Alerts and Updates
Federal Arbitration Act Preempts State Laws Discriminating Against Arbitration Clauses
May 24, 2017
The 7-1 majority opinion not only strengthened the substance of case law protecting arbitration agreements, but also signaled that the U.S. Supreme Court would not bend on the issue in the future.
In Kindred Nursing Centers Ltd. Partn. v. Clark, 16-32, 2017 WL 2039160 (U.S. May 15, 2017), the U.S. Supreme Court struck down a ruling by the Supreme Court of Kentucky that invalidated arbitration agreements signed by individuals with powers of attorney because the principals did not expressly provide their agents with authority to enter into arbitration agreements. The ruling reaffirmed the preemptive effect of the Federal Arbitration Act (“FAA”), codified at 9 U.S.C. § 1 et seq., over state laws that discriminate against arbitration clauses. The Supreme Court clarified that this rule applies regardless of whether the state laws are directed at contract formation or enforcement.
In Kindred Nursing, two arbitration agreements were successfully challenged by plaintiffs in Kentucky. Both agreements were executed by close family members on behalf of the nursing home residents pursuant to powers of attorney during the admission process. In each instance, the powers of attorney granted the family members broad authority to manage the residents’ affairs.
After the residents passed away, their estates commenced lawsuits in Kentucky state court against the nursing homes, alleging that the nursing homes delivered substandard care and caused the residents’ deaths. The nursing homes sought to dismiss the cases in favor of arbitration in accordance with the agreements executed by the family members with the powers of attorney. Both the trial court and the Kentucky Court of Appeals ruled that the lawsuits could proceed.
The Supreme Court of Kentucky affirmed those decisions, holding that powers of attorney must contain a clear statement granting permission to enter into arbitration agreements before arbitration agreements signed pursuant to powers of attorney may be enforced. In support of its ruling, the Court noted that the Kentucky Constitution protects the rights of access to the courts and trial by jury and declares that the jury guarantee is a sacred and inviolable right.
The U.S. Supreme Court, citing to the FAA at 9 U.S.C. § 2, overruled the decision and held that arbitration agreements must be treated the same as other contracts, and may only be invalidated based on “generally applicable contract defenses like fraud or unconscionability, 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.” Kindred Nursing, 16-32, 2017 WL 2039160, at *4 (internal quotations omitted). This equal treatment principle preempts any state rule facially discriminatory against arbitration agreements and “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” Id.
In making its decision, the U.S. Supreme Court rejected the argument that the equal treatment principle did not preempt state rules applying to contract formation, and instead stated that the equal treatment principle applied broadly to ensure that arbitration agreements received the same treatment as other contracts regardless of whether contract formation or enforcement is at issue. To hold otherwise, the Court noted, would make it “trivially easy” for states to undermine the FAA by passing laws preventing anyone from entering into arbitration agreements. Id. at 6.
Justice Thomas was the lone dissenter to the opinion. He has consistently stated his view that the FAA does not apply to proceedings in state court. His view, if accepted by a majority of justices, would effectively nullify the FAA protection of arbitration agreements because most cases involving arbitration agreements are brought in state court.
The 7-1 majority opinion not only strengthened the substance of case law protecting arbitration agreements, but also signaled that the U.S. Supreme Court would not bend on the issue in the future. In the past, cases governing arbitration have been divided. For example, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), only four justices joined the majority opinion and one concurred, with four dissenting justices arguing that the arbitration agreement should not be enforced under California law. This led some to believe that the Supreme Court might be more solicitous of arguments that state law can limit arbitration agreements in the future. Today’s 7-1 majority opinion places federal law protecting arbitration agreements on firmer footing.
For Further Information
If you have any questions about this Alert, please contact Kenneth M. Argentieri, Steven K. Schartup, any of the attorneys in the Appellate Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.