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May 24, 2017 Practice Points

What You Need to Know about Kindred Nursing Centers L.P. v. Clark

The U.S. Supreme Court issued the latest salvo in its long-running dispute with a number of state courts over the enforceability of arbitration agreements.

George Tzanetopoulos – May 24, 2017

On May 15, 2017, the U.S. Supreme Court issued the latest salvo in its long-running dispute with a number of state courts over the enforceability of arbitration agreements. In Kindred Nursing Centers L.P. v. Clark, 510 U.S. ____ (2017), the U.S. Supreme Court reviewed the Kentucky Supreme Court’s ruling in two cases that had been consolidated on appeal. In both cases, the Kentucky court had ruled that arbitration agreements executed by individuals holding powers of attorney for relatives were unenforceable because those powers of attorney did not specifically grant authority to waive the principals’ “fundamental constitutional rights to access the courts [and] to trial by jury.” The U.S. Supreme Court reversed the decision in one case and vacated the decision and remanded in the other.

Inthe underlying disputes, the plaintiffs brought suit in Kentucky state court alleging that Kindred Nursing Centers L. P., an operator of nursing homes and rehabilitation centers, delivered substandard care causing the deaths of residents. Kindred moved to dismiss the cases, arguing that agreements signed by relatives who held powers of attorney for the residents required plaintiffs to arbitrate the claims.

The Kentucky Supreme Court, affirming decisions of the lower state courts, declined to give effect to the arbitration agreements. The court construed one of the powers of attorney, which granted the representative authority to “institute legal proceedings” and make “contracts of every nature in relation to both real and personal property” not to authorize the representative to enter into an arbitration agreement on behalf of the principal. The court acknowledged that the language of the second power of attorney in issue, which granted to the representative the capacity to “dispose of all matters” affecting the principal, covered an arbitration agreement, but nonetheless held that the agreement to arbitrate was invalid because the power of attorney did not specifically provide for authority to enter into an arbitration agreement.

The court reasoned that because the Kentucky Constitution protects the rights of access to the courts and trial by jury, an agent can deprive her principal of an “adjudication by judge or jury” only if a power of attorney “expressly so provided.” The court explained that its holding complied with section 2 of the Federal Arbitration Act (FAA), 9 U.S.C. § 2, which provides that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” because this “clear-statement” rule would apply not just to arbitration agreements, but also to other contracts implicating “fundamental constitutional rights.”

The U.S. Supreme Court, in a 7–1 ruling, reversed in the case of the power of attorney whose language the Kentucky court acknowledged covered arbitration agreements and vacated and remanded in the case of the other power of attorney. (Justice Gorsuch took no part in the case. Justice Thomas dissented in accordance with his earlier-stated view that the FAA “does not apply to proceedings in state court.”)

Justice Kagan, writing for the majority, noted that the FAA not only preempts any state rule that discriminates on its face against arbitration agreements, but also “displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of an arbitration agreement” and observed that the Kentucky court’s decision was just such a rule. The opinion pointed out that waiver “of the right to go to court and receive a jury trial” is the primary characteristic of an arbitration agreement. Thus, the Kentucky Supreme Court’s ruling fell afoul of the FAA’s prohibition of covert discrimination against arbitration agreements.

Accordingly, the Supreme Court reversed in the case involving the power of attorney that clearly covered arbitration agreements. Because it was not clear whether the Kentucky court’s invalidation of the other power of attorney was “influenced” by its “clear-statement” rule, the decision in that case was vacated and remanded for the Kentucky court to determine whether it “adheres, in the absence of the clear-statement rule, to its prior ruling.”

In light of Kindred Nursing Centers L.P., practitioners attacking or defending the enforceability of arbitration agreements must be mindful of the Court’s admonition that section 2 of the FAA preempts not only state rules that discriminate on their face against arbitration agreements, but also those that “covertly” disfavor agreements to arbitrate.

George Tzanetopoulos is a partner with BakerHostetler in Chicago, Illinois.

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