines in [the] paragraph about selecting the individual to run the arbitration.” Slip op. at 7. “The key substitute-forum sentence[,]” said the Court “isn’t connected to picking an individual arbitrator[,]” it is connected to the selection of a “forum.” Slip op. at 7. The Court explained that “[t]he heading doesn’t limit the clause’s scope when its text is clear, [stating] ‘forum for the resolution of the Claims’ broadly.” Slip op. at 7 (noting Black’s Law Dictionary definition of “forum” is “‘[a] court or other judicial body; a place of jurisdiction[]’” (quoting Forum, BLACK’S LAW DICTIONARY (12 ed. 2024))).
Concluding that, “contrary to [the Arbitration Proponent’s] argument, the [Arbitration Proponents] didn’t violate the contract on its face[,]” the Court proceeded to resolve the Arbitration Proponent’s remaining challenges.
The Three Remaining Section 3 and Section 4 Challenges
As to Arbitration Opponent Woodwerx, the Arbitration Proponent was in FAA Section 3 Default
FAA Section 3 requires district courts to stay litigation of arbitrable disputes pending arbitration, “providing the applicant for the stay is not in default in proceeding with such arbitration.” 9 U.S.C. § 3. The district court found that the Arbitration Proponent was “in default,” and was not, as to Arbitration Opponent Woodwerx, entitled to a stay, because it “fail[ed] to pre-register its arbitration clause with the AAA.” Slip op. at 9.
Under Bedgood, and other authority, the test for Section 3 default is whether “‘under the totality of the circumstances, the party has acted inconsistently with the arbitration right.’” Slip op. at 9 (quoting Bedgood, 88 F.4th at 1369 (quoting Ivax Corp. v. B. Brun of Am., Inc., 286 F.3d 1309, 1315-16 (11th Cir. 2002), abrogated in part on other grounds, Morgan v. Sundance, Inc., 596 U.S. 411, 419 (2022)). “In Bedgood,” said the Court, “‘we h[e]ld that the AAA was empowered to conclude that [the company’s] arbitration clause violated its policies, and that the district court didn’t err in relying on the AAA’s determination to conclude that [the company] was “in default” within the meaning of Section 3.’” Slip op. at 10 (quoting Bedgood, 88 F.4th at 1363). So it was here.
“While[,]” said the Court, “Bedgood noted that it was especially true that the company [in Bedgood] was in default because it hadn’t made an ‘effort to investigate—let alone remedy—its noncompliance before the AAA[,]’ Bedgood didn’t restrict default to such circumstances.” Slip op. at 10 (quoting Bedgood, 88 F.4th at 1366). Perhaps more significantly, the Court said that “at the time the plaintiffs sued here, [the Arbitration Proponent] had not yet attempted to remedy its noncompliance with the AAA.” Slip op. at 10. The Arbitration Proponent was “therefore in default under Section 3 of the FAA because it acted inconsistently with its arbitration right by not trying to remedy the barrier to arbitration that it caused.” Slip op. at 10.
The Arbitration Proponent was Likewise in Section 3 Default as to Arbitration Opponent True Touch
The Arbitration Proponent argued that Arbitration Opponent True Touch could not establish Section 3 default because True Touch never demanded arbitration. True Touch responded that the AAA’s decision to decline to administer the Woodwerx arbitration demand rendered futile any demand True Touch might have made.
The Court held that the Arbitration Proponent was in default as respects True Touch for the same reasons it was in default concerning Woodwerx. The Court accepted True Touch’s futility argument: “True Touch[,]” the Court explained, “had an identical arbitration provision to Woodwerx, so under Bedgood, it doesn’t matter that True Touch didn’t formally request to arbitrate before filing suit.” Slip op. at 11 (citing Bedgood, 88 F.4th at 1359).
Bedgood, explained the Court, addressed a similar “futility argument as part of its discussion of Section 3 of the FAA and made the futility determination a fact-based inquiry.” Slip op. at 11. Here there was a “sufficient evidentiary basis” for True Touch’s futility argument: “an identical arbitration provision to the one the AAA refused to administer” and the AAA’s rejection letter. Slip op at 11 (quotation and citation omitted).
“[J]ust as in Bedgood,” said the Court, “True Touch’s failure to request arbitration doesn’t matter given the evidence of futility in the form of the AAA’s declination letter to Woodwerx.” Accordingly, the Arbitration Proponent was in Section 3 default not only as to Woodwerx but also True Touch. Slip op. at 12.
The Arbitration Proponent was not Entitled to an Order Compelling Either Woodwerx or True Touch to Arbitrate
The fourth challenge to the district court turned principally on the Arbitration Proponent’s rights under FAA Section 4. The Court explained that Section 4 expressly conditions relief on two distinct yet related requirements. Slip op. at 12: “‘[F]irst, the party resisting arbitration must have failed, neglected, or refused to arbitrate; and second, the party seeking to direct arbitration must have been aggrieved by that failure, neglect, or refusal.’” Slip op. at 12 (quoting Bedgood, 88 F.4th at 1366 and citing 9 U.S.C. § 4).
The Arbitration Proponent was not entitled to an order directing Woodwerx to arbitrate because Woodwerx attempted to arbitrate and thus did not fail, neglect, or refuse to do so. Slip op. at 12. The analysis as respects True Touch was slightly different.
True Touch did not attempt to arbitrate and thus met the first condition for Section 4 relief. But True Touch did not meet the second condition because, “as in Bedgood, . . . ‘to the extent that [the Arbitration Proponent] [was] aggrieved, it was aggrieved either by its own failure to bring its arbitration clause into compliance with AAA policies [by filing it and paying the fee] or, at the very least, by the AAA’s decision to that effect, not . . . [True Touch’s] conduct.’” Slip op. at 12-13 (quoting Bedgood, 88 F.4th at 1367). The Arbitration Proponent’s “own actions[,]” said the Court, “led the AAA to say that it wasn’t going to arbitrate any of [the Arbitration Proponent’s] consumers’ claims at that time, so it cannot now claim to be aggrieved because of True Touch’s actions.” Slip op. at 13.
The Court rejected the Arbitration Proponent’s attempt to distinguish Bedgood on this point. In Bedgood, the party advocating for arbitration never attempted to cure its noncompliance with AAA policies, whereas in Woodwerx the Arbitration Proponent attempted such a cure by filing its arbitration agreement and paying its fee, albeit about one-and-a-half months after the AAA declined to administer and, in any event, after the litigation was commenced.
The Arbitration Proponent “point[ed] to [the Court’s] statement in Bedgood that ‘[w]ithout any indication that [the company] has brought or intends to bring its arbitration agreements into line with the AAA policies, it can’t claim to have been ‘aggrieved’ by [the plaintiffs’] failure or refusal to arbitration’” Slip op. 13 (quoting Bedgood, 88 F.4th at 1367; most bracketed text in original). From that the Arbitration Proponent argued that Bedgood turned on the arbitration-seeking party’s failure to comply at any time with the AAA policies, and that here, the Arbitration Proponent complied prior to moving to compel arbitration. Slip op. at 13.
But the Court found the Arbitration Proponent’s argument “unconvincing.” Slip op. at 13. “Bedgood’s key holdings[,]” the Court said, “are not limited by the type of procedural failure on the part of the party now pressing for arbitration; the key is that the failure resulted in a refusal by the AAA to arbitrate and that [the Arbitration Proponent’s] actions were inconsistent with asserting its arbitration rights at any time before the suit.” Slip op. at 13.
The Court acknowledged that it “stated that the company in Bedgood had not brought and didn’t intend to bring its arbitration agreements in line with the AAA policies, whereas here, [the Arbitration Proponent] did later comply with the AAA’s policies and pay the fee.” Slip op. at 13.
But here, said the Court, the attempt to cure occurred during the litigation. Slip op. at 13-14. “Conduct during the litigation[,]” said the Court, “cannot cure [the Arbitration Proponent’s] previous noncompliance with the AAA policies.” Slip op. at 14. And “[i]n stating. . . that the company failed to comply because it had never attempted to cure the issue preventing AAA arbitration, we never endorsed the converse: that if the company had said the day before our [Bedgood] opinion came out that it now wanted to cure the arbitration issue, we would force the parties to arbitrate.” Slip op. at 14. The reference in the opinion to “continued noncompliance. . . simply reinforced the paucity of the company’s argument in that case.” Slip op at 14.
The Court then laid down what appears to be a bright-line rule: “Put simply, post-filing conduct cannot cure the prior noncompliance.” Slip op. at 14. The Court’s reference to “post-filing conduct” appears to be limited to conduct occurring subsequent to the filing of litigation, and does not apparently include conduct that occurred subsequent to the filing of arbitration but prior to the filing of the litigation. But there may be room for doubt on that point.
The Court explained that any rule contrary to the newly articulated bright-line rule “would result in gamesmanship by companies attempting to remedy an arbitration roadblock that they knowingly caused were they to draw a judge they didn’t like or wanted to waste counterparty resources spent in litigation.” The Court concluded that the rule was particularly appropriate “in the arbitration context, where the parties ‘trade[] the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.’” Slip op. 14-15 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)).
Because the “intended benefits of arbitration are ‘lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes[,]’. . . the rule [the Arbitration Proponent asks us to adopt would frustrate arbitration’s purpose in the first place[.]” Slip op. at 14-15 (quoting Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 685 (2010); other citations and quotations omitted).
Affirming the district court’s conclusion, the Court held that “by ignoring the AAA’s letter for a month and a half until after a lawsuit was filed against it, [the Arbitration Proponent] acted inconsistently with the intention to vindicate its contractual arbitration rights; the fact that it later attempted to comply with the AAA policies doesn’t resurrect the waived contractual right to arbitrate. In support of the proposition that later attempts to comply with AAA policies do not “resurrect” “waived contractual right[s],” the Court cited and quoted Thomas N. Carlton Est., Inc. v. Keller, 52 So.2d 131, 133 (Fla. 1951), which states “When a party waives a right under a contract he cannot, without the consent of his adversary, reclaim it.” Id.
The Court concluded that “the plaintiffs here were within their rights under Bedgood to proceed to-and remain in litigation.” Slip op. 15. And it noted that “[w]hile we said Bedgood was an ‘odd case,’ our dicta doesn’t mean that Bedgood’s legal rules are circumscribed to the exact facts therein.” Slip op. at 15. “The facts],]” said the Court are sufficiently similar here, and so Bedgood resolves the issues raised on appeal.” Slip op. at 15.
Some Further Thoughts. . . .
As discussed above, Merritt Island Woodwerx is an important case for both arbitration opponents and proponents to understand, as are other cases that involve similar issues concerning an arbitration provider’s decision to suspend or terminate an arbitration, or simply not to administer it. There are, indeed, other cases that address similar situations, including Wallrich v. Samsung Electronics America, Inc., 106 F. 4th 609 (7th Cir. 2024), a fairly recent Seventh Circuit case, which we discussed here. There the Seventh Circuit held, consistent with the parties’ agreement, that an arbitration provider’s termination of the proceedings was within the provider’s discretion under the agreement, and meant the mass arbitration proponents could not compel arbitration but could instead litigate their claims. See 106 F. 4th at 621-22.
We asked our good friends and colleagues Richard D. Faulkner, and Charles “Chuck” Bennett, about what the implications of Merritt Island Woodwerx, and similar cases, are on small businesses and others who are looking for ways legitimately to avoid arbitration of their disputes. (More about Chuck and Rick here and here.) According to Chuck:
Merritt Island Woodwerx is a warning shot to businesses that treat arbitration as a tool of delay and control. If you don’t follow the rules—if you ignore the forum’s requirements—you lose the right to arbitrate. It’s that simple. Courts are finally recognizing that arbitration shouldn’t be a loophole to duck accountability. For small businesses and consumers alike, this decision reaffirms the importance of access to real justice in real courts. The gamesmanship days may finally be numbered.
Rick says:
Merritt Island Woodwerx and Bedgood, and similar cases, are a belated, but very welcome recognition by some federal courts of the games and brinkmanship that have permeated arbitration and long frustrated arbitration opponents. The sophisticated companies know arbitration’s purported ‘benefits’ have not existed for years. The ‘benefits’ are a fantasy for both businesses and consumers.
AAA arbitration is very expensive, despite the pittance in fees the AAA pays consumer arbitrators. Nevertheless, many businesses still use the threat of arbitration as a shield against litigation, and the AAA’s communications with parties—which, in my opinion, tend to be more focused on coaxing money from business customers than on protecting consumers’ constitutional rights to a trial in a truly neutral forum—tend to aid and abet this unfortunate tactic.
If a business insists on arbitration, Merritt Island Woodwerx and Bedgood suggest it can be dangerous not to timely pay the AAA and comply with the rules. Arbitration remains an expensive, inefficient morass for the small and midsized businesses I represent. The business owners who understand the reality of AAA arbitration inevitably conclude arbitration is best avoided.
Merritt Island Woodwerx and Bedgood are decades overdue. Whether a proponent or opponent of arbitration, these cases require companies to timely pay the AAA’s expensive fees, comply with the rules and protocols or risk forfeiting arbitration.”
And we agree.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094. PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.
To watch arbitration-related videos or webinars in which Mr. Loree has participated, click here.
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