For years, the U.S. Supreme Court has made two fundamental principles crystal-clear:
- Under the Federal Arbitration Act, arbitration agreements are “valid, irrevocable, and enforceable”, except where grounds exist that could invalidate any type of contract (such as fraud, duress, or lack of consideration).
- As explained by the Supreme Court in its 2011 landmark Concepcion decision, though a court may invalidate an arbitration agreement based on “generally applicable contract defenses,” it may not do so based on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” The FAA thus preempts any state rule that discriminates on its face against arbitration or that covertly accomplishes the same objective by disfavoring contracts that have the defining features of arbitration agreements. Arbitration agreements must stand on an “equal footing” with other contracts.
Unfortunately, some state courts have failed to get the message. And the Supreme Court’s recent 7-1 decision in Kindred Nursing Centers L.P. v Clark, 137 S. Ct. 1421 (2017),forcefully drives home the point that contrived state court attempts to explain why a rule is not impermissibly targeted at arbitration agreements will be viewed dimly
In Kindred, the Kentucky Supreme Court adopted a “clear statement” rule, under which a general power of attorney that was otherwise valid to authorize the execution of contracts in general, would not validly authorize execution of an arbitration agreement unless the power of attorney expressly addressed that topic. Thus, when family members holding a power of attorney agreed to arbitrate claims regarding the care of their loved ones in a Kindred nursing home, the arbitration agreement was deemed invalid, because the family members’ power of attorney did not “clearly state” that they had the power to waive the right to a jury trial. The state court opined that “the divine God-given right” to a jury trial could not be contractually waived, absent “an explicit statement before an attorney-in fact” that could “relinquish that right on another’s behalf.”
Justice Kagan, writing pointedly for the 7-member majority, would have none of that. She wrote that beyond the FAA “prohibiting outright the arbitration of a particular type of claim”, the law likewise prohibits “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of an arbitration agreement.” To the Kentucky court’s suggestion that its rule “could also apply when an agent endeavored to waive other ‘fundamental constitutional rights held by a principal’,” the Court responded: “But what other rights, really? 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.” Justice Kagan further noted the absence in Kentucky law of explicit authorization requirements as to settlement agreements or consents to a bench trial, both of which relinquish the right to a jury trial.
The Court further rebuffed Plaintiffs’ argument that the FAA applied only to contract enforcement, and not to contract formation, which was at issue in this case, emphasizing that:
- This argument was squarely contrary to the FAA’s text and case law; and
- “Adopting the respondents’ view would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it. As the respondents have acknowledged, their reasoning would allow States to pronounce any attorney-in-fact incapable of signing an arbitration agreement—even if a power of attorney specifically authorized her to do so. . . . (After all, such a rule would speak to only the contract’s formation.) And why stop there? If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements. (That rule too would address only formation.) The FAA would then mean nothing at all—its provisions rendered helpless to prevent even the most blatant discrimination against arbitration.”
The Supreme Court’s message in support of the enforceability of arbitration agreements seems unmistakable. But a number of states’ courts (including Missouri, California, and others), while routinely accepting arbitration agreements governing commercial disputes, still seem to bristle at enforcing arbitration agreements between consumers and manufacturers or retailers; or between employees and their employer. State courts that look for reasons not to place all arbitration agreements on an “equal footing” with other contracts in general, do so at their peril.