I would understand if not every state supreme court got the memo from last year’s SCOTUS decision on FAA preemption, Kindred, which reminded state courts that the FAA prevents state courts from imposing additional requirements on arbitration agreements that are not required for other types of contracts.  But Kentucky definitely got the memo.  The memo was addressed to Kentucky. Yet, last week the Supreme Court of Kentucky released a new decision that continues to convey hostility to arbitration and SCOTUS’s decisions interpreting the FAA.

The legal issue in Northern Ky. Area Development District v. Snyder, 2018 WL 4628143 (Ky. Sept. 27, 2018) is straightforward: Does the FAA preempt a Kentucky statute that prohibits employers from conditioning employment on an employee’s agreement to arbitrate claims.  The statute prohibits an employer from requiring an employee to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled.”  In this case, the plaintiff was required to sign an arbitration agreement in order to work for the governmental entity.  When she sued over her termination, the employer moved to compel arbitration.

The trial court refused to compel arbitration.  Then the court of appeals affirmed, finding that the employer never had authority to enter into the arbitration in the first place (due to the statute), so the arbitration agreement did not technically exist.  (Too cute by half.  Plus, Justice Kagan specifically said that formation issues could also be preempted.)

The Kentucky Supreme Court affirmed.  It also concluded that the employer, a state agency, was covered by the anti-arbitration statute.  And therefore, when it conditioned employment on an agreement to arbitrate, in violation of the statute, its action was “ultra vires,” and the resulting arbitration agreement was void.  (See parenthetical above.)

The court went on to find the anti-arbitration statute at issue was not preempted by the FAA.  The decision states with an apparently straight face that the statute “does not actually attack, single out, or specifically discriminate against arbitration agreements” and did not “evidenc[e] hostility to arbitration”.  The statute “simply prevents [the employer] from conditioning employment” on the arbitration agreement. Furthermore, it notes that the statute does not just preclude arbitration agreements, but also any agreement that waives or limits an employee’s rights.

BUT HERE’S THE PROBLEM.  Kentucky’s reasoning only makes sense if we agree that arbitration is a limitation or a diminishment of the employee’s rights.  If, instead, you assume that arbitration is simply an alternative forum for resolving the employee’s full set of rights, the logic falls apart.  But, will SCOTUS really want to hear another Kentucky decision?  Kentucky is betting that it won’t.  Maybe this should not surprise anyone; Kentucky did not exactly bend to SCOTUS’s will when Kindred was remanded.  And btw, the nursing home is seeking certiorari from the remand decision, and SCOTUS just relisted it, meaning it still has a chance. (For good measure, Kentucky’s high court issued a decision compelling arbitration on the same day, overruling an objection that the arbitration clause was not fully mutual.  Grimes v. GHSW Enterprises, 2018 WL 4628160 (Ky. Sept. 27, 2018).)

————————–

Speaking of SCOTUS, Monday it denied cert in at least four arbitration cases.  Two were companion cases (from Cal. and Neb.) that sought guidance on what types of challenges can invalidate a delegation clause.  (My blog post here, SCOTUSblog here and here.)  Another presented issues regarding binding non-signatories to arbitration through equitable estoppel. The fourth involved a question of whether an employer waived its right to arbitration (Cash Biz).  (My post here, filings here.)

And – this morning, SCOTUS hears arguments in New Prime, addressing the exemption in FAA Section One.

[Thanks to @PerryCooper for alerting me to a few of these cert denials.]

If I had to choose a favorite subset of arbitration cases, it might be the ones that come after SCOTUS remands to a state supreme court.  How does a state high court full of accomplished professionals, the cream of the legal crop in their state, respond after the U.S. Supreme Court has found their previous arbitration opinion was flawed?  Often, they find a way to stick to their guns.  We already saw that once in 2017, when Hawaii affirmed its arbitration decision, despite the GVR from SCOTUS.  And now Kentucky has followed suit.

In Kindred Nursing Centers Ltd P’ship v. Wellner, 2017 WL 5031530 (Ky. Nov. 2, 2017), the Kentucky Supreme Court addressed what was left of its Extendicare decision after SCOTUS took it apart in May of this year.  But not much was left.  The original decision had consolidated three separate actions: one was not appealed to SCOTUS, one was reversed by SCOTUS, and only the third was remanded by SCOTUS.  In the remanded matter, the Kentucky Supreme Court had rested its decision on two alternative grounds–the ground that SCOTUS found was preempted (that a power of attorney must clearly grant the right to give up a court or jury trial in order to have a valid arbitration agreement executed by the agent), and a finding that the language of the power of attorney at issue was not broad enough to encompass entering into a pre-dispute arbitration agreement.  So, the job on remand was to determine whether the second ground could stand up on its own, or whether it was “impermissibl[y] taint[ed]” by the preempted ground.

A majority of the Kentucky Supreme Court found there was no taint.  The nursing home relied on two provisions in the power of attorney, one giving power to demand or collect money and institute legal proceedings, and another giving the power to make contracts “in relation to both real and personal property.”  The court found that the arbitration agreement “was not the enforcement…of something then due or to become due” “nor was it the making of a contract…pertaining to” property.  As a result, “that aspect of the Extendicare decision remains undisturbed.”

While four members signed the majority opinion, three members of the court dissented, complaining that the majority failed to follow SCOTUS’s directive.  The dissent wrote “this Court’s distinction between pre-dispute arbitration agreements as not pertaining to a principal’s property rights . . . is simply another attempt to single out arbitration for ‘hostile’ treatment under the guise of Kentucky contract and agency law.”

Indeed, the majority had not completed edited out its hostility to SCOTUS’s arbitration case law from the decision.  For example, it criticized the Supreme Court’s

perception that our application of the clear statement rule, rather than the manifestation of our profound respect for the right of access to the Court of Justice explicitly guaranteed by the Kentucky Constitution and the right to trial by jury designated as “sacred” by Section 7 of the Kentucky Constitution, demonstrated instead a hostility to federal policies implicit in the Federal Arbitration Act and a resulting aversion to any implication of authority to make an arbitration agreement.

Pro tip to Kentucky: edit out any future references to jury trials being sacred if you want to avoid another certiorari petition in an arbitration case.

 

 

Just as I predicted, SCOTUS reversed the Kentucky Supreme Court’s decision in Kindred this morning.  The interesting piece, though, is that the seven member majority went out of its way to cut off some of the “on trend” methods that state courts have been using to avoid arbitration clauses.

The Kentucky decision can be summarized easily.  The case  involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents.  In each case, a relative with power of attorney had signed an admission document that included arbitration when the resident entered the nursing home.  However, the Kentucky court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document.  (You may recall this is the decision that analogized entering into an arbitration agreement to: putting a child up for adoption, aborting a pregnancy, and entering into personal servitude.  If that doesn’t cry out “judicial hostility to arbitration,” I don’t know what does.)

Justice Kagan, writing for the seven-member majority, found Kentucky’s “clear statement rule” preempted by the Federal Arbitration Act.  “[T]he 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.”  In response to Kentucky’s attempt to paint its rule as broader than arbitration, the Court said 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.”

That preemption aspect of the decision seems to confirm what I have been saying about the impact of DirecTV: states are in much better position to defend their anti-arbitration “general contract rule” if they can point to at least one non-arbitration circumstance in which it has been applied.  (The decision added a footnote to clarify this isn’t an absolute necessity: “We do not suggest that a state court is precluded from announcing a new, generally applicable rule of law in an arbitration case.” But that’s like saying it is conceivable that your mother will appreciate a new vacuum for mothers day, but we don’t recommend it.)

The Court’s decision to clearly state that courts cannot invalidate arbitration agreements based on their (necessary) waiver of the right to a jury trial also cuts off a trendy argument in state courts.  New Jersey courts, for example, have invalidated arbitration agreements in recent years based on their failure to clearly advise consumers they are waiving their rights to jury trials (SCOTUS denied cert in the key NJ case, Atalese.)  Those NJ decisions are now shaky precedent, IMHO.

The decision then went beyond the basic preemption analysis.  Respondents had argued the FAA had no application to contract formation, that only state law controlled that question.  SCOTUS quickly disabused the respondents, and all state courts, of that notion, reasoning that the purpose of the FAA would be completely undercut by the rule: “If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements.  (That rule too would address only formation.)” In doing so, the Court cut off another avenue for avoiding the FAA.  (In my view, though, the slippery slope argument relied on by SCOTUS also cuts against the formation/validity  distinction used to separate which issues are decided in court and which by arbitrators.)

[As usual, Justice Thomas dissented based on his position that the FAA does not apply in state courts.]

While the Supreme Court has put off hearing a more contentious arbitration case until the fall (presumably in hopes that it will have nine justices by then), tomorrow it will hear the nursing home arbitration case from Kentucky.  I look forward to listening to the questions and trying to figure out why the Justices granted a review on the merits…  Instead of repeating my analysis of the Kentucky case, here are some recent state court arbitration cases of interest (in addition to the three I posted about a few weeks ago).

West Virginia.  Remember when West Virginia was the thorn in the FAA’s side?  When it was the leader of the pack of anti-arbitration states?  Well, not in West Virginia CVS Pharmacy v. McDowell Pharmacy, Inc., 2017 WL 562826 (W. Va. Feb. 9, 2017).   The lower court had refused to compel arbitration of disputes between retail pharmacies and a pharmacy benefit management company.  Applying West Virginia law, the lower court found there was no arbitration agreement, because the parties did not validly incorporate the manual that contained the arbitration provision.   The West Virginia Supreme Court, however, applied Arizona law, as provided in the contract, and that made all the difference.  It found the arbitration agreements were adequately incorporated, and that their reference to AAA rules was sufficient to delegate questions of arbitrability to the arbitrator.  No cert likely here.

Missouri.  The Supreme Court of Missouri took a safe bet in siding (partially) against the arbitrator in State ex rel Greitens, 2017 WL 587296 (Mo. Feb. 14, 2017), since the Supreme Court has denied cert petitions in many cases stemming from the master settlement agreement between states and tobacco companies.  (E.g., this most recent one.)  In this case, the state’s highest court found the arbitration panel exceeded its power when it deprived Missouri of its share of $50 Million in tobacco settlement payments for 2003.  The case is too complicated to explain in this post, but know that this is one of those rare examples of a court modifying an arbitration award, as opposed to just confirming or vacating it.  No cert likely here either.

Iowa.  I never get to write about Iowa (which my daughter called “why-owa” after a long road trip through farm country), but its supreme court issued a decision in late 2016 about nursing home arbitration that merits mention here.  In Roth v. Evangelical Lutheran Good Samaritan Society, 886 N.W.2d 601 (Iowa 2016), Iowa’s highest court answered a certified question from the federal district court.  In short, it found that Iowa’s statutes do not require judicial resolution of loss of consortium cases, and in this case the children of the decedent were not bound by the decedent’s arbitration clause because the “claims belong to the adult children and they never personally agreed to arbitrate.”  (Hard to make a bet on certiorari in this case, since it is headed back to federal trial court…)

Alabama.  In Hanover Ins. Co. v. Kiva Lodge Condominium Owners’ Assoc., 2016 WL 5135201 (Ala. Oct. 21, 2016), the Supreme Court of Alabama found that when the parties adopted the following addendum to their contract, the first party who filed an action was able to dictate the forum: “Notwithstanding anything in this Addendum to the contrary, either party may pursue any claim or dispute in a court of law, or through mediation and arbitration.”  That amended language was added to the parties’ A201 General Conditions, right after language indicating that “any claim arising out of or related to the Contract… may at the election of either party…be subject to arbitration.”  After the condo association brought their claims in court and requested a referral to arbitration, the defendants argued that the case should stay in court.  The trial court sent the claims to arbitration and the supreme court affirmed that result, finding “the addendum provides that once a party elects arbitration as a method for resolution of a dispute…the other party cannot neutralize that choice by insisting on litigation in court…In short, Kiva Lodge has proven the existence of a binding mandatory arbitration agreement between the parties.”  This will not end up at the Supreme Court, but it’s an important drafting lesson for all of us.

On October 28, the Supreme Court granted a cert petition in a case in which the Kentucky Supreme Court refused to enforce arbitration agreements in nursing home agreements.  (Kentucky recently topped my list of states hostile to arbitration precisely because of the language in the decision that will be reviewed…)

In Kindred Nursing Centers Limited Partnership v. Clark, three wrongful death cases were consolidated.  In each of them, someone with power of attorney for the decedent had signed admission documents that included an arbitration clause.  However, Kentucky requires that a power-of-attorney document specifically authorize the agent to waive a jury or court trial in order to validly form an arbitration agreement, and these three POAs did not have that language.  The Kentucky court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document.

In its application to SCOTUS, the nursing homes engaged experienced Supreme Court practitioners and framed the question presented as: “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.”

I am always happy when SCOTUS takes a new arbitration case, because it usually provides further evidence of the need for my continued existence as an arbitration blogger, advocate, and specialist.  However, this grant strikes me as a bit odd.  Why wouldn’t SCOTUS just grant, vacate, and reverse (GVR) this case? It had all the hallmarks of a case ripe for GVR?  It also doesn’t make sense for SCOTUS to use this as a vehicle to address the many state court decisions refusing to uphold arbitration agreements in nursing home contracts, since in just one month, the federal government will start prohibiting the use of arbitration agreements in nursing home admission documents.  In that sense, this type of case is almost moot.  Nor does it make sense to me to clarify the preemption doctrine of Concepcion, when the Court just had that opportunity 11 months ago in DIRECTV.

One possible explanation is that SCOTUS wants to define which formation issues are appropriate for courts to tackle on motions to compel arbitration.  Indeed, in a cert petition in another arbitration case that was also conferenced on Friday, the petitioner alleged that state courts are (falsely?) labeling many disputes as ones of contract formation in order to keep them in the courts.

As long as we’re talking about the SCOTUS docket, it always surprises me which cases are and are not appealed to the highest court in the land.  For example, that Finn case from New Hampshire’s high court that left me speechless in June, because it held that Sections 9-11 of the FAA do not apply in state court?  Apparently the party whose arbitration award got vacated did not petition for cert.  (Though that party probably made the right call, as earlier this month SCOTUS denied cert in a case asking whether the FAA’s judicial review standards apply in state court.)  Same thing seems true of the for-profit college case in which the NJ Supreme Court refused to enforce a delegation clause (no cert petition).  But, the new circuit split over whether putting class action waivers in employment arbitration agreements violates the NRLA is already a subject of multiple cert petitions (this, and this and this ).  That issue seems like a strong contender for getting a petition granted.

A recent decision from a federal district court in Tennessee raises a discrepancy in how the courts treat arbitration agreements that hinder a plaintiff’s state law and federal law claims.  Cases under the FAA state that arbitration agreements cannot be enforced if enforcement means plaintiffs will not be able to effectively vindicate their federal statutory rights (as the DOJ argued recently). But what happens if plaintiffs cannot effective vindicate their rights under state statutes in arbitration?  That is the situation that the court addressed in Dean v. Draughons Junior College, Inc., __ F. Supp. 2d __, 2013 WL 173249 (M.D. Tenn. 2013).

In Dean, a class of students at affiliated junior colleges alleged the colleges violated state statutes by making false representations about their record of placing students in jobs.  The colleges moved to compel arbitration, based on an arbitration agreement with all of the students that included a delegation clause (authorizing the arbitrator to determine even the validity of the arbitration agreement).  The class of students argued that the delegation clause itself was unenforceable, because it was prohibitively expensive for the students to arbitrate the validity of the arbitration agreement.  (There was no class action waiver.)

The court in Dean concluded that Kentucky state law, which governed the dispute, recognized a cost-prohibitiveness defense to arbitration, and it also concluded that the plaintiffs could not pay the costs to arbitrate arbitrability.  (This is the only time I have seen a successful challenge to the delegation clause itself, pursuant to Rent-A-Center.)  However, it then concluded that Kentucky’s case law  — that precluded enforcement of arbitration agreements if those agreements hinder enforcement of state statutes — was preempted under Concepcion, because the doctrine was specific to arbitration agreements.  The court summarized that “although Rent-a-Center indicated that federal district courts could entertain state law challenges to the enforcement of a delegation clause based on [cost], this court construes Concepcion … as precluding the assertion of a Kentucky cost-prohibitiveness defense to the Delegation Clause here.”  Clearly frustrated, the court granted the defendants’ motion to compel arbitration, but noted that “this result strikes the court as manifestly unjust and, perhaps, deserving of legislative attention.”

Not only is this decision interesting because federal judges do not usually say that the Supreme Court’s case law is manifestly unjust, but because it raises a parallel issue to the one before the Supreme Court right now in AmExIII    In AmEx, the Court will (I assume) decide whether federal law will allow plaintiffs to challenge arbitration agreements that make it economically unfeasible to pursue their federal statutory claims.  If that “effective vindication” rule survives for federal statutes, why shouldn’t states be allowed to enforce similar rules for their own statutes?  On the other hand, if SCOTUS strikes down the “effective vindication” rule, then state and federal laws are treated equally.