U.S. Supreme Court Holds Federal Arbitration Act (FAA) Preempts Kentucky Law Disfavoring Arbitration Agreements

On May 15, 2017, the Supreme Court of the United States held in Kindred Nursing Centers, L.P. v. Clark, No. 16-32, that state courts are pre-empted by the Federal Arbitration Act (“FAA”) from singling out arbitration agreements for disfavored treatment.

At issue in the underlying case were powers of attorney held by respondents, the wife and daughter, respectively, of residents of a nursing home operated by Kindred Nursing Centers, L.P. (“Kindred”). When moving their relatives into the home, respondents used their powers of attorney to complete all necessary paperwork, including signing arbitration agreements on behalf of the residents. The arbitration agreement involved in both instances provided that any claims arising from the resident’s stay at the facility would be resolved through binding arbitration. After the deaths of the relatives, their estates (represented by respondents) filed suits against Kindred alleging the nursing home’s substandard care caused their deaths. Kindred moved to dismiss the cases, arguing that the arbitration agreement prohibited bringing the disputes to court.

The trial court denied Kindred’s motion to dismiss based on the arbitration agreement, and the Kentucky Court of Appeals agreed the suits could move forward. The Kentucky Supreme Court consolidated the cases and affirmed, finding the arbitration agreements invalid because neither power of attorney specifically entitled the representative to enter into an arbitration agreement through an express statement within the power of attorney.

The United States Supreme Court reversed, finding Kentucky’s “clear-statement rule” in violation of the FAA. The Court explained that the FAA, which makes arbitration agreements “valid, irrevocable, and enforceable […],” 9 U.S.C. § 2, establishes an equal-treatment principle: an arbitration agreement may be invalidated based on “contract defenses” but not on rules that “apply only to arbitration.” Thus, the FAA preempts any state rule that discriminates on its face against arbitration or against contracts that have the same effect as arbitration agreements.

Limitations

The United States Supreme Court has acknowledged two limitations to the enforceability of arbitration provisions governed by the FAA: “they must be part of a contract ‘evidencing a transaction involving commerce’ and such clauses may be revoked upon ‘grounds as exist at law or in equity for the revocation of any contract.’” Southland Corp. v. Keating, 465 U.S.1, 10-11, 104 S. Ct. 852, 858 (1984). Thus, contract defense arguments such as the capacity to sue, fraud, duress, authority, unconscionability, mutuality of consideration, and unavailability of the arbitration forum are still available to defeat the enforcement of arbitration agreements.

Illinois Application

In Carter v. SSC Odin Operating Co., LLC (Carter II), 2012 IL 113204 (2012), the Illinois Supreme Court reaffirmed that under the FAA, an arbitration agreement may be invalidated by a state law contract defense of general applicability without conflicting with the FAA, but an arbitration agreement may not be invalidated by a state law applicable only to arbitration agreements.

Conclusion

Long term care providers interested in enforcing arbitration agreements should be careful in drafting the arbitration agreement and make certain the agreement is based on a valid enforceable contract.

To obtain a copy of the Kindred Nursing Centers, L.P. v. Clark, No. 16-32 decision, click here. Please contact Candice Rudd by phone (312-673-7814) or e-mail (Candice.Rudd@ARandPartners.com) with any questions.