By Design, LLC terminated the employment of Oded Nachmani, who claimed he was wrongfully dismissed in violation of his employment contract and certain discrimination laws. The contract contained an arbitration clause, which provided as follows:

In the event of any controversy among the parties hereto arising out of, or relating to, this Agreement . . . such controversy shall be submitted to binding arbitration. . . A hearing shall be held by the arbitrator or arbitrators in the City of New York, and a decision of the matter so submitted shall be rendered promptly in accordance with the commercial rules of the American Arbitration Association [AAA]. (Emphasis added.)

The arbitration clause further provided that each party would designate “one independent arbitrator” and that the two arbitrators would select a third independent arbitrator. Nachmani demanded arbitration and named his arbitrator. By Design responded, asserted a counterclaim, and appointed its arbitrator. Neither parties’ claim was filed with the AAA.

A dispute then arose as to whether Nachmani’s arbitrator was “independent.” By Design requested guidance concerning this issue from the AAA, which responded that it would administer the arbitration if either party filed a demand with the AAA. As a result, By Design filed a separate arbitration demand and claim against Nachmani with the AAA. Nachmani refused to participate in the “second” arbitration and instead commenced an action in New York state court for an order enjoining By Design from proceeding with its “second” arbitration before the AAA. The court granted Nachmani’s motion, and By Design appealed.

In affirming the lower court’s ruling, the Appellate Division, First Department, criticized By Design for participating in the first arbitration (answering, asserting a counterclaim, and appointing an arbitrator) and then seeking to commence a second arbitration with the AAA. The First Department viewed By Design’s actions as delay tactics and noted that it should have sought to stay the first arbitration at the outset if By Design believed the dispute was not commenced properly (even though By Design’s position was that the first arbitration should have been administered by the AAA rules as well).

The court further found that the parties’ agreement to arbitrate “in accordance with the commercial rules of the AAA” was not an express agreement to have an AAA-administered arbitration, or to incorporate the AAA rules into the parties’ dispute. Rather, the court held that the arbitration clause’s reference to the AAA rules was a choice of law provision, as opposed to forum selection clause, and thus there was no agreement by the parties to have the AAA administer the arbitration.

Click here to review the decision, captioned Nachmani v. By Design, LLC, 2010 NY Slip Op 04847 (1st Dep’t, Aug. 25, 2010).