In Kindred Nursing Centers Limited Partnership v. Clark 137 S.Ct. 1421, 2017 DJDAR 4461 (May 15, 2017) the U.S. Supreme Court again revisited the issue of the extent to which states can limit the availability of arbitration in the face of the Court’s persistent endorsement of the Federal Arbitration Act’s broad applicability. The states – in this case Kentucky – lost, with the Kentucky Supreme Court being excoriated for “having flouted the FAA’s command to place [arbitration] agreements on an equal footing with all other contracts.” (Id. at 1429 and 2017 DJDAR at 4465). The seven to one decision (Thomas dissenting as usual, Gorsuch not participating) and the strong language of the decision suggest that the Court is running out of patience on this issue.
At issue in the Kentucky case was a state court rule that an arbitration agreement signed using a power of attorney was not enforceable unless the power clearly and specifically authorized the agent to agree to arbitrate, what the Supreme Court called the “clear statement rule.” (Id. at 1426, 2017 DJDAR at 4464. The son and daughter of ailing parents signed agreements placing the parents in a nursing home, agreements which mandated arbitration of any disputes. After their parents’ deaths, the children filed suit against the nursing home alleging negligence. The nursing home moved to compel arbitration, but the trial court denied the motions. The Kentucky Court of Appeals and the Kentucky Supreme Court confirmed the trial court. The Kentucky Supreme Court reasoned that the right to trial was a fundamental constitutional right, and that only an express authorization to waive that right could warrant waiver by an agent. Perhaps anticipating SCOTUS review, the Kentucky Supreme Court added that that rule would apply to any constitutional right and thus was not singling out the right to trial which arbitration would preempt.
The US Supreme Court’s analysis is curtly (and even snidely) firm. The FAA establishes “an equal treatment principle” whereby an arbitration agreement can be invalidated only on generally applicable contract defenses. A state rule that discriminates on its face against arbitration is thus preempted, but so is “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” (Id. at 1426, 2017 DJDAR at 4464, the Court’s parenthesis.) The Kentucky Supreme Court’s “clear-statement rule” is, the Court found, just such a covert rule, one that “hinges on the primary characteristic of an arbitration agreement – namely, a waiver of the right to go to court and receive a jury trial.” (Id. at 1427, 2017 DJDAR at 4464.) It cannot be “salvaged,” the Supreme Court found, by the “slim set of both patently objectionable and utterly fanciful contracts that would be subject to [the same] rule” proffered by the Kentucky Court. (Ibid.) Seen clearly, the Kentucky “clear statement rule” is “applicable to arbitration agreements and black swans” (ibid.), and is thus invalid.
Comment: Six years ago, SCOTUS similarly rebuffed the California Supreme Court’s carving out an exception to the enforceability of arbitration agreements in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 (FAA preempted a ruling that an arbitration provision containing a class action waiver was unconscionable and unenforceable), a decision cited often in Kindred Nursing Center. Yet the Court denied certiorari to the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles LLC (2014) 59 Cal.4th 348, cert. denied 135 S.Ct. 1155 (Jan 20, 2015) (upholding a refusal to enforce an arbitration provision that waived an employee’s right to seek representative relief under California’s Private Attorney General Act (PAGA)) as it also did a month after its Kindred Nursing Center decision to the Ninth Circuit decision in Vitolo v. Bloomingdale’s, Inc. (PAGA waiver rendered arbitration provision unenforceable) 2017 WL 1001331 (June 19, 2017)(see Richard Samp, “California courts still haven’t learned the FAA lesson,” San Francisco Daily Journal, May 19, 2017, page 7). On neither occasion did SCOTUS explain its decision, so its reasons for finding the conclusions not susceptible to the objections that led to a reversal in Kindred Nursing Centers and AT&T Mobility are, well, not perfectly clear.