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Toeing the Arbitration Line after Marmet Health Care Center v. Brown

By Neal Troum October 4, 2012

The Upper Hand

The subject: The U.S. Supreme Court’s rulings backing contractual arbitration.

That law is clear. Yes, but West Virginia’s top court found a way around it in a nursing home contract case.

How? It sent the Scotus-overruled case back for an unconscionability assessment—one which the W. Va. Supreme Court of Appeals appears to have already decided. Result: Court over ADR clause.

Commentators are free to criticize. Indeed, readers expect critical analysis from their pundits.

But judges are expected to keep in line.

All judges can expect some degree of scrutiny of their decisions. All except Supreme Court justices must live with the fact that there is a tribunal above them with the authority to set forth the law they must follow.

There are instances when this tension comes to a boil. For example, the Daubert standard on the admissibility of expert witness testimony, which replaced the long-running Frye standard (Frye v. United States, 293 F. 1013, 1014 (1923)), is now simply accepted.

It was not always so.

Following the remand of Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993), to the Ninth U.S. Circuit Court of Appeals, now-Chief Judge Alex Kozinski , author of the decision the Supreme Court reversed, bristled.

“Federal judges,” he observed, “face a far more complex and daunting task in a post-Daubert world than before,” where they find themselves “in an uncomfortable position.” Recognizing the fate of the intermediate appellate judge, however, Kozinski concluded: “Mindful of our position in the hierarchy of the federal judiciary, we take a deep breath and proceed … .” Daubert v. Merrell Dow Pharmaceuticals, 43 F.3d 1311 (1995), at 1315-1316.

FAA CRITICISM

Criticism of the Supreme Court’s Federal Arbitration Act jurisprudence is not unheard of, either. Dissenters have labeled the Court’s rulings “fantastic,” as in Rent-A-Center, West Inc. v. Jackson, 130 S. Ct. 2772 (2010)(available at http://www.supremecourt.gov/opinions/09pdf/09-497.pdf) (Justice Stevens, dissenting), and lower court judges have called the law “puzzling” (Circuit Judge Richard A. Posner writing for the majority in Matterhorn Inc. v. NCR Corp., 763 F. 2d 866 (7th Cir. 1985)).

The West Virginia Supreme Court of Appeals, in Brown v. Genesis Healthcare Corp., 724 S.E.2d 250, 2011 WL 2611327 ( W. Va. June 29, 2011)(available at www.courtswv.gov/supreme-court/docs/spring2011/35494-35546-35635.pdf), rev’d sub nom, Marmet Health Care Center Inc. v. Brown, 132 S.Ct. 1201 (2012)(available at www.supremecourt.gov/opinions/11pdf/11-391.pdf), has entered the fray. West Virginia’s top court referred to the Supreme Court’s FAA jurisprudence as “created from whole cloth” and “tendentious.”

The West Virginia case concerns contracts relating to nursing home stays containing mandatory arbitration clauses. It held, among other things, that the FAA did not apply to agreements to arbitrate negligence claims in nursing home contracts where the agreement containing the arbitration clause had been entered into prior to when the negligence took place. The West Virginia court declared that the applicable arbitration agreements were unenforceable:

[A]s a matter of public policy under West Virginia law, an arbitration clause in a nursing home admission agreement adopted prior to an occurrence of negligence that results in personal injury or death, shall not be enforced to compel arbitration of a dispute concerning the negligence.

[Among the authorities referenced and quoted by the West Virginia Supreme Court of Appeals in Brown was this author’s previous Alternatives article, “Another View of Rent–A–Center, Arbitration and Arbitrability: Who is Watching the Watchmen?” 28 Alternatives 184 (Oct. 2010). See Brown, 2011 WL 2611327, at *279 n.93.]

The U.S. Supreme Court disagreed, and it surely didn’t like the “whole cloth” and “tendentious” comments. In a terse, four-page per curiam opinion, the justices scolded the West Virginia court, reminding it that “[w]hen this Court has fulfilled its duty to interpret federal law, a state court may not contradict or fail to implement the rule so established.” Marmet Health Care Center Inc. v. Brown, 132 S.Ct. 1201 (2012).

It concluded: “The West Virginia court’s interpretation of the FAA was both incorrect and inconsistent with the clear instruction in the precedents of this Court.” Id. The no-arbitration-of-certain-negligence-claims rule was deemed “contrary to the terms and coverage of the FAA” and, therefore, preempted. Id.

SOURCE OF FRUSTRATION

It is easy to understand the West Virginia judges’ frustration. The Court’s latest opinion on FAA preemption, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011)(available at www.supremecourt.gov/
opinions/10pdf/
09-893.pdf
), raised more than a few eyebrows.

The case addressed a California state law rule that invalidated certain class action waivers in contracts also containing an arbitration clause, so that class arbitration could go forward. The opinion held that because the class action vehicle was deemed incompatible with the “point” of arbitration—speed, informality, less cost, etc.—the state law rule by which the class action waiver was deemed unconscionable was preempted, and class action treatment of the contract claims at issue remained off the table.

Circuit courts are going out of their way to distinguish AT&T Mobility and find a way for class actions to go forward where there is a class action waiver, an arbitration clause, and an argument that the class action waiver is unenforceable under state law.

The Second Circuit, for example, in In re Amex, has concluded that where a federal statutory right could only be exercised by means of a class proceeding—and where there is an arbitration clause and a class action waiver—the class action waiver and the arbitration clause must be stricken and the case must proceed as a class action, in court. In re: American Express Merchants Ass’n, 634 F.3d 187 (2d Cir. Feb. 12, 2012)(available at bit.ly/Mc1vXL).

It distinguishes AT&T Mobility as dealing with state contract law rights, and In re Amex with federal statutory rights under the Sherman Act. Its holding effectively wrote the arbitration clause at issue out of existence. The case was the subject of a Supreme Court cert petition this summer; at press time, the Court had not yet decided whether to hear the case.

A Ninth Circuit case, Coneff v. AT&T Corp., No. 09-35563 (9th Cir. March 16, 2012) (available at www.ca9.uscourts.
gov/datastore/opinions/
2012/03/16/
09-35563.pdf
), finds a different way around AT&T Mobility, which it saw as barring application of only substantive state law unconscionability purporting to invalidate a class action waiver in an arbitration clause. It sent the consolidated cases before it back to the lower court for potential application of procedural unconscionability to determine if the class action waiver was enforceable.

Coneff tells the trial court on remand that it must determine whether the state’s procedural unconscionability law invalidated the class action waiver, in order to determine “which [p]laintiffs, if any, may benefit.”

A CALL TO COURT

It is not clear, however, for those Coneff plaintiffs who enjoy that “benefit,” how the case will proceed—in class arbitration or in a class action in state court. Coneff states that, to the extent that In re Amex was not distinguishable, “we disagree with it.” That suggests a class action in court will not be it.

The U.S. Supreme Court may step in to clear things up. Indeed, one of the dissenters to the Second Circuit’s denial of en banc review of In re Amex— there were three dissents; see the official opinions at http://1.usa.gov/
LiB1yJ
; see also Congsi Wu, “No 2d Circuit Rehearing on Case Striking Amex Class Arbitration Waiver (June 1),” at www.cpradr.org (direct link: http://bit.ly/
Nndxhe
))—essentially took out an ad for certiorari: “[T]his is one of those unusual cases where one can infer that the denial of [e]n banc review can only be explained as a signal that the matter can and should be resolved by the Supreme Court.”

This is the backdrop against which the West Virginia court, according to the Supreme Court, “fail[ed] to implement the rule [the Court had] established.”

But West Virginia may have the last laugh. On remand, in Brown v. Genesis HealthCare Corp., the West Virginia Supreme Court of Appeals announced that the arbitration agreement was unconscionable under state law and, hence, unenforceable.

The Court made clear that it was hewing to the letter, if not the spirit, of AT&T Mobility: “The doctrine of unconscionability is a general, state, common-law, contract principle that is not specific to arbitration, and does not implicate the FAA.” (Emphasis added.)

So after the U.S. Supreme Court reversed its ruling that the arbitration clause was unenforceable, the West Virginia Court deemed it unenforceable again—but on a different basis.

Thus, at the end of the day, the plaintiffs in the nursing home cases will proceed in court and not arbitration, just where they wanted to be, with state law invalidating their arbitration provision, just as the West Virginia Court originally held.

The U.S. Supreme Court will probably not again take Brown on appeal to administer another drubbing. After all, the Supreme Court had its hands full reversing lower courts’ FAA rulings in the 2011 Term, with two FAA reversals in addition to Brown.

The Supreme Courts per curiam decision in KPMG LLP v. Cocchi, No. 10–1521 (Nov. 7, 2011)(available at www.supremecourt.gov/
opinions/11pdf/
10-1521.pdf
), reminded the Florida high court that where arbitrable and nonarbitrable claims are at issue, the former must be compelled to arbitration.

In CompuCredit Corp. v. Greenwood, No. 10-948 (Jan. 10)(available at www.supremecourt.gov/
opinions/11pdf/
10-948.pdf
), the Court held that the Credit Repair Organizations Act was subject to the FAA, and therefore CROA claims could be subject to arbitration clauses.

Brown was FAA reversal number three this past term.

* * *

Perhaps with all these reversals lining up, it may be time for the Court to take a look at the state of the law under the FAA.

Until then, there may be more reversals as lower court judges continue to scratch their heads and fail to toe the line.

The author is a commercial litigator in Stradley Ronon Stevens & Young’s litigation practice group in Philadelphia. He focuses on complex civil litigation, including securities fraud, insurance coverage matters and appellate practice.


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