SCOTUS: Federal Arbitration Act kills Kentucky's clear-statement rule

One more time, with gusto: A state-law rule that singles out arbitration agreements for disfavored treatment violates the Federal Arbitration Act (FAA). Kindred Nursing Centers v. Clark (US Supreme Court 05/15/2017) [opinion text].

The significant teaching in this case is a strong re-statement that the FAA requires courts to place arbitration agreements on equal footing with all other contracts at the contract-formation stage as well as the contract-enforcement stage.

Janis Clark held a broad power of attorney for her mother. When Mom moved in to a nursing home operated by Kindred Nursing Centers, Janis completed all the paperwork – including an arbitration agreement on Mom's behalf providing that any claims arising from Mom's stay at the facility would be resolved through binding arbitration. After Mom died, her estate sued claiming that Kindred's substandard care caused her death. Kindred moved to dismiss, citing the arbitration agreement, but the Kentucky courts allowed the suit to go forward. [Kentucky opinion text]

The Supreme Court of Kentucky examined the power-of-attorney instrument with considerable care, and concluded that Janis was not authorized to enter into an arbitration agreement. The court emphasized that it would enforce an arbitration agreement if one had been made, but that its decision was that there was no assent to an arbitration agreement in the first place.

The Kentucky court put things in terms of a waiver of fundamental constitutional rights – access to the courts, appeal to a higher court, and trial by jury – and said that "the power to waive generally such fundamental constitutional rights must be unambiguously expressed in the text of the power-of-attorney document."

"[W]e are convinced that the power to waive generally such fundamental constitutional rights must be unambiguously expressed in the text of the power-of-attorney document in order for that authority to be vested in the attorney-in-fact. The need for specificity is all the more important when the affected fundamental rights include the right of access to the courts (Ky. Const. § 14), the right of appeal to a higher court (Ky. Const. § 115), and the right of trial by jury, which incidentally is the only thing that our Constitution commands us to 'hold sacred.' See Ky. Const. § 7 ('The ancient mode of trial by jury shall be held sacred, and the right thereof remain inviolate, subject to such modifications as may be authorized by this Constitution.')."

In a 10-page smack-down, Justice Kagan ripped through the Kentucky court's analysis, saying, "The Kentucky Supreme Court’s clear-statement rule … fails to put arbitration agreements on an equal plane with other contracts." She avoided saying that the Kentucky court manipulated its analysis, or that it was openly hostile to arbitration, or that it was using smoke and mirrors – but just barely.

Justice Kagan suggested that the Kentucky court was acting covertly, saying, "The [FAA] also displaces any rule that covertly [prohibits arbitration of a particular type of claim] by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements."

She also hammered home the idea that the FAA applies to contract formation as well as contract enforcement: "By its terms, then, the [FAA] cares not only about the 'enforce[ment]' of arbitration agreements, but also about their initial 'valid[ity]' – that is, about what it takes to enter into them."

Interesting that the Court never mentioned "preemption" or the Supremacy Clause. I guess it goes without saying.

The decision was 7-1. Justice Gorsuch did not participate. Justice Thomas dissented, as usual, based on his theory that the FAA does not apply to proceedings in state courts.

In a companion case the Court asked the Supreme Court of Kentucky to re-examine its holding to be sure that it was not tainted by its clear-statement rule.

[For recent decisions and pending employment law cases, see Supreme Court Watch.]