Kindred Nursing Centers, L.P. v. Clark, ___ U.S. ___, 137 S.Ct. 1421 (May 15, 2017) – The Supreme Court reemphasizes that arbitration agreements must be placed on equal footing with other contracts.

In 2009, the executors of the estates of the late Joe Wellner and Olive Clark separately sued Kindred Nursing Centers in Kentucky state court, alleging that Kindred had delivered substandard care to Joe and Olive, causing their deaths. Kindred moved to dismiss based on the fact that the executors had each signed – pursuant to a power of attorney – contracts that contained mandatory arbitration provisions as a condition to Joe and Olive being allowed to move into one of Kindred’s nursing homes. The trial court denied Kindred’s motion.

On appeal to the Kentucky Supreme Court, the Court consolidated the cases and affirmed the trial court’s ruling, holding that, because the right to a jury trial under Kentucky law is “inviolate,” “sacred,” and a “divine God-given right,” the power to waive generally such fundamental constitutional rights must be unambiguously expressed in the text of the power of attorney document in order for that authority to be vested in an attorney-in-fact. Put another way, the Kentucky Supreme Court basically held that a principal must expressly give its agent the specific authority to bind the principal to an arbitration agreement in order for that agreement to be valid and enforceable. This was referred to by the United States Supreme Court as Kentucky’s “clear statement rule.”

On appeal to the United States Supreme Court, the Court reaffirmed that the FAA preempts state laws placing agreements to arbitrate on weaker footing that other types of contracts, and found that Kentucky’s “clear statement rule,” though facially neutral, was really an attempt to target and disfavor arbitration agreements. The Court therefore refused to enforce the rule and held that the arbitration agreements at issue must be enforced. In an opinion written by Justice Kagan, the court held that the Kentucky Supreme Court’s “clear statement rule” – which required an explicit statement before an attorney-in-fact with broad powers could relinquish the right to a jury trial on another’s behalf – violated the FAA’s “equal-treatment principle;” that Kentucky’s “clear statement rule” was “too tailor-made to arbitration agreements – subjecting them, by virtue of their defining trait, to uncommon barriers.”

The Supreme Court’s decision is notable for three reasons:

  • First, this case garnered a 7 to 1 majority, notwithstanding the Roberts Court’s stark division on other decisions involving the FAA. See, e.g., AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) (5-4 split); American Exp. Co. v. Italian Colors Restaurant, ___ U.S. ___, 137 S.Ct. 2301 (2013) (5-3 split); DirecTV, Inc. v. Imburgia, ___ U.S. ___, 136 S.Ct. 468 (2015) (6-3 split). The near-unanimous agreement in Kindred is likely due more to the case fitting “well within the confines of … present well-established law” than to any realignment of the Justices’ positions on matters of arbitration. It is worth nothing that in Concepcion in 2011, the Court hypothesized that states may attempt an end-run around the FAA by “classifying as unconscionable arbitration agreements … that disallow an ultimate disposition by a jury.” That is exactly what appears to have happened in Kindred!
  • Second, the Supreme court indicated that it will look past the surface-level justification of state courts in order to protect the reach of the FAA. The Kentucky Supreme Court attempted to frame its rule as a broad one that rejected the ability of attorneys-in-fact to find their principals to any contracts affecting “fundamental … liberties,” and offered as examples contracts that “waive the principal’s civil rights; or the principal’s right to worship freely; put her child up for adoption; consent to abort a pregnancy; consent to an arranged marriage; or bind the principal to personal servitude.” The Supreme Court rejected the Kentucky Supreme Court’s invocation of these “patently objectionable and utterly fanciful contracts” to justify its decision. Accordingly, state courts cannot properly invoke the FAA’s saving clause by simply broadening an otherwise arbitration-focused rule or encompass other merely hypothetical contracts or “black swans,” as the Court called them.
  • Third, in light of Kindred, attorneys should note the Court’s visceral reaction against common-law rules and arguments that effectively act as back-handed ways to discriminate against arbitration agreements. While the Supreme Court acknowledged that traditional common law defenses to contract formation – like mutual mistake, duress, unconscionability, and the like – may potentially serve as a basis to invalidate an arbitration agreement, the Court was clear that rules and arguments that target arbitration’s effect on “fundamental liberties,” such as the right to a jury trial, are unlikely to succeed. Put most simply, Kindred reemphasizes the principle that arbitration agreements must be placed on an equal footing with other contracts.