Kindred Nursing Centers v. Clark

LII note: The U.S. Supreme Court has now decided Kindred Nursing Centers v. Clark.

Issues 

Does the Federal Arbitration Act preempt a state-law contract rule that requires a power of attorney to expressly refer to arbitration agreements before an attorney-in-fact can bind her principal to such an agreement?

Oral argument: 
February 22, 2017
Court below: 

The Court must consider whether federal law preempts state law regarding arbitration clauses in powers-of-attorneys. Kindred Nursing Centers argues that state law, which requires principals to explicitly authorize an agent to enter into arbitration agreements, violates the Federal Arbitration Act. Contrarily, Janis E. Clark and Beverly Wellner argue that state law governs contract formation and that state law requires powers-of-attorneys to adhere to the expressed intentions of the principal in a contract. The case will determine whether powers-of-attorney must explicitly grant the agent the power to bind the grantor to an arbitration agreement and may impact elder care and estate planning practices across the United States.

Questions as Framed for the Court by the Parties 

Whether the Federal Arbitration Act preempts a state-law contract rule that singles out arbitration by requiring a power of attorney to expressly refer to arbitration agreements before the attorney-in-fact can bind her principal to an arbitration agreement.

Facts 

Petitioners Kindred Nursing Centers et al. (“Kindred Nursing”) operate nursing homes and rehabilitation centers, including the Winchester Centre for Health and Rehabilitation. Respondents Janis E. Clark (“Clark”) and Beverly Wellner (“Wellner”) represent their principals, the estates of Olive Clark and Joe Paul Wellner. Both now-deceased individuals were residents at the Winchester Centre before their deaths. Prior to being admitted to the Winchester Centre, both individuals executed power of attorney agreements designating respondents Clark and Wellner, respectively, as their attorneys-in-fact. The power of attorney agreements provided Clark and Wellner with broad authority to enter into agreements that related to their principals’ affairs. More specifically, Clark’s agreement granted power to “draw, make, and sign in my name any and all checks, promissory notes, contracts, deeds or agreements” and Wellner’s agreement granted power to “make, execute, and deliver deeds, releases, conveyances, and contracts of every nature.”

When both individuals were admitted to the Winchester Centre, Clark and Wellner signed admission paperwork as well as an “Alternative Dispute Resolution Agreement Between Resident and Facility (Optional).” The agreement required all disputes arising between residents and the facility to be resolved through arbitration. The agreement stated that “the execution of this Agreement is not a precondition to the furnishing of services to the Resident by the Facility.”

Clark and Wellner sued petitioners in Kentucky state circuit court for wrongful death, personal injury, and violations of certain Kentucky laws that establish rights for long-term care residents. Kindred Nursing moved to dismiss both cases, arguing that the arbitration agreements between the residents and the facility should be enforced. The state trial court agreed with Kindred Nursing and dismissed both cases, enforcing the arbitration agreements. After the trial court issued its judgment, however, the Supreme Court of Kentucky reached a contradictory decision in Ping v. Beverly Enterprises, Inc., 376 S.W.3d 581 (Ky. 2012), holding hat broad language in a power of attorney agreement was limited to specific areas like “financial affairs” and “health-care decisions,” but did not include the ability to bind the principal to an arbitration agreement.

Subsequently, Clark and Wellner asked the state circuit court to reconsider the dismissal of their respective cases because of the Kentucky Supreme Court’s decision in Ping. The circuit court granted reconsideration and found that the arbitration agreements were unenforceable because Clark and Wellner did not have enough authority to bind their principals to such an agreement. Kindred Nursing appealed, but the Kentucky Court of Appeals affirmed, stating that the power of attorney agreements did not give Clark and Wellner enough authority to bind the nursing residents to arbitration. Kindred Nursing next appealed to the Supreme Court of Kentucky, which consolidated the Clark and Wellner cases.

The Kentucky Supreme Court affirmed by a 4-3 vote. The court found that Wellner’s power of attorney agreement did not give her enough authority to enter into arbitration agreements, but that Clark’s agreement did. The court also held that the only way an attorney-in-fact can possess the authority to enter into arbitration agreements on behalf of her principal is if the power of attorney agreement expressly states the attorney-in-fact as the authority to do so. The court argued that an explicit grant of authority to the attorney-in-fact is required to bind a principal to an arbitration agreement because a principal should not be able to waive their fundamental constitutional right to have a trial by jury and to appeal to a higher court.

Analysis 

DID THE PRINCIPALS INVOKE SUFFICIENT AGENCY?

Kindred Nursing claims that the principals in these cases explicitly authorized the attorneys-in-fact to enter all contracts on their behalf by signing powers of attorney. Kindred Nursing claims that Kentucky general agency laws allow principals to waive specific rights in a contract, including constitutional rights, without giving attorneys-in-fact express authority. Kindred Nursing argues that if Kentucky agency law allowed principals to enter into all “contracts” with the exception of dispute-resolution agreements (such as arbitration agreements), it would burden agent-entered arbitration agreements more significantly than other contracts. Kindred Nursing notes that any law that disproportionally burdens arbitration agreements violates the Federal Arbitration Agreement (“FAA”).

On the other hand, Clark and Wellner contend that powers of attorney do not encompass every possible circumstance and that there are limits to the rights that Kentucky courts will infer from them. Clark and Wellner argue that the common law protects principals by only recognizing transactions that have consequences contemplated by the principal. Clark and Wellner cite past Kentucky Supreme Court decisions where limitations were read into especially vague powers of attorney that lacked explicit references. Clark and Wellner contend that, because the Kentucky Supreme Court recognizes limits on what a principal can expect from the legal language of a contract, agency laws do not require principals to give attorneys-in-fact express authority.

IS THE ARBITRATION AGREEMENT ENFORCEABLE?

Kindred Nursing rejects the argument that there is a dispute over contract formation, and contends that, because the attorneys-in-fact entered into written arbitration agreements with the principals, the only question is whether these agreements should be enforced. See Brief for Petitioners at 31. Kindred Nursing contends that Clark and Wellner are trying to circumvent the FAA by characterizing laws that govern arbitration agreement enforceability as rules of contract formation. See id. Furthermore, Kindred Nursing argues that even if the presented question centers around contract formation, it would not make a difference under Saturn Distribution Corp. v. Williams (“Saturn”), 717 F. Supp. 1147 (E.D. Va. 1989). See id. at 32. In Saturn, the court rejected the argument that FAA preemption only applied to existing arbitration agreements and did not cover laws that regulated the formation of arbitration agreements as well.

On the other hand, Clark and Wellner argue that the FAA does not preempt state law when a contract was never formed because a contract requires both parties to agree to a transaction. Clark and Wellner cite the Kentucky Supreme Court decision for support that both parties never assented to the contract because one party was absent. They contend that a party’s signature is not proof of assent in certain circumstances; the attorney-in-fact still has the burden of demonstrating authorization by the party to be bound. Furthermore, Clark and Wellner argue that the cases relied upon by the Kindred Nursing address the issue of contract enforceability, but not the formation of a contract, which is the issue here. In support of their argument, Clark and Wellner cite AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), in which the Supreme Court held that a California law prohibiting class action waivers was unenforceable and preempted by the FAA because it would have a disproportionate effect on arbitration. Clark and Wellner also cite DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2016), in which the Court held that any California contract law that resulted in rendering an arbitration agreement unenforceable was also preempted by the FAA.

DOES THE KENTUCKY COURT'S EXPLICIT-REFERENCE RULE SINGLE OUT ARBITRATION FOR SUSPECT STATUS?

Kindred Nursing notes that the Court has consistently held that states cannot single out arbitration provisions in contracts. Kindred Nursing argues that the “explicit-reference rule” established by the Kentucky Supreme Court distinguishes arbitration clauses for suspect status. Kindred Nursing notes that the FAA was passed to protect arbitration agreements from discrimination; accordingly, Kindred Nursing contends that requiring an explicit reference rule would differentiate arbitration agreements from other forms of contract and violate the FAA. Kindred Nursing contends that if the decision below is affirmed, states will have broad authority to impose discriminatory barriers on all rights associated with contracting.

Clark and Wellner argue that Kentucky’s law does not single out arbitration agreements and criticize Kindred Nursing’s reliance on Doctor’s Associates v. Casarotto (“Casarotto”), 517 U.S. 681 (1996). Clark and Wellner contend that, in Casarotto, Montana required contracts with arbitration clauses to be written differently than other contract clauses to ensure that unsophisticated parties understood what they were assenting to. Clark and Wellner claim that the contracts in these cases differ from Casarotto because the Casarotto contract specifically discussed arbitration whereas the contracts at issue contain broader dispute resolution language. Furthermore, the Kentucky Supreme Court did not require additional formalities such as specific signatures, fonts, or notarization of the arbitration language in the power of attorney. Clark and Wellner contend that the Montana statute attempted to encumber arbitration whereas the Kentucky laws do not because language that simply promotes understanding of a right is not an encumbrance.

WHERE DOES THE KENTUCKY POWER OF ATTORNEY DERIVE ITS MEANING?

Clark and Wellner argue that the FAA cannot preempt a state court’s determination of a principal’s intent in a contract. Clark and Wellner note that because Kentucky has not adopted the Uniform Power of Attorney Act or any other equivalent statutory scheme, Kentucky powers of attorney are interpreted under the common law. Thus, according to Clark and Wellner, under Kentucky law, a power of attorney’s meaning derives from the reasonable intentions of the principal. Clark and Wellner argue that a broad granting of agency is insufficient to demonstrate that the principal meant for the attorney-in-fact to have the power to enter into arbitration agreements.

Kindred Nursing argues that the FAA prohibits reliance on judicial policy concerns as a justification for refusing to enforce arbitration agreements. Kindred Nursing notes that it is inconsequential that the discriminatory rule is not from a statute, but rather from the common law, because the FAA preempts any state law that disfavors arbitration, regardless of whether it is a legislative or judicial construct.

Discussion 

IS ARBITRATION BETTER THAN TRADITIONAL LITIGATION?

The Chamber of Commerce of the United States (the “Chamber”) argues in support of Kindred Nursing that the Federal Arbitration Act (“FAA”) endorses a policy that is pro-arbitration, demonstrating the fact that arbitration is a more efficient and less expensive alternative to litigation. The Chamber asserts that arbitration is fair and valuable to both individuals and businesses, which is why Congress has continued to expand on the benefits of arbitration including the fact that it is cheaper, faster, and reduces hostility between the parties, allowing for future business transactions between the parties. The Chamber also argues that arbitration should be used here because the Court has consistently upheld the FAA’s pro-arbitration policy because of the “real benefits” of arbitration. According to the Chamber, data also shows that arbitration is quicker than litigation due to less complex procedural requirements, reduces the already over-burdened court dockets, lowers the significant costs of litigation, and allows parties to resolve their claims with at least as much success as in a traditional lawsuit.

The American Association for Justice (“AAJ”), in support of Clark and Wellner, does not disagree with the benefits of arbitration; however, the AAJ asserts that third parties typically cannot bind a non-party to arbitration because third parties generally are not allowed to commit another person to a contractual relationship. Specifically, the AAJ contends that there is no meeting of the minds, an essential requirement of a valid contract, when a third party binds a non-party to a contract. According to the AAJ, a contract formed without the necessary understanding of what each party is agreeing to is fundamentally unfair to the non-party. Furthermore, the AAJ argues that even when a third party binds a non-party to arbitration, the non-party can only waive its constitutional rights if it does so voluntarily, knowingly, and intelligently. Such rights, the AAJ argues, are uniquely important; thus, courts should be weary in allowing an individual to waive them.

IS ARBITRATION A BETTER ALTERNATIVE TO LITIGATION FOR RESOLVING DISPUTES IN THE LONG-TERM CARE PROFESSION?

The American Health Care Association (“AHCA”), in support of Kindred Nursing, asserts that the long-term care profession in particular has a long-standing use of arbitration in an efficient and fair manner which should be maintained. The AHCA argues that disputes arising in such a profession often stem from tort or a breach of professional duty of care, and involve issues specific to that industry; thus, the use of an arbitrator with expertise in the long-term care industry provides a better avenue to resolve disputes. According to the AHCA, arbitration resolves disputes in the long-term care profession faster than those not resolved through arbitration further demonstrating arbitration serves as a better alternative to litigation in such disputes.

The American Association of Retired Persons (widely known as “AARP”), in support of Clark and Wellner, responds that access to the courts is essential in the long-term care profession because of the prevalence of elder abuse and neglect in nursing facilities. According to the AARP, nursing facility residents are especially vulnerable to abuse due to their isolation from the community and their dependence on others to perform daily activities; thus, allowing nursing facilities to rely on arbitration allows such facilities to severely limit their legal liability and disincentives them from taking proper care of residents.

Edited by 

Acknowledgments 

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