Arbitration Agreements and Black Swans: Supreme Court Strikes Down Kentucky’s Clear Statement Rule as an Impermissible Impediment to Arbitration

By John R. Snyder

On May 15 the Supreme Court yet again reasserted the preeminence of the Federal Arbitration Act (“FAA”) over state courts’ efforts to concoct end runs around its dictates. In Kindred Nursing Centers LP v. Clark, No. 16-32, the Court held the Kentucky Supreme Court had “flouted the FAA’s command to place [arbitration] agreements on an equal footing with all other contracts.” The Kentucky court had done so, the Supreme Court found, when it held that a power of attorney did not empower the attorney-in-fact to sign an arbitration agreement on behalf of her principal because the power of attorney did not specifically authorize the agent to deprive her principal of the “sacred” and “inviolate” right under the Kentucky Constitution to adjudication by a judge or jury. (This despite the facts that the power of attorney was an “extremely broad, universal delegation of authority” and that arbitration as a dispute resolution mechanism is also enshrined in Kentucky’s Constitution.)

The Court stated that the FAA “displaces any rule that covertly accomplishes the same objective [of disfavoring arbitration agreements] by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” The Kentucky court had contended it was not singling out arbitration agreements; that it would have reached to same conclusion had the agent waived her principal’s right to worship freely, consented to an arranged marriage, or bound her principal to personal servitude. The Supreme Court found that rationale, which Justice Kagan characterized as based on “both patently objectionable and utterly fanciful contracts,” wholly unconvincing: “Placing arbitration agreements within that class . . . makes clear the arbitration-specific character of the [clear-statement] rule, much as if it were made applicable to arbitration agreements and black swans.”

The Kindred Nursing Centers decision is the latest in a line of Supreme Court opinions over the last several years striking down state courts’ increasingly attenuated attempts to disfavor and defeat contractual arbitration provisions. It is nevertheless notable for at least a couple reasons. First, it is a 7-1 decision. The sole dissenter is Justice Thomas, who has been a lone voice contending for two decades that the FAA does not apply to proceedings in state courts. (Newly minted Justice Gorsuch did not participate in the decision.)

Also, the majority opinion was authored by Justice Kagan, who is no unabashed fan of arbitration or of some of the Court’s recent interpretations of the FAA. See, for example, her somewhat scathing dissent in American Express Co. v. Italian Colors Restaurant, 570 U.S. ___, 133 S. Ct. 2304 (2013) (wherein she declaimed that the majority’s holding that the FAA’s “command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims” in effect tells holders of such claims, “too darn bad”). Justice Ginsburg, who joined in Justice Kagan’s Italian Colors dissent, and Justice Sotomayor have on occasion been similarly unenthusiastic about the Court’s use of the FAA to protect arbitration agreements. See, for example, Justice Ginsburg’s dissent, joined by Justice Sotomayor, in DIRECTV v. Imburgia, 136 S. Ct. 463 (2015) (decrying the majority’s “further step to disarm consumers, leaving them without effective access to justice”). Perhaps the Court thought it important to speak now with a more unified voice so as to send a message that it is tiring of state courts’ intransigence and contrivance?

Kindred Nursing Centers is also notable because this decision and its predecessors (including in particular Marmet Health Care Center, Inc. v. Brown, 565 U.S. 530 (2012), and AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)) seem to toll the death knell for the continued viability of state court decisions that utilize rationales similar to the Kentucky Supreme Court’s clear-statement rule. Those imperiled decisions include the Massachusetts Supreme Judicial Court’s opinion in Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390 (2009), which singled out statutory employment discrimination claims for “distinct treatment,” on the basis of the state’s “public policy against workplace discrimination,” decreeing that, unless an arbitration agreement states “in clear and unmistakable terms” that employment discrimination claims are subject to arbitration, such claims may not be compelled to arbitration. The Kindred Nursing Centers opinion provides guidance on how such decisions will be analyzed: “We do not suggest that a state court is precluded from announcing a new, generally applicable rule of law in an arbitration case. We simply reiterate here what we have said many times before—that the rule must in fact apply generally, rather than single out arbitration.”

Related Regulatory Proscription: While the Supreme Court has been busy upholding enforcement of arbitration agreements, some federal regulators have been hard at work forbidding them, or at least certain variations. For example, the Department of Health and Human Services’ Centers for Medicare and Medicaid Services (“CMS”) has decreed that a federally funded long-term care “facility must not enter into a pre-dispute agreement for binding arbitration with any resident or resident’s representative nor require that a resident sign an arbitration agreement as a condition of admission to the LTC [long-term care] facility.” 42 C.F.R. § 483.70(n). A Northern District of Mississippi court preliminarily enjoined that regulation last fall. American Health Care Assn. v. Burwell, 2016 WL 6585295 (Nov. 7, 2016). That order is on appeal to the Fifth Circuit Court of Appeals.

Meanwhile, the National Labor Relations Board has since 2012 ruled that requiring workers to sign arbitration agreements waiving their right to file class actions violates the workers’ collective action rights under the National Labor Relations Act (“NLRA”). D.H. Horton, Inc., 357 NLRB No. 184, 2012 WL 36274, and other cases.   The Seventh and Ninth Circuits have held the NLRA’s guarantee of workers’ concerted activity rights overrides the FAA protections, while the Second, Fifth and Eighth Circuits have held that it does not. The Supreme Court will take up the issue in the fall.

Practice Tip: Do not rely on a power of attorney as authorization for an agent to act for a principal in signing an agreement containing an arbitration agreement (or any agreement for that matter) unless the power of attorney clearly authorizes the attorney-in-fact to act with respect to the subject matter of the agreement. In Kindred Nursing Centers the Kentucky Supreme Court had held a second power of attorney was insufficiently broad to give the agent authority to execute an arbitration agreement for the principal in connection with the principal’s becoming a resident of a nursing center. The U.S. Supreme Court remanded that issue to the Kentucky court for consideration of whether its determination as to the scope of that power of attorney was impermissibly tainted by its now-disapproved clear-statement rule.