Kindred spirits

SCOTUS case rules on nursing home arbitration clauses

Nev's Health Law

Neville M. Bilimoria

Neville M. Bilimoria is a partner in the health law practice group, in the Chicago office of Duane Morris.

On May 15, the U.S. Supreme Court ruled 7 to 1 in favor of nursing home arbitration clauses and against any state law that would diminish the right of parties to enter into arbitration clauses in the health-care context. See Kindred Nursing Centers L.P. v. Clark, U.S., No. 16-0032, 2017 WL 2039160 (May 15, 2017). Justice Elena Kagan delivered the majority opinion and Justice Clarence Thomas submitted the dissenting opinion. Kagan made it clear that the right to engage in arbitration is king and extends over and above state laws that would preclude its use.

The decision was handed down amid continuing controversy over whether arbitration clauses are somehow unfair when presented before elderly nursing home residents who may not understand their rights. Some say arbitration is a mechanism for nursing homes to reduce liability while others tout the mutual benefits of health-care arbitration: shortened resolution times, less costly alternative to litigation, more reasoned outcomes. Opponents point out that awards through arbitration are usually lower than those reached in court.

The Kindred decision arose from two nursing home residents who had their power of attorneys each sign an admission agreement to a nursing home. Their relatives filed suit in Kentucky state court, alleging the two had died due to substandard care. The defendant nursing home moved to enforce the arbitration clause in the admission agreements that the plaintiffs had signed on behalf of their relatives when they were admitted to the nursing home. The Kentucky Supreme Court found in favor of the plaintiffs, ruling that the arbitration provisions signed were invalid because neither power of attorney specifically entitled the representative to enter into an arbitration agreement.

Coupled with the fact that the Kentucky Constitution declares the right trial by jury a sacred (a “divine God-given right”) and inviolate, the state Supreme Court held an agent could deprive her principal of such rights only if expressly provided in a power of attorney.

The U.S. Supreme Court spelled out the doctrine of the Federal Arbitration Act, pointing out that the Kentucky Supreme Court’s Clear Statement Rule requiring powers of attorney to specifically allow entrance into arbitration violated the act by singling out arbitration agreements for disfavored treatment. The act’s purpose is to pre-empt any state rule that discriminates on its face against arbitration.

The act clearly states that courts may only invalidate arbitration agreements based on “generally applicable contract defenses,” but not on legal rules or rules of law at the state level that would apply only to arbitration, and, thereby, covertly discriminate against arbitration clauses in favor of trial by jury. The U.S. Supreme Court held that the arbitration act’s rule is a more sacred one, effectively pre-empting the Kentucky Supreme Court’s Clear Statement Rule.

One of the reasons that the U.S. Supreme Court overturned the Kentucky Supreme Court was because the Kentucky Supreme Court’s Clear Statement Rule applied only to arbitration clauses and not to other powers of a principal under a power of attorney.

The court concluded that the Kentucky Supreme Court’s “demand for specificity and powers of attorney arises from the suspect status of the arbitration rather than the sacred status of jury trials.” Going further, the court stated that the Kentucky Supreme Court’s decision to require specific authorization in a power of attorney to agree to arbitration reveals the kind of “hostility to arbitration” that led Congress to enact the arbitration act.

At one point, the plaintiffs argued that the act should not apply to pre-empt Kentucky law because the act only deals with contract enforcement and the Clear Statement Rule only deals with contract formation. The court defeated that argument by stating that if such a view is held, states would have the trivially easy ability to undermine the act and wholly defeat it — for example, states would have the right to pronounce any attorney in fact incapable of signing an arbitration agreement or, worse yet, states would be able to easily declare everyone incompetent to sign arbitration agreements.

Highlighting the act’s importance and its protections against state law abuses, the court stated that if plaintiffs’ arguments were accepted, then “the FAA would then mean nothing at all — its provisions rendered helpless to prevent even the most blatant discrimination against arbitration.”

Kindred is not alone. On Nov. 7, 2016, a federal judge in Mississippi followed similar reasoning adopted by Kindred and granted a preliminary injunction brought by the American Health Care Association to prevent the Centers for Medicare and Medicaid Services from enforcing an arbitration-related rule slated to go into effect on Nov. 28, 2016, that would prohibit nursing homes from requiring residents to enter into binding arbitration agreements before a dispute arises.

On June 5, Centers for Medicare and Medicaid Services issued proposed revisions to its arbitration rule and officially removed the prohibition on predispute binding arbitration agreements, recognizing the act’s clear presumption in favor of arbitration.

In Illinois, proposed HB 238 purported to prohibit the use of arbitration agreements as a condition of admission in nursing home contracts. With the Kindred case, the U.S. Supreme Court’s decision seems to indicate that any state laws akin to proposed HB 238 would be defeated and pre-empted by the Federal Arbitration Act as being discriminatory against arbitration.