Some wondered why the U.S. Supreme Court granted certiorari in Kindred Nursing Centers L.P. v. Clark, No. 16-32, and after oral argument on February 22, 2017, many felt they knew the outcome. Indeed, Justice Stephen Breyer commented during that argument:

“. . . Of course I’m highly suspicious as you can tell from my tone of voice. What I really think has happened is that Kentucky just doesn’t like the Federal law. That’s what I suspect.”

And Justice Ruth Bader Ginsburg asked:

But what about the principle that making an arbitration agreement harder to form than other agreements violates the Federal Arbitration Act. . . . [T]he main rule is equal footing. Arbitration we thought to be on the same footing as all other contracts. If you make the arbitration agreement harder to form because you have to have this explicit reference than other contracts, doesn’t that discriminate against arbitration agreements?

While everyone knows you can’t read too much into oral argument, there did seem to be some genuine skepticism among the justices. 

Now we see that the apparent skepticism was genuine doubt. And while this blog is not concerned with nursing home agreements, it is concerned with how the Court interprets and applies the Federal Arbitration Act (FAA). In a 7-1 opinion written by Justice Elena Kagan, the Court found that the Kentucky Supreme Court’s clear-statement rule for powers of attorney to manage a family member’s affairs violated the FAA “because that rule singles out arbitration agreements for disfavored treatment.”

The Background

Respondents Beverly Wellner and Janis Clark each held a power of attorney for their relatives Joe Wellner and Olive Clark. Both powers of attorney granted them broad authority to manage their family members’ affairs. When those family members moved into a Kindred Nursing facility, Beverly and Janis used their powers of attorney to complete admission documents, including an arbitration agreement with Kindred Nursing on behalf of the respective family members.

When the two family members died the next year, their estates (through Beverly and Janis) filed suits for substandard care in Kentucky state court. Kindred Nursing responded with motions to dismiss the cases based on the arbitration agreements. The trial court denied the motions, and the Kentucky Court of Appeals agreed. A divided Kentucky Supreme Court affirmed.

The Kentucky Supreme Court reasoned that a power of attorney could not entitle a representative to enter into an arbitration agreement “without specifically saying so.” The Kentucky high court found that the state constitution safeguards access to the courts and trial by jury as “sacred” and “inviolate.”

Justice Kagan, in a sometimes colorful opinion, found the clear-statement rule flawed. The rule was “too tailor-made to arbitration agreements – subjecting them, by virtue of their defining trait, to uncommon barriers” to overcome the FAA’s prohibition “against singling out those contracts for disfavored treatment.” The state court then sought to broaden the scope of the rule to other “fundamental constitutional rights” possessed by the principal – to which Justice Kagan responded, “[b]ut what other rights really? 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.”

Going in a different direction, the respondents Janis and Beverly argued that there was a distinction between contract formation and contract enforcement under the FAA. And according to the argument, the Kentucky rule only impacted contract formation which was not protected by the FAA. Yet Justice Kagan forcefully rejected this argument as well, declaring:

[T]he Act cares not only about the “enforce[ment] of arbitration agreements, but also about their initial “valid[ity]” – that is, about what it takes to enter into them. Or said otherwise: A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made.

Further, “[a]dopting the respondents’ view would make it trivially easy for States to undermine the Act – indeed to wholly defeat it.”

Accordingly, the Court ordered the Kentucky Supreme Court to enforce the Clark arbitration agreement because its invalidation rested on the clear-stated rule but remanded the Wellner arbitration agreement because it was unclear whether the state supreme court had another reason for its refusal to enforce it.

Justice Clarence Thomas dissented based on his well-established view that the FAA does not apply in state court. And Justice Gorsuch did not participate.

While Justice Kagan characterized the decision as not creating new law, its forcefulness raises hopes in some quarters as to the Court’s future path in FAA interpretation cases, such as the arbitration agreement with class waivers cases presently before the Court. Others attribute its tone and content more to the majority’s unhappiness with the state court’s superficial attempt to circumvent the provisions of the FAA.

Bottom Line

Following AT&T Mobility v. Concepcion and DIRECTV, Inc. v. Imburgia, the Court has demonstrated strong support for the FAA and against a state rule that “single[d] out arbitration agreements for disfavored treatment.”