Arbitration Agreements and Powers of Attorneys - Another Win under the Federal Arbitration Act

The Federal Arbitration Act

The Federal Arbitration Act (“FAA” or the “Act”) scored another triumph on May 15, 2017, when the United States Supreme Court overturned a ruling by the Kentucky Supreme Court which had invalidated two nursing home arbitration agreements.

The Act codifies the federal policy of mandating “the enforcement — upon the motion of one of the parties — of privately negotiated arbitration agreements.”[1]  The purpose of the Act was to “place an arbitration agreement ‘upon the same footing as other contracts, where it belongs’,” and to “overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate.”[2]  The Act makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”.[3]  Under this 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.’”[4]

The Cases

Kindred, a consolidated case, involved two identically worded arbitration agreements executed between the Winchester Centre, a nursing home in Kentucky, and the relatives of residents who held powers of attorney on behalf of the residents at the nursing home.[5]  Joe and Olive moved into the nursing home in 2008.[6]  Joe gave Beverly the authority, in Joe’s “name, place and stead” to (among other things) “institute legal proceedings” and make “contracts of every nature in relation to both real and personal property”.[7]  Olive gave Janis “full power . . . to transact, handle, and dispose of all matters affecting” Olive and/or his estate “in any possible way,” including the power to “draw, make, and sign” in Olive’s name “any and all . . .  contracts, deeds, or agreements.”[8]  As part of the moving in process, Beverly and Janis each signed an arbitration agreement with Kindred on behalf of Joe and Olive respectively.[9]  The arbitration agreements provided that “[a]ny and all claims or controversies arising out of or in any way relating to . . . the Resident’s stay at the Facility” would be resolved through “binding arbitration” rather than a lawsuit.[10]  When Joe and Olive died the next year, their estates (represented by Beverly and Janis) brought separate suits against Kindred in Kentucky state court.[11]  The complaints alleged that Kindred had delivered substandard care to Joe and Olive, causing their deaths.[12]  Kindred moved to dismiss the cases, arguing that the arbitration agreements Beverly and Janis had signed prohibited litigation in court.[13]

The cases eventually reached the Kentucky Supreme Court and were consolidated. Regarding the Joe/Beverly power of attorney, the Kentucky Supreme Court found that it did not permit Beverly to enter into an arbitration agreement on Joe’s behalf, because neither the provision authorizing Beverly to bring legal proceedings nor the one enabling Beverly to make property-related contracts was broad enough to permit such.[14]  By contrast, the Kentucky Supreme Court did acknowledge that “it would be impossible to say that entering into an arbitration agreement was not covered” by the Olive/Janis power of attorney because that document gave Janis the capacity to “dispose of all matters” affecting Olive.[15]

Nonetheless, the Kentucky Supreme Court went on to find both arbitration agreements to be invalid, reasoning that a power of attorney could not entitle a representative to enter into an arbitration agreement without “expressly” so providing, because the rights of access to the courts and trial by jury were “sacred” and “inviolate” and protected by the Kentucky Constitution.[16]

In an attempt to show that such a “clear statement rule” places arbitration agreements upon equal footing as other contracts and does not single out arbitration agreements, the Kentucky Supreme Court argued that the rule would apply not just to arbitration agreements, but also to some other contracts implicating “fundamental constitutional rights”; for example, the rule would in the future bar the holder of a “non-specific” power of attorney from entering into a contract binding the principal to personal servitude.[17]

The United States Supreme Court, however, held that the Kentucky Supreme Court did exactly what was 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.”[18]  Further, “[s]uch a rule is too tailor-made to arbitration agreements - subjecting them, by virtue of their defining trait, to uncommon barriers - to survive the FAA’s edict against singling out those contracts for disfavored treatment.”[19]  Further, the Kentucky Supreme Court’s attempt to cast the rule in broader terms - by holding that the rule could also apply when an attorney-in-fact endeavored to waive other “fundamental constitutional rights” held by a principal - cannot salvage its decision, because “[n]o Kentucky court . . . has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees,” and the state court’s opinion did not “indicate that such a grant would be needed for the many routine contracts . . . meeting that description,” such as the “inherent and inalienable” rights to acquire and protect property protected by the Kentucky Constitution.[20]  Rather, the Kentucky Supreme Court “hypothesized a slim set of both patently objectionable and utterly fanciful contracts that would be subject to this rule”, such as a principal’s right to worship freely, to consent to an arranged marriage, or to be bound to personal servitude.[21]  “Placing arbitration agreements within this class reveals the kind of ‘hostility to arbitration’ that led Congress to enact the FAA. And doing so only makes clear the arbitration-specific character of the rule.”[22]

Beverly and Janis advanced a different argument, which was swiftly disposed of by the United States Supreme Court. Beverly and Janis argued that the clear statement rule only affected contract formation, because it bars agents without explicit authority from entering into arbitration agreements, and that the FAA had no application to contract formation issues.[23]  The United States Supreme Court held, however, that “the Act cares not only about the enforcement of arbitration agreements, but also about their initial validity.”[24]

Takeaways

Nursing homes and other businesses alike (both in Kentucky and elsewhere) can take comfort in the fact that the FAA prohibits disfavored treatment of arbitration agreements. Nonetheless, businesses should carefully review powers of attorneys purporting to grant the agents authority to act on behalf of others as well as carefully craft the arbitration agreements in order to benefit from the FAA, given the courts’ lingering reluctance to enforce arbitration agreements.

1] Dean Witter Reynold, Inc. v. Byrd, 470 U.S. 213, 219 (1985). [2] Id. at 219-220. [3] 9 U.S.C. §2 (italics added). [4] Kindred Nursing Centers Limited Partnership v. Clark, slip op. at 4 (U.S. May 15, 2017) [5] Id. at 2. [6] Id. [7] Id. [8] Id. [9] Id. [10] Id. [11] Id. at 2-3. [12] Id. at 3. [13] Id. [14] Id. [15] Id. [16] Id. at 3-4. [17] Id. [18] Id. at 5. [19] Id. at 6. [20] Id. 6-7. [21] Id. at 7. [22] Id. [23] Id. [24] Id. at 8.