Tuesday, May 16, 2017

With Kindred, Supreme Court Signals It Will Stand By Arbitration Contracts that Limit Private Parties' Recourse in State Courts

By Professor Adam Zimmerman

This week, the Supreme Court rejected a Kentucky rule that prevented people from entering into arbitration with general power of attorney agreements. The Kentucky Supreme Court last year found that such agreements violated its constitutional guarantee to court access and held people only could only assign and waive those rights when a power of attorney contract expressly said so. The US Supreme Court found that the state rule unlawfully "single[d] out" arbitration agreements for "disfavored treatment" and violated the Federal Arbitration Act, which prevents states from discriminating against arbitration agreements.

In some ways, the impact of this decision is narrow. The Court emphasized that states could still prevent people from entering into contracts to arbitrate under "generally applicable contract defenses," like fraud. They just cannot adopt rules that only apply to arbitration. The Court took pains to emphasize that this Kentucky rule was unique because it specifically singled out arbitration as something that had to be expressly provided for, but not other forms of alternative dispute resolution, like settlement discussions or mediation. Said the Court in a footnote, "[m]ark that as yet another indication that the court’s demand for specificity in powers of attorney arises from the suspect status of arbitration rather than the sacred status of jury trials."

But there were some broader implications for the decision. First, the decision is consistent with a long line of cases, dating back almost 50 years, to broadly enforce agreements that require parties to resolve disputes outside of the federal courts. See Prima Paint Corp. v. Flood & Conklin Mfg. Co. 388 U.S. 395 (1967). Even as some questioned during oral argument, like Justice Alito and Chief Justice Roberts, whether the FAA was meant to apply to elderly patients' state law rights to enter into nursing home contracts, in the end, the Court broadly supported the idea that the FAA continues to preempt state law obstacles to arbitration. (Only Justice Thomas dissented these grounds.) Notably, the author of the opinion, Justice Kagan, repeatedly cited AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 339 (2011), a 5-4 decision which sharply divided the Court just six years ago.

Second, the Court emphasized that it did not matter that this dispute challenged whether a contract was even formed at all. The Court noted that contract formation was just as important a part of the Federal Arbitration Act as other contract defenses, observing that Section 2 of the FAA says that an arbitration agreement must ordinarily be treated as “valid, irrevocable, and enforceable.” (emphasis added). The Court feared that permitting states to undo agreements on such grounds would make it "trivially easy" to evade the FAA when they wanted to: "If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements."

A number of federal agencies have justified regulations barring arbitration agreements, including nursing home agreements, student loans or other contracts based on such "contract formation" arguments. Notably, however, nothing in the Court's opinion or reasoning invalidates current federal regulations barring arbitration agreements in specific areas of law. Nor does the Court's opinion bar federal or state regulators from challenging practices and recouping funds for private parties who sign arbitration agreements. Nevertheless, the decision is a clear sign that the Supreme Court's will continue to stand by arbitration contracts that stop private parties from enforcing state law in state courts.

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