jossey-bass

Expanding Views? Justices Test Kentucky Ruling that Defeated an Arbitration Contract

ADR Briefs

By Russ Bleemer & Ava ChetritApril 2017 | Print
ALT-35-4-to-microsite
U.S. Supreme Court arguments in Kindred Nursing Centers v. Clark, No. 16-32, took an unexpected turn in February when two of the justices appeared to support arbitration positions uncharacteristic of their usual views.

The context was an action by families of deceased residents against the Supreme Court petitioners, units of Kindred Healthcare Inc., a publicly traded, Louisville, Ky., nursing home operator.

The respondents, who were the original plaintiffs and who won the right to go to trial in Kentucky state courts, charged the Kindred units with abuse, neglect and wrongful death under state statutory and common law claims. Kindred moved to stay the suits and compel arbitration under agreements in the nursing home admission papers for disputes arising with residents.

The case focused on the fact that the arbitration agreements were signed before the patients entered the homes by their attorney-representatives, who were authorized to execute contracts in their principals’ names under powers-of-attorney forms.

But in a decision analyzing state contract law, the Kentucky Supreme Court affirmed a lower court decision ruling that the arbitration agreements signed by the attorneys were unenforceable. The pivotal point was that while the scope of the powers of attorney were broad and undefined, it wasn’t broad enough to include a waiver of a fundamental constitutional right: The Kentucky courts said that the principals could not relinquish their access to court and to trial by jury in favor of arbitration without a specific delegation in their powers of attorney under Kentucky law.

The advocates faced a lot of Court skepticism about treating arbitration differently than other contract provisions under Kentucky state law—a familiar fact pattern in cases in which the Supreme Court has reversed lower court decisions by finding that the Federal Arbitration Act preempted state law.

But the attorneys arguing the case also faced challenges from the nation’s top Court on the preemption issue, too, with comments from justices seemingly backing Kentucky’s moves in determining the extent of its own contract law on powers of attorney.

In the Feb. 22 arguments at the Supreme Court, first, Justice Samuel A. Alito Jr., a steady vote for boosting the FAA by joining in Court opinions finding that the 91-year-old act preempts state law, told the nursing home’s attorney that his clients’ care agreement deserved higher scrutiny by the courts than the consumer financial contracts cases in which the justice, and the Court itself, had backed individualized arbitration processes rather than class litigation.

Then, Justice Stephen G. Breyer, who wrote the Court’s most recent significant opinion upholding arbitration last term in DirecTV v. Imburgia, 136 S. Ct. 463 (2015)(available at 1.usa.gov/1Qhzb6R)—which invoked the FAA while expressing concerns about the Court’s arbitration jurisprudence involving class waivers—launched an opposing view. Breyer suggested to the original plaintiffs’ attorney that he believed the Kentucky Supreme Court decision didn’t make sense, and was based on “not liking the federal law.”

The problem in the case, according to the Kentucky Supreme Court, was that the powers of attorney were not specific enough to cover the arbitration agreements’ enforceability. The court referred to the principals’ “inviolate” fundamental constitutional right to a jury trial under the state constitution, declaring that arbitration agreements affecting that right needed to be specifically written into the power-of-attorney document.

The specific issue before the U.S. Supreme Court was whether the Federal Arbitration Act preempts the Kentucky Supreme Court’s decision holding that the arbitration agreement in the powers-of-attorney documents was unenforceable, requiring a power of attorney to expressly refer to arbitration before the attorney-in-fact can bind the principal to an arbitration agreement.

[For more background on Kindred, see “Scotus Update: An Arbitration Case Is Added, as the Pending List Grows,” 34 Alternatives 174 (December 2015). Scotusblog’s case page containing the cert petition, briefs and answers is available at http://bit.ly/2nBEWQP.]

At the oral arguments, the justices asked questions to distinguish whether the Kentucky ruling was discriminating against arbitration.

The counselor for the petitioner nursing homes, Andrew Pincus, a partner in the Washington, D.C., office of Mayer Brown, said it was. He oriented the Court at the outset by asking it whether the FAA “precludes Kentucky from erecting the special obstacle to enforce arbitration agreements signed by an attorney-in-fact.”

Pincus’s argument was that Kentucky failed to put the arbitration contract on equal footing with other contracts. He said the Kentucky court’s contract interpretation of the powers of attorney forced arbitration into “a special category.”

He focused on Kentucky’s rule he said specifically targeted arbitration agreements, maintaining that it was unequal treatment of arbitration. He contrasted it with rules applying to any contract, noting, for example, that forum-selection clauses may waive due process rights.

In an exchange with Pincus, Justice Alito also focused on the need to treat arbitration equally under the law, expressing his skepticism regarding Kentucky’s different treatment that requires an express and specific provision about the attorney’s power to enter in arbitration agreement.

But Alito took a surprising turn, noting that he believed the Kindred case was different, even beyond the Kentucky Supreme Court’s contract interpretation. “[T]he context here seems different from the arbitration cases that we’ve had in recent years,” said Alito. “This doesn’t involve … an arbitration about the amount that you were charged for your cable bill or for your telephone bill. This involves a situation where an elderly person needs care.”

He continued: “[I]t may be that the only facility that’s available, or all of the facilities, require the signing of an … arbitration agreement which prevents the assertion of tort claims and the … elimination of the deterrents that they provide may really implicate the care of someone who is vulnerable. So this seems like something that is close to[,] or that it falls squarely within[,] the police power of a State.”

Alito concluded: “But you see the problem? This is really taking the arbitration precedence that we have handed down in recent years into a different category of interests.”

Pincus vehemently disagreed, immediately citing Marmet Health Care Ctr. Inc. v. Brown, 132 S.Ct. 1201 (2012)(available at http://bit.ly/2nnYqsG), in which the Court upheld an arbitration agreement in a nursing home care contract, rejecting a West Virginia Supreme Court’s decision holding that the arbitration contract was against the state’s public policy.

During Pincus’s argument, Justice Ruth Bader Ginsburg tried to refute the argument on the arbitration agreement’s enforceability, focusing instead on whether the arbitration contract actually was formed. Pincus countered that the “Kentucky court said: ‘We are interpreting the power-of-attorney document in a way that renders the arbitration agreement unenforceable,’” so formation was not an issue.

He also noted that the Supreme Court “has never drawn a distinction between contract formation and enforceability in applying the FAA.” He said that the interpretation that there was no contract “would open a dramatic hole” that would allow states “to say, for example, an arbitration agreement requires notarization” or needs a revocation provision.

He asked the Court whether the language is “sufficiently clear that a decision by the State court that it is ambiguous triggers the same kind of a concern that the Court identified in [DirectTV v. Imburgia, see above] as … indicating that this is really a special rule targeting arbitration, as opposed to the application of a neutral principle.”

Robert Salyer, of Lexington, Ky.’s Wilkes & McHugh, who represented the original plaintiffs in the Supreme Court argument, began by explaining that “Kentucky is a common law state in the development of its attorney interpretative law.”

His argument was that the power-of-attorney contract interpretation by the Kentucky Supreme Court was a logical part of the state court’s power. The rule is that “[the power to waive generally fundamental constitutional rights must be unambiguously expressed in the text of a power of attorney,” said Salyer in his opening.

In response, Justice Ginsburg questioned whether this power-of-attorney requirement was explicit for anything other than arbitration agreements. Salyer suggested that the particularity of the rule was needed in the arbitration context, but added that, for example, the power of attorney also might need to spell out its restriction of the principal’s free speech rights in the context of a non-disparagement or confidentiality clause.

Justice Anthony Kennedy said that, “in other words, for a number of years Kentucky allowed powers of attorney[,] and the first time that one was called into question under this theory was with reference to the arbitration.”

Salyer made an agency argument, suggesting that the interpretation of powers of attorney made the FAA unable to preempt that state law. He invoked the longstanding contracting principle between third parties and agents, under which the third party bore the burden to ensure the existence of agent’s effective power when signing the contract, relying on that “very explicit information in that power of attorney.”

Justice Breyer then took a surprising position as part of a long exchange with Salyer. As it developed, he said he thought that Salyer’s answers showed Kentucky was discriminating against arbitration.

Breyer said that Salyer had told the Court that the Kentucky Supreme Court presumes “that anything that waives the right to a jury is illegal unless it’s explicitly there” in the power of attorney. He asked Salyer for a distinction between mediation, bench trial and arbitration since all three constituted means of resolving disputes without jury trial, but only one, arbitration, was allegedly violating the jury trial constitutional right.

Said Breyer,

I’m testing out whether it’s really true [whether Kentucky isn’t discriminating against arbitration]. 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. So they’re not going to follow it. Now, that, of course, you’re going to say, ‘No[,] they would never do that.’ … Because it seems to me that arbitration as a means of settlement of a … dispute, mediation as a means of settling a dispute, [or] a judge as a means of settling a dispute, are equally and no different in the respect that none of those three involves a trial by jury.

The comments probably surprised some Court arbitration watchers. Last term, Breyer expressed reservations about the Court’s seminal case backing class waivers and mandatory arbitration, AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011)(available at bit.ly/1Sf42Bm), even though he said precedent was paramount in his 6-3 majority opinion in sending the case to arbitration in DirecTV v. Imburgia. [For more on Breyer’s class waiver and mandatory arbitration concerns, see “Gone and Gone and Gone: The Supreme Court Decides an Arbitration Case, and Dumps Two More,” 34 Alternatives 29 (February 2016).]

Breyer also presented hypotheticals to Salyer about an attorney-in-fact’s ability to settle a dispute under a power of attorney, but Salyer’s answers attempting to distinguish them from situations where arbitration could be deployed did not convince Breyer.

The justice said Salyer’s answers confirmed his suspicions about the reach of the ruling on the powers of attorney. “[E]very time I think of examples that would be very weird, which is what I’m trying to do,” said Breyer to Salyer, “then you say, ‘Oh, well, yeah, that’s right. You can’t do that anymore in Kentucky.’ And every time you say that, the law of Kentucky in terms of … powers of attorney is getting more and more peculiar.”

While Salyer concluded by insisting that the Kentucky Supreme Court “did not single out arbitration for distinctive treatment” and was within the limits of the Federal Arbitration Act in analyzing the power-of-attorney contract, Justice Breyer’s words were used twice by Andrew Pincus during his rebuttal.

Pincus emphasized the fact that not all means of dispute resolution were affected by the interpretation of the powers of attorney, nor were other fundamental rights, but rather, the decision was designed against and in order to isolate arbitration.

Chief Justice John G. Roberts Jr. reinterpreted Pincus’s position and fed it back to him. During the rebuttal, Roberts said that the Kentucky Supreme Court “doesn’t single out arbitration. … [I]it seems to me what it’s coming down to is you just don’t believe the Kentucky Supreme Court when it says this is the general principle. And you’re saying, well, I really think you’re hostile to arbitration because I haven’t heard that principle before. …”

Justice Kagan appeared to agree, noting, “[U]sually we don’t presume that State courts are acting in ways that are not in accordance with law. Actually, we usually give them the benefit of a kind of good-faith presumption.”

Chief Justice Roberts re-emphasized his point after Kagan’s, alluding to the state’s power-of-attorney law that didn’t distinguish—or even mention—arbitration. Roberts told Pincus that the advocate hadn’t “come up with a distinction that persuades” him the Kentucky court was discriminating against arbitration.

Breyer concluded by asking Pincus what the Court should do. “This case brings out the fact that sometimes courts don’t write enough in the opinion for us to make the decision as to whether or not it is being discriminated against,” said Breyer, “in which case we send it back and ask them to write more. So is that what we should do?”

With his time expired, Pincus replied “No.” He cited Breyer again, noting that the exception doesn’t apply to all jury waivers.

The case hadn’t been decided at press time; a decision is expected before the Court term ends in June. The Kindred oral argument transcript can be found at http://bit.ly/2lUU3Z9; the Supreme Court has posted an audio of the argument as a stream and for download here: http://bit.ly/2ny8dvt. For further analysis, see Tony Mauro, “Justices Pose Tough Questions in Nursing Home Arbitration Case,” Law.com (Feb. 22)(available at http://bit.ly/2nqGSvW).

Attorneys’ Powers

The argument: The U.S. Supreme Court tackles another state law ruling that reviews the Federal Arbitration Act but won’t compel arbitration.

The issue this time: It’s not a consumer credit or cellphone bill dispute. It’s a nursing home agreement requiring arbitration.

Does it make a difference? It might. The nation’s top Court already has backed class waivers requiring arbitration in nursing care contracts. But this is about agreeing to the arbitration clause under a power of attorney. Kentucky says you can’t waive a jury trial right in that manner.

Biography

Bleemer edits Alternatives. Chetrit is a 2017 CPR Institute Spring intern. She is an LLM student at Yeshiva University’s Benjamin N. Cardozo School of Law in New York.

Why Wait?

Get the current newsletter and
JOIN OUR EMAIL LIST
Sign up to receive exclusive content and special offers in the areas that interest you.
Send
Copyright © 2000-2015 by John Wiley & Sons, Inc. or related companies. All rights reserved.
Wiley