The Supreme Court of the United States recently concluded that Kentucky’s “clear-statement” rule violates the Federal Arbitration Act (FAA) by singling out arbitration agreements and treating them differently from other contracts.
The Kentucky Supreme Court had held that the arbitration agreements at issue were invalid because the individuals who entered into the agreements did so under a power of attorney, and the powers of attorney at issue did not specifically entitle the representatives to enter into an arbitration agreement. The Kentucky Supreme Court reasoned that, because the Kentucky Constitution declares the rights of access to the courts and trial by jury to be “sacred” and “inviolate,” an agent could deprive her principal of such rights only if expressly provided in the power of attorney. Thus, the “clear-statement” rule was applied.
The Supreme Court of the United States disagreed, holding that the clear-statement rule fails to put arbitration agreements on an equal plane with other contracts, and that by requiring an explicit statement before an agent can relinquish her principal’s right to go to court and receive a jury trial, the court had adopted a legal rule that singled out arbitration agreements for disfavored treatment in violation of the FAA. Accordingly, the Supreme Court reversed the holding of the Kentucky Supreme Court.
A copy of the opinion in Kindred Nursing Centers L.P. v. Clark is available at: Link to Opinion.
The plaintiffs in this case were the wife and daughter of two individuals who had been moved into the defendant’s nursing home. Both plaintiffs held a power of attorney for their respective family member that gave them broad authority to manage their family member’s affairs. Upon moving their family members into the nursing home, the plaintiffs executed arbitration agreements providing that any claims arising from the family member’s stay at the facility would be resolved through binding arbitration.
When the family members passed away, their estates (represented by the plaintiffs) filed tort claims against the defendant nursing home. The nursing home moved to dismiss the suits, asserting the claims were governed by the arbitration agreements. The trial court denied the motions, and the Kentucky Court of Appeals upheld the trial court’s ruling.
The Kentucky Supreme Court consolidated the cases and affirmed the rulings of the lower courts. According to the Kentucky Supreme Court, the Kentucky Constitution declares the rights of access to the courts and trial by jury to be “sacred” and “inviolate,” and because the plaintiffs’ powers of attorney did not include specific language authorizing plaintiffs to waive those constitutional rights, the plaintiffs were not authorized to enter into the arbitration agreements.
The Supreme Court of the United States accepted the defendant nursing home’s petition for certiorari.
You may recall that the FAA requires courts to place arbitration agreements “on equal footing with all other contracts.” DIRECTV, Inc. v. Imburgia, 577 U. S. ___, ___, 136 S. Ct. 463, 468, 193 L. Ed. 2d 365, 372 (2015) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U. S. 440, 443, 126 S. Ct. 1204, 163 L. Ed. 2d 1038 (2006)); see also 9 U. S. C. §2.
The FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2.
According to the Supreme Court of the United States, that provision establishes an equal-treatment principle: A court may invalidate an arbitration agreement 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.” AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 339, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011).
The Supreme Court of the United States was clear in its interpretations of the FAA: it preempts any state rule that discriminates on its face against arbitration, and it supersedes any rule that indirectly attempts to accomplish the same goal by disfavoring contracts that have characteristics specific to arbitration agreements.
The Court’s prior decision in Concepcion set the precedent for its ruling in this matter. In Concepcion, the Court analyzed a hypothetical state law declaring unenforceable any contract that “disallow[ed] an ultimate disposition [of a dispute] by a jury.” Id., at 342, 131 S. Ct. 1740, 179 L. Ed. 2d 742. Even though the law might avoid referring to arbitration by name, according to the Court, it would still rely on “the uniqueness of an agreement to arbitrate as [its] basis”—and thereby violate the FAA. Id., at 341, (quoting Perry v. Thomas, 482 U. S. 483, 493, n. 9, (1987)).
Applying the ruling from Concepcion to this matter, the Supreme Court of the United States concluded that Kentucky’s clear-statement rule fails to put arbitration agreements on an equal plane with other contracts. “Such a rule is too tailor-made to arbitration agreements—subjecting them, by virtue of their defining trait, to uncommon barriers—to survive the FAA’s edict against singling out those contracts for disfavored treatment.”
The Supreme Court of the United States took issue with the Kentucky Supreme Court’s suggestion that the clear-statement rule could apply equally to other contracts that involve the waiver of constitutional rights. The Supreme Court of the United States held 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. Nor did the opinion below indicate that such a grant would be needed for the many routine contracts—executed day in and day out by legal representatives—meeting that description.”
The Court also rejected the plaintiffs’ argument that the clear-statement rule only applies to contract formation, not enforcement issues. According to the plaintiffs, the FAA has no application to contract formation issues. The Court, however, observed that the language of the FAA and case law interpreting it proved otherwise.
First, the FAA states that an arbitration agreement must ordinarily be treated as “valid, irrevocable, and enforceable.” 9 U. S. C. §2. Thus, according to the Court, the FAA applies not only to the “enforce[ment]” of arbitration agreements, but also to their initial “valid[ity].”
In addition, the Court cited to prior opinions that addressed the validity of arbitration agreements where issues of duress and fraud were raised. According to the Court, addressing those defenses would not have been necessary if, as the plaintiffs argue, the FAA did not apply to contract formation.
Furthermore, according to the Court, adopting the argument of the plaintiffs would lead to states undermining the FAA by declaring powers of attorney incapable of authorizing entering into arbitration agreements – even if the authority granted by the power of attorney was incredibly broad. Going even one step further, the Court reasoned, would lead to states completely eviscerating the FAA by declaring everyone incompetent to execute arbitration agreements. Accordingly, the Supreme Court refused to adopt the plaintiffs’ argument.
In reversing the Kentucky Supreme Court, the Supreme Court of the United States concluded: “The Kentucky Supreme Court specifically impeded the ability of attorneys-in-fact to enter into arbitration agreements. The court thus flouted the FAA’s command to place those agreements on an equal footing with all other contracts.”
The powers of attorney at issue were not identical. For one of them, the lower court concluded it was broad enough to authorize the plaintiff to execute an arbitration agreement. As to that matter, the Supreme Court of the United States reversed the Kentucky Supreme Court’s decision and held that the arbitration agreement was enforceable. With regard to the other power of attorney, there was an issue of whether the clear-statement rule may have influenced the Kentucky Supreme Court’s declaration that that power of attorney was insufficiently broad to give the plaintiff the authority to execute an arbitration agreement.
As a result, the Supreme Court of the United States vacated the Kentucky Supreme Court’s ruling, and remanded the matter to the trial court for an assessment of the scope of the authority contained in the power of attorney without consideration of the clear-statement rule.