SCOTUS Upholds the Federal Arbitration Act – Takeaways
No Pre-Emption Exemption – The U.S. Supreme Court and the Kentucky Supreme Court are not kindred spirits with respect to state law restrictions on arbitration agreements
• High court upholds the Federal Arbitration Act in the face of state law attempts to restrict certain types of agreements to arbitrate.
• State laws aimed at protecting individuals or consumers will not override the Federal policy in favor of arbitration to the extent those laws are discriminatory against arbitration.
The U.S. Supreme Court and the Kentucky Supreme Court are not kindred spirits with respect to state law restrictions on arbitration agreements
On May 15, 2017, the U.S. Supreme Court in Kindred Nursing Centers Ltd. v. Clark continued a trend of recent pro-arbitration decisions that strike down state laws that fail to place arbitration agreements on equal footing with other contracts. In Kindred, the Court re-affirmed that (1) legal rules that explicitly or implicitly disfavor contracts that “have the defining features of arbitration agreements” violate the Federal Arbitration Act (FAA), and (2) the Federal Arbitration Act applies to contract formation issues.
Kindred builds upon recent Supreme Court precedent in favor of arbitration agreements. For example, in 2015 the Court held in a 6-3 decision in DirectTV v. Imburgia that a California state court’s interpretation of a contract provision was also preempted by the FAA because the interpretation did not put arbitration contracts “on equal footing with all other contracts.” In a 2011 5-4 decision in AT&T Mobility LLC v. Concepcion, the Court similarly held that a California Supreme Court decision that rendered class-arbitration waivers unenforceable was also preempted by the FAA because it stood “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”
The Kindred Holding
In Kindred, Petitioners appealed a decision by the Kentucky Supreme Court that held their agreements to arbitrate disputes with Respondents were unenforceable. In separate contracts, the two Respondents had held power-of-attorney over their relatives, and using that power signed contracts with Petitioners for the care of their relatives in Petitioners’ nursing home. The contracts between Respondents and Petitioners included an agreement to arbitrate disputes. When a dispute arose, the Respondents brought suit in Kentucky state court. Petitioners opposed the suit on the grounds that there were valid agreements to arbitrate. After an initial decision was appealed, the Kentucky Supreme Court held that the agreements to arbitrate were unenforceable. According to the Kentucky Supreme Court, the underlying power-of-attorney contracts did not specifically grant the right for Respondents to enter into arbitration agreements, and the court held that such specificity was required because at issue was a “sacred” state constitutional right to a jury trial.
The U.S. Supreme Court disagreed in a 7-1 decision. The Court noted that that the Federal Arbitration Act preempts legal rules that discriminate against arbitration. Explaining that this principle of preemption extends to a rule that either discriminates against arbitration “on its face” or “covertly accomplishes the same objective by disfavoring contracts that … have the defining features of arbitration agreements,” the Court held that the Kentucky Supreme Court’s decision created a legal rule that did the latter. The Court was skeptical of the Kentucky Supreme Court’s rationale that the requirement of specificity in agent contracts also applies to “other contracts implicating ‘fundamental constitutional rights,’” and pointed out that “[n]o 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.”
The Court also rejected a separate argument raised by Respondents that the FAA does not apply to contract formation issues. Respondents argued that states had “free rein” to determine whether arbitration agreements were validly created. But the Court highlighted language in the FAA that required arbitration agreements to be treated as “valid, irrevocable, and enforceable.” By using the word “valid,” the Court held, the FAA clearly applied to issues regarding the initial validity of the agreement. The Court also noted that to agree with Respondents would effectively eviscerate the FAA, as holding the FAA inapplicable to contract formation issues would allow states to “declare everyone incompetent to sign arbitration agreements.”
Potential impact of the decision
In coming to its conclusions, the Court was careful to point out that it was only reaching “a conclusion that … falls within the confines of (and goes no further than) well-established law.” Nonetheless, industry should take note of the Court’s willingness to uphold the FAA in the face of state law attempts to build in restrictions on certain types of agreements to arbitrate. Kindred could have broad reaching impacts on health care-related arbitration agreements and, combined with Imburgia and Concepcion, continues to signal that state laws aimed at protecting individuals or consumers will not override the Federal policy in favor of arbitration.