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We Called It! SCOTUS Rules that FAA Preempts Kentucky Rule of Law Impinging on Arbitration Agreements
Posted on Categories Arbitration, Arbitration Agreements, Court Decisions, Federal, NewsTags , , , , ,

The Supreme Court ruled on May 15th that a Kentucky rule of law requiring that a power of attorney specifically authorize agreements to arbitrate was preempted by the Federal Arbitration Act (“FAA”).

To review, the Court granted certiorari last October in Kindred Nursing Centers v. Clark & Wellner, No. 16-32, two related preemption cases, each involving an arbitration clause in a nursing home admission agreement signed by an attorney-in-fact (SAA 2016-41). The issue as framed in the Petition for Certiorari was: “Whether the FAA preempts a state-law contract rule that singles out arbitration by requiring a power of attorney to expressly refer to arbitration agreements before the attorney-in-fact can bind her principal to an arbitration agreement.” This court-made rule became known as the “clear-statement” rule.

Oral Argument was a Harbinger of Things to Come

We perused the 51-page February 22nd oral argument transcript and listened to the audio recording. Based on that, we blogged: “As we’ve said many times before, you can go poor in a hurry betting on SCOTUS cases, but our money is still on a reversal, even with the current 4-4 Court composition. The key indicators to us were the questions posed by Justices Breyer and Ginsberg” (see SAA 2017-08). For example: Justice Breyer: “Of course I'm highly suspicious as you can tell from my tone of voice. What I really think has happened is that Kentucky just doesn't like the Federal law. That's what I suspect. So they're not going to follow it. Now, that, of course, you're going to say, no, they would never do that.” Justice Ginsberg: “But what about the principle that making an arbitration agreement harder to form than other agreements violates the Federal Arbitration Act? As [Petitioners’ Counsel] mentioned, the main rule is equal footing. Arbitration we thought to be on the same footing as all other contracts. If you make the arbitration agreement harder to form because you have to have this explicit reference than other contracts, doesn't that discriminate against arbitration agreements?

The Holding’s Two Key Elements

The Court ruled 7-1 that the Kentucky rule of law was preempted by the FAA. Writing for the majority, Justice Kagan relies heavily on AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), where SCOTUS held that PDAAs containing class action waivers were enforceable under section 2 of the FAA, and that a state rule of law prohibiting such waivers was preempted by the FAA. Said the Court: “The Kentucky Supreme Court’s clear-statement rule, in just that way, fails to put arbitration agreements on an equal plane with other contracts.... And so it was that the court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement -- namely, a waiver of the right to go to court and receive a jury trial.... Such a rule is too tailor-made to arbitration agreements -- subjecting them, by virtue of their defining trait, to uncommon barriers -- to survive the FAA’s edict against singling out those contracts for disfavored treatment.”

Justice Kagan also rejects Respondents’ argument that the FAA’s preemptive reach does not impact contract formation issues. “Both the FAA’s text and our case law interpreting it say otherwise.... By its terms, then, the Act 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. Or said otherwise: A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made” (brackets in original).

(ed: *So much for fears of a 4-4 deadlock! **Our reading is that: 1) the Court is extending the Concepcion rule to preempt not only a state’s legal rule or statute that on its face discriminates against arbitration, but also laws that in practical terms attack “the primary characteristic of an arbitration agreement -- namely, a waiver of the right to go to court and receive a jury trial;" and 2) the FAA does not completely leave contract-formation issues to the states. ***As usual, Justice Thomas dissented, based on his long-held belief that the FAA does not apply in state courts. Justice Gorsuch did not participate. ****Because one of the consolidated cases under review had a narrow PDAA, the Court remands it with instructions to see if the Kentucky Supreme Court’s holding can be supported “wholly-independent” independent of the Court’s “clear-statement rule.”) (SAC Ref. No. 2017-19-01)

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