Be Careful With That Power of Attorney!: Arbitration Clauses and Nursing Home Lawsuits

by LeClairRyan

On May 15, 2017, the Supreme Court of the United States handed down its opinion in Kindred Nursing Centers, L.P. v. Clark This case addressed the issue of whether an agent acting pursuant to a power of attorney could bind an estate to an arbitration agreement.

The facts of the case were simple.  Beverly and Janis, family members of Joe and Olive respectively, each held their family member’s respective power of attorney.  Joe and Olive moved into a nursing home operated by Kindred Nursing Centers, L.P. (“Kindred”).  Beverly and Janis used their family members’ powers of attorney to sign an arbitration agreement, on behalf of Joe and Olive.  Arbitration is the process by which parties use a third-party person (rather than a court) to decide their claims. The agreements at issue in the case stated that Joe and Olive agreed to arbitrate all claims arising from their stay at the nursing home (rather than file a lawsuit).  Joe and Olive later died.

Beverly and Janis both brought claims alleging that their family members’ deaths were caused by Kindred’s substandard care.  Kindred moved to dismiss based on the arbitration agreement.  The trial court in Kentucky denied Kindred’s motions to dismiss.  The Kentucky Court of Appeals agreed with the trial court.  The Kentucky Supreme Court affirmed and held that the arbitration agreements were invalid because the powers of attorney did not specifically grant the agents the authority to enter into arbitration agreements.  The Kentucky Supreme Court further stated that the Kentucky Constitution provided that a person’s rights to juries and the courts were “inviolate” and “sacred”.  The Kentucky Supreme Court held that an agent could not bind a person to arbitration unless the power of attorney specifically addressed the ability of the agent to sign an arbitration agreement.

The Supreme Court of the United States (the “Court”) granted certiorari and reversed the Kentucky Supreme Court.  In its analysis, the Court stated that the Kentucky Supreme Court’s opinion violated the Federal Arbitration Act (the “FAA”) by singling out arbitration agreements for disfavored treatment.

As background, the FAA is a federal act that is aimed at upholding arbitration agreements.  Arbitration is seen by many as a more favorable option to large corporations and entities, compared to litigating consumer claims in court.  Arbitration is favored by large corporations because it helps reduce the amount of litigation and attorney’s fees incurred in defending claims.  Critics of arbitration allege that it can be expensive and burdensome on the part of plaintiffs.  For example, arbitration agreements may limit the time within which plaintiffs may make a claim, require plaintiffs to travel, and sometimes require the plaintiffs to help pay the cost of the arbitrator.

The FAA’s main effect, as codified at 9 U.S.C. § 2, provides in part that “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  In other words, arbitration agreements are valid unless there are grounds for invalidating it, just as any other contract.  Since most people do not read every word of every contract they enter, the FAA can be an unpleasant surprise to many plaintiffs and plaintiffs’ attorneys.

The FAA does not just apply to federal contracts.  The FAA works to preempt (override) any inconsistent state rule that discriminates against arbitration agreements.  The FAA requires that arbitration agreements be treated the same as all other contracts.  For example, a state would violate the FAA if it passed a law that said “all arbitration agreements are invalid.”

The Court found that the Kentucky Supreme Court’s refusal to place the arbitration agreements on the same level as contracts violated the FAA.  Instead of treating the arbitration agreements the same as any other contract, the Kentucky Supreme Court’s opinion “specially impeded the ability of attorneys-in-fact to enter into arbitration agreements.”  The Court made it clear that states cannot single out arbitration agreements for greater scrutiny than run-of-the-mill contracts.  Since the Kentucky Supreme Court analyzed the bindingness of arbitration agreements (by considering a power of attorney’s specific authority to do so) entered into by agents under a power of attorney, it conceptually singled out arbitration agreements. This analysis, according to the Court, was impermissible under the FAA.

Ultimately, the Court reversed, in part, and vacated, in part, the judgment of the Kentucky Supreme Court.  The Court enforced Olive’s arbitration agreement because the state court found that her power of attorney was broad enough to execute the arbitration agreement.  The Court noted that the Kentucky Supreme Court violated the FAA because it refused to enforce Olive’s arbitration agreement only because there was no specific authority to enter into the arbitration agreement (thereby singling out arbitration agreements from regular contracts).  The Court remanded the issue of Joe’s arbitration agreement because the state court did not find that his power of attorney was broad enough to permit the execution of the arbitration agreement.

The Clark opinion, while interpreting in part the Kentucky Constitution, has a national impact. While it appears there is still an argument that a power of attorney may not be sufficiently broad enough to bind an estate to arbitration, the Clark opinion makes equally clear that it is possible for an agent under a power of attorney to do so.  The Clark opinion is important to both agents acting pursuant to powers of attorney, as well as to the principals of powers of attorney.   In other words, if you appoint an agent pursuant to your power of attorney, they may well bind you and your estate to arbitration.  As the population ages and nursing homes become more ubiquitous, it is likely we will see both (i) an increase in nursing home litigation, and (ii) an effort by nursing homes to include arbitration agreements in their contracts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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