Just as I predicted, SCOTUS reversed the Kentucky Supreme Court’s decision in Kindred this morning. The interesting piece, though, is that the seven member majority went out of its way to cut off some of the “on trend” methods that state courts have been using to avoid arbitration clauses.
The Kentucky decision can be summarized easily. The case involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents. In each case, a relative with power of attorney had signed an admission document that included arbitration when the resident entered the nursing home. However, the Kentucky court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document. (You may recall this is the decision that analogized entering into an arbitration agreement to: putting a child up for adoption, aborting a pregnancy, and entering into personal servitude. If that doesn’t cry out “judicial hostility to arbitration,” I don’t know what does.)
Justice Kagan, writing for the seven-member majority, found Kentucky’s “clear statement rule” preempted by the Federal Arbitration Act. “[T]he 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.” In response to Kentucky’s attempt to paint its rule as broader than arbitration, the Court said “No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.”
That preemption aspect of the decision seems to confirm what I have been saying about the impact of DirecTV: states are in much better position to defend their anti-arbitration “general contract rule” if they can point to at least one non-arbitration circumstance in which it has been applied. (The decision added a footnote to clarify this isn’t an absolute necessity: “We do not suggest that a state court is precluded from announcing a new, generally applicable rule of law in an arbitration case.” But that’s like saying it is conceivable that your mother will appreciate a new vacuum for mothers day, but we don’t recommend it.)
The Court’s decision to clearly state that courts cannot invalidate arbitration agreements based on their (necessary) waiver of the right to a jury trial also cuts off a trendy argument in state courts. New Jersey courts, for example, have invalidated arbitration agreements in recent years based on their failure to clearly advise consumers they are waiving their rights to jury trials (SCOTUS denied cert in the key NJ case, Atalese.) Those NJ decisions are now shaky precedent, IMHO.
The decision then went beyond the basic preemption analysis. Respondents had argued the FAA had no application to contract formation, that only state law controlled that question. SCOTUS quickly disabused the respondents, and all state courts, of that notion, reasoning that the purpose of the FAA would be completely undercut by the rule: “If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements. (That rule too would address only formation.)” In doing so, the Court cut off another avenue for avoiding the FAA. (In my view, though, the slippery slope argument relied on by SCOTUS also cuts against the formation/validity distinction used to separate which issues are decided in court and which by arbitrators.)
[As usual, Justice Thomas dissented based on his position that the FAA does not apply in state courts.]