Eleventh Circuit: Breach of AAA Rules Bars Compelling Arbitration

In Merritt Island Woodwerx, LLC v. Space Coast Credit Union [1], the United States Court of Appeals for the Eleventh Circuit had to decide whether an arbitration agreement referring to the American Arbitration Association’s Consumer Rules is binding when the business party fails to abide by the regulations of the arbitral institution. According to the Eleventh Circuit, such a failure constitutes a default in the meaning of Section 3 of the Federal Arbitration Act (“FAA”).

Background

Merritt Island Woodwerx, LLC and True Touch Services, LLC opened checking accounts with Space Coast Credit Union. Their relationships were governed by the Master Services Agreement (“MSA”). The MSA included an arbitration clause requiring all claims to be resolved in arbitration “administered by the American Arbitration Association (“AAA”) in accordance with the applicable rules and procedures for consumer disputes.” The clause clarified that once arbitration was elected (either by initiating arbitration, demanding it, or seeking to compel it), the parties would have given up their right to hear the claim in court.

The dispute arose when both Merritt and True Touch alleged that Space Coast was overcharging them on overdraft fees in cases where the transaction occurred before the account was overdrawn.

On March 27, 2023, Woodwerx filed an arbitration demand with the AAA seeking to resolve the dispute through arbitration. However, the AAA informed Woodwerx that Space Coast has not submitted the dispute resolution clause for review or paid the necessary review fees. As a consequence, the AAA declined “to administer this and any other claims between Space Coast and its consumers at this time.”

On June 7, 2023, Woodwerx and True Touch filed a class action complaint against Space Coast alleging breach of the MSA. On June 9, 2023, Space Coast filed the arbitration agreement with the AAA for review and paid the necessary fees. On July 24, 2023, the AAA approved Space Coast’s provision and stated that it is prepared to administer consumer-related disputes filed pursuant to the clause.

As Woodwerx and True Touch refused to return to arbitration, Space Coast moved to compel arbitration and dismiss the complaint. Woodwerx and True Touch opposed.

District Court Proceedings

On December 15, 2023, the United States District Court for the Middle District of Florida denied Space Coast’s motions to compel arbitration and dismiss the complaint [2].

The District Court reasoned that:

When deciding on a motion to compel arbitration, the court must first determine whether the parties agreed to arbitrate their dispute and, if there are no legal constraints, external to the parties’ agreement, that would foreclose the arbitration of the claims. Furthermore, the opposing party must fail to comply with the terms of the arbitration agreement, and this failure must aggrieve the party seeking to compel arbitration.
In this case, the parties’ arbitration agreement explicitly incorporated the AAA Consumer Rules (“AAA Rules“) [3]. Pursuant to AAA Rule 1(a), they apply when parties have provided for the AAA’s rules as part of their consumer agreement.
Under AAA Rule 12, a business intending to provide for the AAA Rules or other rules by the AAA in a consumer contract should notify the AAA of the existence of such a contract and provide a copy of the arbitration agreement to the AAA for review. Furthermore, the business should pay appropriate fees for the review. If this obligation is not met, the AAA may decline to administer an arbitration, and either party may choose to submit their dispute to an appropriate court.
Space Coast did not follow the registration procedure and, thus, defaulted on the terms of the arbitration agreement. This neglect was the cause of the AAA’s refusal to arbitrate the dispute. It also amounted to a waiver of the contractual right to arbitrate the dispute.
As such, it was not Woodwerx or True Touch that failed to comply with the arbitration agreement, but Space Coast. Because the Plaintiffs did not fail to comply with the arbitration agreement, the court could not compel arbitration.
Finally, the wording of the arbitration clause did not prohibit the Plaintiffs from pursuing claims in court, as the AAA Rules explicitly allow such a solution if the AAA declines to administer the case.
There were also no grounds to dismiss the case for failure to state a claim.

Space Coast appealed.

Eleventh Circuit Proceedings

On May 21, 2025, the Eleventh Circuit affirmed the denial of the motion to compel arbitration [4].

The Eleventh Circuit reasoned that:

Parties were not contractually obligated to arbitrate their dispute in any forum, but in proceedings administered by the AAA. When this failed, the parties’ agreement allowed the dispute to proceed to court as a substitute forum, as it did not require the forum to be an arbitration.
The court was bound by its recent decision in Bedgood v. Wyndham Vacation Resorts [5], which tackled similar issues.
Space Coast was in default due to the violation of the AAA’s regulations. Under Bedgood [6], to determine whether a party has defaulted under FAA Section 3, “a court must ‘decide if, under the totality of the circumstances, the party has acted inconsistently with the arbitration right.’” Here, at the time the Plaintiffs filed the complaint, Space Coast had not attempted to remedy the violation of the AAA Rules, creating a barrier to proceeding with the arbitration.
As decided in Bedgood, it did not matter that True Touch did not attempt to initiate arbitration before filing the complaint. The fact that the MSA binding True Touch was identical to the agreement rejected by the AAA meant that True Touch had a sufficient evidentiary basis to support its claim of futility of arbitration.
Finally, Woodwerx did not resist arbitration, as it attempted to initiate the proceedings with the AAA. As such, Woodwerx could not be compelled to arbitrate the dispute. True Touch failed to initiate arbitration proceedings, and, as such, could be considered as resisting arbitration. However, Space Coast was not aggrieved by this because it failed to cure the non-compliance with the AAA policies before the litigation was commenced. As such, Bedgood was controlling, even though in that case, there was no attempt by the business to cure the policy violations.

Takeaways

Merritt Island Woodwerx highlights the enforceability risks associated with non-compliance with institutional arbitration rules.

When arbitration clauses incorporate the AAA Consumer Arbitration Rules in consumer contracts, parties must be aware of Rule 12, which requires businesses to register the clause and pay an associated fee before the AAA will accept a case. Failure to do so may result in administrative rejection and a finding of default under the FAA.

Courts in the Eleventh Circuit will interpret such failures as a default, even if the business later cures the procedural defect. This may allow parties resisting arbitration to litigate their claims even if they did not attempt arbitration, so long as the business’s failure to comply with institutional rules was not cured before the lawsuit was filed.

Notably, neither the parties nor the courts addressed a threshold issue under the applicable AAA Rule 12: whether the arbitration involved a “consumer agreement” as defined in AAA Rule 1. AAA Rule 1 defines a consumer agreement as a contract between an individual consumer and a business. Here, both plaintiffs were LLCs. Nonetheless, Space Coast implicitly accepted the applicability of AAA Rule 12 by belatedly registering the clause and not contesting its applicability to the LLCs. As a result, the court applied this rule without examining whether it was triggered under the AAA’s own definition. Bedgood did not preclude this threshold question, as, in that case, the plaintiffs were natural persons, not limited liability companies.

For practitioners, this case underscores that institutional choice in arbitration agreements is more than boilerplate. Different institutions impose different preconditions for accepting disputes. Some, like the AAA, conduct a pre-screening of consumer clauses. Others do not. The inclusion of administrative procedures in arbitral rules can shape not only how, and whether, arbitration proceeds, but also whether a court will later enforce the clause under the FAA.

[1] Merritt Island Woodwerx, LLC v. Space Coast Credit Union, No. 24-10019 (11th Cir. 2025).

[2] Merritt Island Woodwerx, LLC v. Space Coast Credit Union, No. 6:23-cv-1066-PGB-DCI (M.D. Fla. Dec. 15, 2023).

[3] American Arbitration Association, Consumer Arbitration Rules (amended and effective Sept. 1, 2014).

[4] Merritt Island Woodwerx, LLC v. Space Coast Credit Union, No. 24-10019 (11th Cir. 2025).

[5] Bedgood v. Wyndham Vacation Resorts, Inc., 88 F.4th 1355 (11th Cir. 2023).

[6] Id. at 1369.