iOn May 15, 2017, the Supreme Court of the United States reaffirmed that the Federal Arbitration Act (the “FAA”) preempts state laws placing agreements to arbitrate on weaker footing than other types of contracts.[1] In Kindred Nursing Centers L.P. v. Clark,[2] the Supreme Court found that a state-court rule (the so-called “clear-statement rule”), though facially neutral, was really an attempt to target and disfavor arbitration agreements, and the Court therefore refused to enforce the rule and held that the arbitration agreements at issue must be enforced.
In 2009, the executors of the estates of the late Joe Wellner and Olive Clark separately sued Kindred Nursing Centers in Kentucky state court, alleging “that Kindred had delivered substandard care to Joe and Olive, causing their deaths.”[3] Kindred moved to dismiss based on the fact that the executors had each signed — pursuant to power-of-attorney agreements — a contract containing a mandatory arbitration provision as a condition of moving Joe and Olive into Kindred’s Winchester Centre nursing home.[4] The trial courts denied Kindred’s motions.
On appeal, the Kentucky Supreme Court consolidated the cases and affirmed the trial courts, holding that, because the right to a jury trial under the Kentucky Constitution is “inviolate” and “sacred” — a “divine God-given right” — “the power to waive generally such fundamental constitutional rights must be unambiguously expressed in the text of the power-of-attorney document in order for that authority to be vested in the attorney-in-fact.”[5] Put another way, the Kentucky Supreme Court said that a principal must expressly give its agent the specific authority to bind the principal to an arbitration agreement for that agreement to be valid and enforceable.
The Supreme Court of the United States reversed. In an opinion written by Justice Kagan, the Court held that the Kentucky Supreme Court’s “clear-statement rule” — which required “an explicit statement before an attorney-in-fact with broad powers could relinquish [the right to a jury trial] on another’s behalf”[6] — violated the FAA’s “equal-treatment principle.”[7] In other words, Kentucky’s “clear-statement rule” was “too tailor-made to arbitration agreements — subjecting them, by virtue of their defining trait, to uncommon barriers.”[8]
The Supreme Court’s decision is notable for at least three reasons.
First, this case garnered a clear 7–1 majority,[9] notwithstanding the Roberts Court’s stark division on other decisions involving the FAA.[10] But the Supreme Court’s near-unanimous agreement in Kindred is likely due more to the case fitting “well within the confines of . . . present well-established law” than to any realignment of the Justices’ positions on matters of arbitration.[11] Indeed, the Supreme Court hypothesized in Concepcion in 2011 that states may attempt an end-run around the FAA by “classifying as unconscionable arbitration agreements . . . that disallow an ultimate disposition by a jury.”[12] And that is exactly what appears to have happened in Kindred.[13]
Second, the Supreme Court indicated that it will look past the surface-level justification of state courts in order to protect the reach of the FAA. The Kentucky Supreme Court attempted to frame its rule as a broad one that rejected the ability of attorneys-in-fact to bind their principals to any contracts affecting “fundamental . . . liberties,” and offered as examples contracts that “waive the principal’s civil rights; or the principal’s right to worship freely; put her child up for adoption; consent to abort a pregnancy; consent to an arranged marriage; or bind the principal to personal servitude.”[14] But the Supreme Court rejected the Kentucky Supreme Court’s invocation of these “patently objectionable and utterly fanciful contracts” to justify its decision.[15] Accordingly, state courts cannot properly invoke the FAA’s saving clause by simply broadening an otherwise arbitration-focused rule to encompass other merely hypothetical contracts, or “black swans,” as the Court called them.[16]
Third, in light of Kindred, attorneys should note the Court’s visceral reaction against common-law rules and arguments that effectively act as back-handed ways to discriminate against arbitration agreements. While the Supreme Court acknowledged that traditional common law defenses to contract formation — like mutual mistake, duress, unconscionability, and the like — may potentially serve as a basis to invalidate an arbitration agreement, the Supreme Court was clear that rules and arguments that target arbitration’s effect on “fundamental liberties,” such as the right to a jury trial, are unlikely to succeed.[17]
Put most simply, Kindred is a reemphasis of an important principle of law: “A court may invalidate an arbitration agreement based on ‘generally applicable contract defenses,’ 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.’”[18]
Notes:
[1] See 9 USC § 2; see AT&T Mobility v. Concepcion, 563 U.S. 333, 339 (2011) (“The final phrase of § 2 . . . permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ This saving clause permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” (some internal quotations omitted)).
[2] Kindred Nursing Centers L.P. v. Clark, No.16-32 (2017), https://www.supremecourt.gov/opinions/16pdf/16-32_o7jp.pdf.
[3] Id. at 3.
[4] Id.
[5] See Extendicare Homes, Inc. v. Whisman, 478 S.W.3d 306, 328-29 (Ky. 2015) (emphasis added) (“[A]n agent's authority to waive his principal's constitutional right to access the courts and to trial by jury must be clearly expressed by the principal.”). The Supreme Court refers to this as the “clear-statement rule.” See, e.g., Kindred, slip op. at 4.
[6] Kindred, slip op. at 5.
[7] See DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 468 (2015) (citation omitted).
[8] Kindred, slip op. at 6.
[9] Justice Gorsuch took no part in the Supreme Court’s decision because the briefing and arguments occurred before he was confirmed. Justice Thomas wrote the lone dissent, reiterating his belief that the FAA “does not apply to proceedings in state courts,” a view that he has steadfastly maintained for over two decades. See Kindred, slip op. at 1 (Thomas, J., dissenting); Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 285 (1995) (Thomas, J., dissenting).
[10] See, e.g.,AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) (5–4 split); American Exp. Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013) (5–3 split); DIRECTV, 136 S. Ct. at 463 (6–3 split).
[11] See Kindred, slip op. at 9 (quoting DIRECTV, 136 S. Ct. at 471).
[12] See Concepcion, 563 U.S. at 342.
[13] See Kindred, slip op. at 5.
[14] See Extendicare Homes, 478 S.W.3d at 328.
[15] See Kindred, slip op. at 6–7 (“No 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.”).
[16] Id. (“Placing arbitration agreements within that class reveals the kind of hostility to arbitration that led Congress to enact the FAA. And doing so only makes clear the arbitration-specific character of the rule, much as if it were made applicable to arbitration agreements and black swans.” (all internals omitted)).
[17] See Kindred, slip op. at 6. Note, however, that contract formation defenses can sometimes be “too tailor-made” to arbitration agreements. The Supreme Court emphasized in Kindred that the FAA’s “equal-treatment principal” equally applies to contract formation and enforcement. See id. at 7–8. As a result, even formation arguments that disproportionately invalidate arbitration agreements are likely faulty under the FAA.
[18] Id. at 4 (quoting Concepcion, 563 U.S. at 339).
