Emphasizing that the Federal Arbitration Act (FAA) preempts state laws that "single out arbitration agreements for disfavored treatment," the U.S. Supreme Court has overturned the Kentucky Supreme Court's refusal to enforce two arbitration agreements signed by persons holding general powers of attorney given by nursing home residents.

In a 7-1 decision authored by Justice Kagan, the Court in Kindred Nursing Centers Limited Partnership v. Clark held that by requiring powers of attorney to specifically authorize the representative to enter into an arbitration agreement, the state court violated the fundamental FAA principle that arbitration agreements must be placed "on an equal footing with all other contracts."

The Kentucky Supreme Court had reasoned that because the rights of access to the courts and trial by jury were "sacred" and "inviolate" under state law, an agent could deprive his principal of such rights only if expressly provided in the power of attorney. It found that this "clear-statement" rule was consistent with the FAA because it applied to all contracts implicating fundamental constitutional rights, not just arbitration agreements.

Nevertheless, Justice Kagan's opinion forcefully rejected this reasoning on the ground that it "fail[ed] to put arbitration agreements on an equal place with other contracts." The state court's clear-statement rule did exactly what the U.S. Supreme Court previously barred in AT&T Mobility, LLC v. Concepcion: "adopt 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." The rule thus reflected "the kind of 'hostility to arbitration' that led Congress to enact the FAA." By impeding the ability of attorneys-in-fact to enter into arbitration agreements, the Kentucky Supreme Court "flouted the FAA's command to place those agreements on an equal footing with all other contracts."

The Court also rejected the argument that the Kentucky rule did not violate the FAA because it dealt only with contract formation. According to the Court, the FAA applies not only to the enforcement of arbitration agreements, but also to "their initial valid[ity]— that is, what it takes to enter into them." To hold otherwise, the Court emphasized, "would make it trivially easy for States to undermine the [FAA]—indeed, to wholly defeat it."

Because the Kentucky Supreme Court invalidated one of the arbitration agreements based exclusively on the clear-statement rule, the Court held that it must now enforce that agreement. With respect to the second arbitration agreement, the Court remanded the case to the state court for further consideration in light of the principles enumerated in Justice Kagan's opinion.

Kindred Nursing Centers sends a powerful pro-arbitration message to state and federal courts that direct and indirect efforts to sidestep the FAA will not be tolerated. It also comes at a time when agencies such as the Consumer Financial Protection Bureau, Department of Education, and Department of Health and Human Services are proposing to prohibit companies from including class action waivers in their arbitration agreements, even though the Supreme Court in Concepcion upheld the use of such waivers under the FAA.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).


Copyright © 2017 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.