The Court reaffirms that states cannot pass laws that directly or indirectly “disfavor” arbitration.

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Kindred Nursing Centers Ltd. P’Ship v. Clark, 137 U.S. 1421 (2017)
 

Relevant Facts: Beverly Wellner and Janis Clark, two individuals who did not know each other, used their respective powers of attorney to move their family members into a nursing and rehabilitation facility owned by Kindred Nursing Centers Limited Partnership (“Kindred”). Completing the relocation required signing a lot of paperwork, among which included an arbitration clause requiring all disputes with Kindred be resolved in arbitration. Within a year, each of the loved ones had died while in the care of Kindred. Wellner and Clark separately sued, each alleging wrongful death. Kindred moved to dismiss under the arbitration clauses. Because the state constitution declared the rights of access to the courts and trial by jury to be “sacred” and “inviolate” the state courts held the arbitration agreements were invalid under the state constitution.

 

Question Before The Court: Whether the state’s clear-statement rule, which permitted an agent to enter an arbitration agreement waiving the right to adjudication by a judge or jury of behalf of her principal only if expressly provided that authority in their power of attorney, is preempted by the Federal Arbitration Act (FAA).

 

The Opinion: The Court identified that the FAA “establishes an equal treatment principle: A court may invalidate an arbitration agreement based on ‘generally applicable contract defenses’ like fraud or unconscionability, but not on legal rules that ‘apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’ The FAA thus preempts any state rule discriminating on its face against arbitration . . . And not only that: The Act also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”

 

Here, the Court found that the state supreme court did “exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial.” Because the clear-statement rule singled out arbitration for disfavored treatment, the Court held that it violated the FAA.

 

The Court emphatically rejected the argument that the state’s clear-statement rule “affects only contract formation because it bars agents without explicit authority from entering into arbitration agreements,” and that the FAA did not apply because “states have free rein to decide . . . whether such contracts are validly entered in the first instance.” Citing both the FAA’s text requiring arbitration contracts to be held “valid, irrevocable, and enforceable” and the Court’s existing case law on the formation of arbitration agreements, the Court held that, “A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made.”

 

With this ruling, the Court appears to be warning states that it will not permit any legislation that gives the slightest whiff of disfavoring arbitration, even if the potentially adverse effect on arbitration is merely incidental. Moreover, the Court is indicating that states are just as tightly restricted in writing laws governing the formation of arbitration contracts as they are in legislating their enforceability.

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