The 2-carboxy-6-hydroxyoctahydroindole (Choi) moiety is a hallmark of aeruginosins, a class of cyanobacterial derived bioactive linear tetrapeptides that possess antithrombotic activity. The biosynthetic pathway of Choi has yet to be resolved. AerE is a cupin superfamily enzyme that was shown to be involved in the biosynthesis of Choi, but its exact role remains unclear. This study reports the functional characterization and structural analyses of AerE. Enzymatic observation reveals that AerE can dramatically accelerate 1,3-allylic isomerization of the non-aromatic decarboxylation product of prephenate, dihydro-4-hydroxyphenylpyruvate (H2HPP). This olefin isomerization reaction can occur non-enzymatically and is the second step of the biosynthetic pathway from prephenate to Choi. The results of comparative structural analysis and substrate analogue binding geometry analysis combined with the results of mutational studies suggest that AerE employs an induced fit strategy to bind and stabilize the substrate in a particular conformation that is possibly favorable for 1,3-allylic isomerization of H2HPP through coordinate bonds, hydrogen bonds, pi-pi conjugation interaction and hydrophobic interactions. All of these interactions are critical for the catalytic efficiency.