May 15, 2017

May 15, 2017:

Supreme Court holds that the FAA invalidates a Kentucky rule requiring that, for a power of attorney to authorize an agent to enter into an arbitration agreement on behalf of the principal, the power of attorney must expressly state that the agent has the power to waive the principal's rights of access to the courts and trial by jury.  Kindred Nursing Ctrs. Ltd. P'ship v. Clark, 137 S. Ct. 1421 (2017).

Joe Wellner and Olive Clark signed powers of attorney that granted Mr. Wellner's wife and Ms. Clark's daughter broad authority to manage their affairs.  When Mr. Wellner and Ms. Clark moved into a nursing home, the wife and daughter signed the necessary paperwork, which included an arbitration agreement.  Mr. Wellner and Ms. Clark died in the nursing home.  Their estates sued, alleging substandard care.  The nursing home moved to dismiss, arguing that the arbitration agreements precluded the estates from suing in state court.  The trial court denied that motion, and the Kentucky Court of Appeals and Kentucky Supreme Court affirmed.    

The Kentucky Supreme Court held that a power of attorney would not entitle an agent representative to enter into an arbitration agreement on behalf of a principal unless the power of attorney expressly said that the agent had the power to waive the principal's right of access to the courts and to trial by jury.  This was so, reasoned the Kentucky court, because the Kentucky constitution declared such rights "sacred" and "inviolate."  137 S. Ct. at 1426.  The United States Supreme Court reversed, holding that the Kentucky legal rule was invalid under the Federal Arbitration Act becausae it effectively singled out arbitration agreements for unfavorable treatment.     

The FAA provides that arbitration agreements are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."  9 U.S.C. 2.  Construing this statute, the Supreme Court has held that "[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."  Id. (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)).  A state rule may not explicitly single out arbitration agreements for unfavorable treatment.  "And not only that:  The Act also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements."  Id.  The Kentucky clear statement rule failed this test because the rule "hing[ed] on the primary characteristic of an arbitration agreement -- namely, a waiver of the right to go to court and receive a jury trial."  Id. at 1427.  Acccordingly, the FAA invalidated the Kentucky state court rule.      

Justice Kagan's opinion for the Court was joined by six other Justices.  Justice Gorsuch did not participate, and Justice Thomas dissented based on his view that the FAA does not apply to state court proceedings.       

 

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