U.S. Supreme Court Rejects State Rule Disfavoring Arbitration Agreements
On May 15, 2017, the United States Supreme Court issued a 7-1 decision in Kindred Nursing Centers Ltd. Partnership v. Clark, wherein it reversed a ruling from the Kentucky Supreme Court that attempted to circumvent the Federal Arbitration Act (“FAA”). The Court’s decision signals that the Supreme Court is skeptical of attempts by states to limit the FAA. This makes it more likely that contractual arbitration provisions will be upheld as enforceable even where state law disfavors arbitration agreements.
In Kindred Nursing Centers, the estates of two deceased nursing home residents sued Kindred alleging damages for claims arising out of the care provided to the decedents. Kindred filed motions with the trial court to dismiss the suits because the decedents, through their representatives, had signed agreements that included a provision to resolve any disputes through arbitration rather than through litigation. The Kentucky trial court denied the motions to dismiss, and the Kentucky Court of Appeals affirmed the trial court’s decision to permit the litigations to continue.
By a 4-3 vote, the Kentucky Supreme Court also affirmed and held that the arbitration provisions were unenforceable because the decedents did not expressly authorize their representatives to deprive them of their rights to jury trials, and such express authorizations are required by Kentucky’s “clear-statement rule.”
In rejecting the clear-statement rule, the U.S. Supreme Court explained that the FAA requires courts to place arbitration agreements “on equal footing with all other contracts.” The Court explained that, under the equal-treatment principle of the FAA, “[a] court may invalidate an arbitration agreement based on ‘generally applicable contract defenses’ like fraud or unconscionability, but not 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 Court found that the Kentucky clear-statement rule discriminated against arbitration provisions by “specially imped[ing]” the ability of agents to enter into arbitration agreements. Thus, the Kentucky rule permitted state courts to invalidate arbitration provisions even when the underlying contract was not itself illegal or deficient, thereby violating the FAA.
Kindred firmly establishes that the FAA generally preempts state laws that disfavor arbitration provisions. Thus, companies that would prefer to resolve disputes through arbitration now may have more assurance that their employee agreements and professional services contracts will less likely result in litigation.
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