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SCOTUS to States: Keep Out of Arbitration Agreements

The U.S. Supreme Court on Monday continued its streak of pro-arbitration rulings, reaffirming in a closely watched nursing home case that states may not impose rules that single out, overtly or otherwise, arbitration agreements for negative treatment.

The 7-1 ruling came in Kindred Nursing Centers v. Clark, a seemingly narrow case that could have broader ramifications for the nursing home industry in particular and businesses in general that look to the Federal Arbitration Act to protect arbitration agreements from invalidation under state laws.

“The FAA … preempts any state rule discriminating on its face against arbitration,” Justice Elena Kagan wrote for the majority, adding that the law also “displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements."

In that respect, the ruling expanded on AT&T Mobility v. Concepciona somewhat narrower 2011 decision that said a state court cannot invalidate an arbitration agreement based on legal rules that specifically apply only to arbitration.

Mayer Brown partner Andrew Pincus, who argued both Concepcion and Kindred Nursing, said Monday’s ruling “fits the line of cases” protecting arbitration from being undermined by states. “The court has consistently said the FAA pre-empts state law” in this context, Pincus said.

In the case before the justices, the Kentucky Supreme Court ruled against enforcing arbitration agreements signed on behalf of two nursing home residents by relatives with "power of attorney."

The families of the deceased residents sued the company, claiming abuse and neglect. Kindred Nursing invoked the arbitration agreements to keep the cases out of court, but the Kentucky high court ruled that the power of attorney does not give them the authority to take away the "inviolate" right to a jury trial under the state constitution.

Last November, Pincus also won a preliminary injunction in Mississippi federal court halting enforcement of an Obama administration regulation that bars nursing homes from forcing disputes into arbitration. The case American Health Care Association v. Burwell is now on appeal before the U.S. Court of Appeals for the Fifth Circuit, but the Trump administration is expected to cancel the rule.

In a brief filed by AARP, several senior advocacy groups urged the high court to uphold that the Kentucky decision does not apply to proceedings in state courts. “The stakes are high,” the brief stated. "Neglect and abuse of nursing facility residents is all-too common,” making it crucial to residents to be able to “seek justice in court,” not arbitration.

But long-term care companies countered in a brief that the Kentucky ruling demonstrates the “struggle” they face in protecting their federal arbitration rights from hostile state courts.

During oral arguments in February, at least one justice seemed sympathetic to the plight of the residents. "The context here seems different from the arbitration cases that we've had in recent years," Justice Samuel Alito Jr. said. "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."

But other justices saw the Kentucky ruling as a backdoor way of weakening arbitration. "I'm highly suspicious,” Justice Stephen Breyer said. “What I really think has happened is that Kentucky just doesn't like the federal law."

In the end, both Alito and Breyer joined Kagan’s pro-arbitration decision. Justice Clarence Thomas was the only dissent, holding to his view that the FAA “does not apply to proceedings in state courts.” Justice Neil Gorsuch, who joined the court after the case was argued, did not participate in the ruling.

Contact Tony Mauro at tmauro@alm.com. On Twitter: @Tonymauro.

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