In a recent ruling, the U.S. Supreme Court sustained the well-established principle that the Federal Arbitration Act pre-empts state laws that specifically disfavor arbitration agreements.
In Kindred Nursing Centers, L.P. v. Clark, et al, 16-32 (May 15, 2017), the U.S. Supreme Court overruled a Kentucky Supreme Court decision not to enforce arbitration agreements between a nursing home and residents that had been signed by family members on behalf of the residents pursuant to powers of attorney. In the underlying case, two family members each held a power of attorney that designated the family member as an “attorney-in-fact” providing broad authority to manage the affairs of the residents. Notably, one power of attorney provided for the family member to institute legal proceedings and to enter into contracts, and the other power of attorney provided “full power” to the family member to transact, handle and dispose of all matters including entering into contracts. The family members used their powers of attorney on behalf of the residents to sign contracts with the nursing home that contained broad arbitration agreements.
When the residents died, their estates brought suit against the nursing home in Kentucky state court alleging substandard care had caused the deaths. The nursing home moved to dismiss the lawsuits because the arbitration agreements prohibited the claims from being brought in court. The Kentucky trial court and appellate court denied the nursing home’s motions and refused to enforce the arbitration agreements.
The Kentucky Supreme Court consolidated the two cases and ultimately affirmed the trial court and appellate court decisions denying the nursing home’s motions and refusing to enforce the arbitration agreements. The Kentucky Supreme Court found that, despite the broad powers and authority provided to the family members to act on behalf of the residents, the powers of attorneys did not specifically grant the family members express authority to enter into an arbitration agreement. The Kentucky Supreme Court looked to Kentucky’s Constitution, which protects its citizens’ rights to access to the court and trial by jury, to determine that a power of attorney would need to expressly provide for an agent to deprive the principal of adjudication by judge or jury. Hence, without such a clear statement in the powers of attorney to specifically allow for the family members to enter into arbitration agreements on behalf of the residents, the Kentucky Supreme Court determined the nursing home arbitration agreements to be invalid.
The U.S. Supreme Court found the Kentucky Supreme Court’s “clear statement” requirement violated the Federal Arbitration Act because it discriminated against arbitration agreements. Citing to the Federal Arbitration Act and well-established prior U.S. Supreme Court opinions, the court started by recognizing the equal-treatment principle that arbitration agreements are to be treated no differently than other contracts. That is, a court may invalidate an arbitration agreement based upon “generally applicable contract defenses,” but a court may not invalidate an arbitration agreement based on legal rules that only apply to arbitration or only have the effect of applying to arbitration agreements. In this case, the court found that the Kentucky Supreme Court’s clear-statement rule failed to treat arbitration agreements equally with other contracts, and further, the court rejected any contention that the clear-statement rule could be applied more broadly to protect other rights not directly associated with arbitration.
The court also rejected an argument advanced by the respondents that the clear-statement rule only applies to contract formation issues (as opposed to contract enforcement issues) and the Federal Arbitration Act does not apply to contract formation issues. The court rejected any distinction between contract formation and enforcement with respect to application of the Federal Arbitration Act. In the court’s view, the Federal Arbitration Act applies not only to enforcement of an arbitration agreement but also to the initial validity of the arbitration agreement.
Arbitration continues to be the chosen dispute resolution process for many in the construction industry. Most projects and construction contracts containing arbitration agreements are likely to be subject to the Federal Arbitration Act, which generally requires a finding that “interstate commerce” is involved, such as the parties involved with or the materials used in the project are from different states. As demonstrated by this recent decision, under the Federal Arbitration Act, the question of the validity and enforcement of arbitration agreements should be no different than contracts in general.