Supreme Court holds that states cannot adopt rules disfavoring arbitration agreements.
Imagine the next time you visit your doctor’s office, the receptionist gives you two papers to sign before you can be seen for your appointment. The first would have you agree to pay any amount billed by the physician and not covered by insurance. The second would have you agree that any dispute between you and the doctor be referred to arbitration—which would prevent you from demanding a jury trial on any medical malpractice claim. Intuitively, you recognize the first agreement is quite likely enforceable. But is the second agreement enforceable as well? The outcome of the U.S. Supreme Court’s decision this term in Kindred Nursing Centers L.P. v. Clark strongly suggests that it is.
In Clark, Beverly Wellner and Janis Clark each held power of attorney for their relatives, Joe and Olive, who lived in a nursing home operated by Kindred Nursing Centers. In addition to other paperwork, Wellner and Clark used their power of attorney to sign arbitration agreements on behalf of Joe and Olive, providing “that any claims arising from the relative’s stay at the facility would be resolved through binding arbitration.” Clark arose after Joe and Olive died, when Wellner and Clark each filed suit alleging that Kindred Nursing Centers had provided poor-quality care. Kindred Nursing Centers sought to compel arbitration and prevent the plaintiffs from proceeding in state court. But the Kentucky Supreme Court invalidated the arbitration agreement, adopting what it called a “clear statement rule.” Under the clear statement rule, even though a power of attorney is sufficient to allow the agent to make ordinary contracts on behalf of the principal, execution of an agreement that waives a right guaranteed by the Kentucky Constitution, such as the right to trial by jury, required an express statement granting the power of attorney that authority.
Whether Kentucky’s clear statement rule complied with the Federal Arbitration Act (FAA) was the question Kindred Nursing Centers asked the Supreme Court to review. When Congress passed the FAA in 1925, it did so to overturn the common law’s hostility to arbitration agreements and, in the words of the House Report accompanying the Act, to place arbitration agreements on the “same footing as other contracts.” In the FAA, Congress provided that an agreement to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist in law or equity for the revocation of any contract.” The latter provision, the FAA’s so-called savings clause, allows each state to apply its own contract law to determine the enforceability of arbitration agreements. Not surprisingly, this has fostered a vast and diverse body of state law, in which we might find that one state deems an arbitration agreement unconscionable—and therefore unenforceable—if an employer threatened to fire an employee who preferred not to sign it, while, on the same facts, another state’s law would uphold it.
There is nothing wrong with this variation in state law, provided it is the product of each state’s earnest application of general contract principles. Still, the states are not free to adopt whatever restrictions they wish. Since its 1984 decision in Southland Corp. v. Keating, which held that the FAA applies in state as well as federal courts, the U.S. Supreme Court has reiterated that state courts reviewing arbitration agreements must comport with a developing “body of federal substantive law”—the central tenet of which holds, as the Court did in 2006 in Buckeye Check Cashing, Inc. v. Cardegna, drawing on the FAA’s legislative history, that state law must place arbitration agreements “on equal footing with all other contracts.”
The Court has invoked this principle in invalidating statutes and decisions that single out arbitration agreements. In Doctor’s Associates, Inc. v. Casarotto, decided in 1996, the Court struck down a Montana law that required notice that a contract is subject to arbitration to appear in underlined capital letters on the contract’s first page. And in a 2012 decision, Marmet Health Care Center, Inc. v. Brown, the Court vacated and remanded a decision by the West Virginia Supreme Court of Appeals, which held that, as a matter of state public policy, a nursing home could not compel arbitration of a personal injury or wrongful death action.
The question for the Court in Clark was different, because the state denied it harbored any animosity toward arbitration. Instead, the Supreme Court of Kentucky purported to ground its decision declining to compel arbitration in a general principle: that a power of attorney assigning to a family member full authority to enter into contracts does not authorize the family member to waive a fundamental constitutional right—in this case, the right to trial by jury of a personal injury claim—unless the power of attorney agreement expressly stated that the holder was authorized to waive that right. Distinguishing Brown, the Kentucky court claimed its new rule did not undermine the enforcement of valid arbitration agreements, but only that the rule precluded arbitration when the assent of one party was not validly obtained.
At oral argument before the U.S. Supreme Court, the Justices focused on two questions: First, was the Kentucky rule truly a general principle? Second, was it meaningful to characterize that rule as pertaining to contract formation rather than enforcement?
On the first question, lawyers for the nursing home argued that Kentucky’s new rule was merely a pretext for refusing to enforce the contract’s arbitration provision—after all, what other fundamental rights would Kentucky protect in the same manner? The list the Kentucky court offered—which included consent to an arranged marriage, or binding the principal to personal servitude—featured unrealistic scenarios while also omitting notable fundamental rights. On the latter point, Justice Stephen Breyer challenged the lawyers for the patients’ family members to explain whether Kentucky should preclude an attorney from settling a lawsuit, thereby foregoing a jury trial and perhaps also committing a client to give up her right to speak freely about the other side. When the family members’ lawyers sought to distinguish the hypothetical, the Justice told him it sounded as if Kentucky meant to treat arbitration differently, adding, “What I really think has happened is that Kentucky just doesn’t like the federal law.”
It was this line of reasoning that the majority of the Supreme Court adopted in reversing and vacating the state’s decision. No other Kentucky decision, the Court observed, had ever demanded that a power of attorney explicitly confer authority over any constitutional right, nor had the Kentucky court indicated it would apply the same rule to other constitutional rights understood to be fundamental, such as the rights to speech and to hold and sell property.
The Supreme Court made short work of the second question about whether the Kentucky court’s rule pertained to contract formation rather than contract enforcement. The Court agreed with the nursing home that the distinction between contract formation and enforcement was artificial. For if a state could freely regulate the formation of arbitration agreements, it also could declare all people incompetent to sign them, a result clearly at odds with the FAA.
Some commentators have downplayed the importance of the Clark decision, suggesting it does not represent new law. It is indeed an unsurprising extension of the FAA’s “body of substantive federal law.” Nonetheless, it may turn out to be the Court’s most significant decision yet on the FAA’s savings clause, as it explains that the “equal footing” doctrine encompasses what we might call equal protection for arbitration agreements. Properly understood, “equal footing” will bar states not only from overtly discriminating against arbitration, but also from establishing any interpretive rule treating arbitration agreements differently from other contracts.
How might this work in practice? As noted above, many states have extensive case law on when arbitration agreements are enforceable. Over time, perhaps inevitably, those lines of authority have evolved away from general contract principles. For example, two court decisions based on Texas law, one from a federal trial court in 2001 and the other from the state’s intermediate appellate court in 2013, have held that an employer who failed to interpret an arbitration agreement written in English for an employee who read only Spanish could not enforce the agreement. But the Supreme Court of Texas evidently does not care whether a contracting party is illiterate—a counterparty is under no duty to explain a contract to someone who cannot read it. Under Clark, the two lower court decisions from 2001 and 2013 should no longer be considered valid, as they depart from general contract principles.
More to the point, no state court rule applying only to arbitration agreements ought to remain valid, unless it is entirely consistent with case law covering commercial contracts—which are voided in only the rarest of circumstances.
We return, then, to the scenario suggested at the outset. Absent extraordinary circumstances, we should expect every state court to enforce a patient’s agreement to pay his physician’s bill, notwithstanding the opacity of the market for health-care services and the urgency with which patients sometimes enter it. Assuming that is true, then every state also ought to enforce an arbitration agreement a physician might require as a condition to her services. If this trend were to catch on not just with nursing homes, but also doctors and hospitals, it could lead to the end of jury trials in medical malpractice claims. One suspects the resistance to this kind of development would be intense—which means, more likely than not, the Supreme Court will have ample opportunity to revisit this issue in the future.
This essay is part of an eight-part series, entitled The Supreme Court’s 2016–2017 Regulatory Term.