On May 15, 2017, in a closely-watched case involving arbitration clauses in nursing home contracts and powers of attorney, the U.S. Supreme Court held that the Federal Arbitration Act preempted a rule applied by the Kentucky Supreme Court when it refused to enforce two binding arbitration agreements between a nursing home and individuals holding general powers of attorney on behalf of two former residents of the nursing home. Kindred Nursing Centers Ltd v. Clark, et al.
As part of the nursing home’s resident intake process, the two individuals holding powers of attorney entered into arbitration agreements on behalf of their relatives that contained a provision requiring that “[a]ny and all claims or controversies arising out of or in any way relating to . . . the Resident’s stay at the Facility” would be resolved through “binding arbitration.” After the death of their family members, the individuals holding powers of attorney sued in state court, alleging that the nursing home had delivered substandard care, causing the deaths of their family members. The Kentucky Supreme Court applied a “clear-statement rule” in holding that both arbitration agreements were invalid because the powers of attorney did not specifically state that the representatives could enter into an arbitration agreement, and therefore the individuals holding powers of attorney were prohibited from restricting their relatives’ rights of access to the courts and trial by jury guaranteed under the Kentucky Constitution.
The U.S. Supreme Court reversed the state court, holding that its “clear-statement” rule was preempted by the FAA. The Supreme Court pointed out that the FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Permissible grounds for revocation of an arbitration agreement may include common contract defenses such as fraud or unconscionability. The Supreme Court stressed that the FAA “preempts any state rule discriminating on its face against arbitration – for example, a ‘law prohibit[ing] outright the arbitration of a particular type of claim.’” (quoting AT&T Mobility LLC v Concepcion, 563 U.S. 333, 341 (2011)).
The Supreme Court also rejected the individuals’ position that the clear-statement rule did not run afoul of the FAA because it affects only contract formation, and not enforceability of a validly-formed contract. The FAA, the Supreme Court said, applies to both the validity of an arbitration agreement at contract formation as well as its subsequent enforcement, and to hold otherwise would make it “trivially easy” for states to undermine the FAA. The Supreme Court reiterated that a contract defense such as “duress” at the contract formation stage could not be used to disfavor arbitration agreements.
The Supreme Court noted that the state court had failed to “put arbitration agreements on an equal plane with other contracts” and instead had adopted “a legal rule hinging on the primary characteristic of an arbitration agreement – namely, a waiver of the right to go to court and receive a jury trial,” in violation of the Court’s Concepcion holding. The Supreme Court found that this subjects arbitration agreements to uncommon barriers and therefore the state court ruling could not survive the “FAA’s edict against singling out those contracts for disfavored treatment.”
Because the state court had determined that one of the underlying powers of attorney was sufficiently broad to cover executing an arbitration agreement while the other was not, the Supreme Court reversed in part and vacated in part the judgment of the Kentucky Supreme Court, remanding the case for further consideration in light of the FAA preemption. The majority opinion was delivered by Justice Kagan, and joined by Chief Justice Roberts, and Justices Kennedy, Ginsburg, Breyer, Alito, and Sotomayor. Justice Thomas dissented, maintaining that the FAA does not apply to proceedings in state courts, and 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.” Id.