By Jeffrey H. Brochin, J.D.
The Kentucky Supreme Court’s clear-statement rule which required that patient powers of attorney specifically authorize an agent to enter into an arbitration agreement in order to be valid, violated the Federal Arbitration Act (FAA) (9 U.S.C. §1 et seq.) by singling out arbitration agreements for disfavored treatment, the U.S. Supreme Court has ruled. The FAA preempts any state rule that discriminates on its face against arbitration, and applies to both formation and enforcement of arbitration agreements (Kindred Nursing Centers Limited Partnership v. Clark, May 15, 2017, Kagan, E.).
Background. Kindred Nursing Centers, L.P. (Kindred) operates nursing homes and rehabilitation centers. Two family members of two separate Kindred patients were agents for the patients pursuant to powers of attorney, which afforded the agents broad authority to manage each patient’s affairs. At the time the agents completed all necessary paperwork related to the nursing home admission process, they each signed an arbitration agreement on behalf of the relative. The agreement provided that any claims arising from the relative’s stay at the facility would be resolved through binding arbitration. After each of the patients died, the agents filed lawsuits alleging that Kindred’s substandard care had caused the deaths.
Kindred moved to dismiss the suits, arguing that the binding arbitration agreements prohibited bringing the suits to court. The trial courts denied Kindred’s motions, the Kentucky Court of Appeals agreed that the cases should go forward, and the Kentucky Supreme Court consolidated the cases and ruled that both arbitration agreements were invalid because neither power of attorney specifically entitled the representative to enter into an arbitration agreement. The U.S. Supreme Court granted certiorari (see Nursing home arbitration clause case on SCOTUS docket; rule’s ban challenged, November 1, 2016).
The Federal Arbitration Act. The FAA, which makes arbitration agreements valid, irrevocable, and enforceable—except upon such grounds as exist at law or in equity for the revocation of any contract—establishes an equal-treatment principle: a court may invalidate an arbitration agreement based on generally applicable contract defenses, but not on legal rules that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. The FAA thereby requires courts to place arbitration agreements on equal footing with all other contracts, and it preempts any state rule that discriminates on its face against arbitration or that covertly accomplishes the same objective by disfavoring contracts that have the defining features of arbitration agreements.
The Kentucky clear-statement rule. The U.S. Supreme Court found that the Kentucky Supreme Court’s clear-statement rule failed to put arbitration agreements on an equal plane with other contracts. By requiring an explicit statement from a principal before an agent could relinquish the principal’s right to go to court and receive a jury trial, the state court did exactly what the Supreme Court barred: it adopted a legal rule hinging on the primary characteristic of an arbitration agreement. Because the clear-statement rule singled out arbitration agreements for disfavored treatment, it was found to violate the FAA.
Kentucky constitutional rights. The Kentucky Supreme Court looked to the state’s constitution as the basis for its ruling, noting that their constitution protects the rights of access to the courts and trial by jury, going so far as to characterize the state’s jury guarantee as the sole right in their constitution deemed "sacred" and "inviolate." That court further asserted that their clear-statement rule would be applicable to other contracts implicating fundamental constitutional rights. However, the U.S. Supreme Court disagreed with the state court’s position, noting that the clear-statement rule revealed the kind of hostility to arbitration that led Congress to enact the FAA.
Differentiating formation from enforcement. The patients’ agents contended that a distinction should be made between contract formation and contract enforcement, and that the Kentucky rule affected only contract formation because it barred agents lacking specific authority from entering into arbitration agreements. Accordingly, they argued that the FAA had no applicability to issues of contract formation. However, the U.S. Supreme Court interpreted the FAA differently and stated that a rule selectively finding arbitration contracts invalid because of its improper formation fared no better under the FAA than a rule selectively refusing to enforce those agreements once properly made.
Distinguishing the two cases. Because the state court invalidated one arbitration agreement based exclusively on the clear-statement rule, the Supreme Court held that Kentucky must now enforce that arbitration agreement. But because it was unclear whether the Kentucky court’s interpretation of the other agent’s power of attorney was wholly independent of its rule, they could not conclude that their decision would require the same result in the second case. The court directed the Kentucky Supreme Court to determine on remand whether it would still adhere, in the absence of the clear-statement rule, to its prior reading of that power of attorney. The court therefore vacated the Kentucky judgment in that case and returned the matter to the state court for further consideration.
Dissenting opinion. Justice Thomas dissented, finding that the FAA does not apply to proceedings in state courts, and that in state-court proceedings, therefore, the FAA does not displace a rule that requires express authorization from a principal before an agent may waive the principal’s right to a jury trial.
The case is No. 16-32.
Attorneys: Andrew J. Pincus (Mayer Brown LLP) for Kindred Nursing Centers Ltd. Partnership d/b/a Winchester Centre For Health And Rehabilitation n/k/a Fountain Circle Health And Rehabilitation. Robert E. Salyer (Wilkes & McHugh, P.A.) for Janis E. Clark.
Companies: Kindred Nursing Centers Ltd. Partnership d/b/a Winchester Centre For Health & Rehabilitation n/k/a Fountain Circle Health and Rehabilitation
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