• Supreme Court Applies FAA Preemption to Contract Formation
  • May 16, 2017 | Authors: Thomas M. Byrne; Margaret L. Flatt; Patricia A. Gorham; Stacey McGavin Mohr; Francis X. Nolan; Amelia Toy Rudolph; Valerie Strong Sanders; Phillip E. Stano; Gail L. Westover; Lewis S. Wiener
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  • The Supreme Court held yesterday that the Federal Arbitration Act preempts state law governing contract formation where a state rule discriminates against arbitration, a holding with broad implications for state-court decisions that treat the formation of an arbitration agreement as purely a state-law matter. Kindred Nursing Centers Ltd. P'ship v. Clark, No. 16-32, 2017 WL 2039160 (May 15, 2017). In a 7-1 opinion authored by Justice Elena Kagan, the Court overruled the Kentucky Supreme Court and invalidated Kentucky’s “clear-statement rule,” which provided that agents holding a power of attorney cannot waive their principal’s rights to access the court and trial by jury unless expressly permitted. The Court was not persuaded by the argument that the FAA applies only to the enforcement of arbitration agreements, not to formation, and held that the FAA preempts the clear-statement rule.

    Petitioner Kindred Nursing Centers L.P. operates nursing homes and rehabilitation centers. Respondents Beverly Wellner and Janis Clark held powers of attorney for two of their family members who were Kindred residents prior to their deaths. Both respondents had broad powers of attorney enabling them to enter contracts for the principals. Respondents moved their family members into the nursing home using their powers of attorney, and signed several contracts with Kindred, including arbitration agreements on behalf of their relatives. Both relatives died shortly thereafter, and respondents instituted legal actions against Kindred alleging that Kindred delivered substandard care, causing their family members’ deaths. 

    Kindred moved to dismiss these cases based on the arbitration agreements. The trial court, Kentucky Court of Appeals, and Kentucky Supreme Court each rejected Kindred’s motions to dismiss. The Kentucky Supreme Court held that a general grant of power of attorney does not permit the representative to enter arbitration agreements on behalf of the agent. Instead, the representative must possess specific authority to “waive his principal’s fundamental constitutional rights to access the courts [and] to trial by jury.” Extendicare Homes, Inc. v. Whisman, 478 S.W.3d 306, 327 (Ky. 2015).

    The Supreme Court held that Kentucky’s clear-statement rule fails to put arbitration agreements on an equal footing with other contracts. “By requiring an explicit statement before an agent can relinquish her principal’s right to go to court and receive a jury trial, the court did exactly what this Court has barred: adopt a rule hinging on the primary characteristic of an arbitration agreement.” The Court rejected the Kentucky Supreme Court’s “sometime-attempt to cast the rule in broader terms” by suggesting that its clear-statement rule could apply when an agent endeavored to waive other constitutional rights. The Court was not convinced, observing, “No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.” 

    Respondents argued that the clear-statement rule affects only contract formation and that the FAA does not apply to contract formation questions. Under respondents’ theory, the clear-statement rule affects only contract formation because it bars agents without explicit authority from entering into arbitration agreements, and the FAA applies only after a court has determined that a valid arbitration agreement was formed. The Court held that the text of the FAA provides otherwise: “The [FAA] cares not only about the ‘enforcement of arbitration agreements, but also about their initial validity’—that is, about what it takes to enter into them.” 

    Justice Kagan’s opinion was joined by Justices Roberts, Kennedy, Ginsburg, Alito, and Sotomayor. Justice Thomas dissented, continuing “to adhere to the view that the [FAA] does not apply to proceedings in state court.”

    This is not the Court’s first foray into the enforcement of arbitration agreements in the nursing home context. In Marmet Health Care Ctr., Inc. v. Brown, 565 U.S. 530, 531 (2012), the Court held that the FAA preempted West Virginia’s rule that arbitration provisions could not be enforced in personal injury and wrongful death actions in the nursing home setting on public policy grounds. The Supreme Court overruled the Supreme Court of Appeals of West Virginia, citing its decision in AT&T Mobility LLC v. Concepcion: “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”

    A federal agency has also entered the fray. The Centers for Medicare and Medicaid Services, an agency within the Health and Human Services Department, issued a rule that bars any nursing home that receives federal funding from requiring its residents to sign arbitration agreements. The Northern District of Mississippi issued an injunction of this rule on November 7, 2016. Am. Health Care Ass’n v. Burwell, No. 3:16-CV-00233, 2016 WL 6585295 (N.D. Miss. Nov. 7, 2016). After that injunction, the CMS suspended enforcement of the rule until and unless the injunction is lifted.