Supreme Court Enters Fray of Nursing Home Arbitration Wars

Requirements that nursing home residents or their estates be required to arbitrate their disputes with nursing homes have been the subject of widespread criticism. Residents of nursing homes and other long-term care facilities are particularly unlikely to realize the existence of an arbitration requirement or to understand its meaning. And yet, these requirements can force into arbitration disputes related to allegations of serious neglect and abuse.

This article surveys the status of a number of challenges to nursing home arbitration agreements, and places the Supreme Court’s May 15 decision in that context.

The Supreme Court Decision in Kindred Nursing Centers

On May 15, in Kindred Nursing Ctrs. v. Clark, __ S.Ct. __, 2017 WL 2039160 (May 15, 2017), the Supreme Court ruled on whether a nursing home resident or the resident’s estate can be bound by an arbitration clause found in the admissions agreement that was signed by a family member with a power of attorney from the resident. Before the Court were two cases each involving residents whose families had been given powers of attorney. But in one case, the power of attorney was broadly drafted and in the other the scope was more limited.

Kentucky courts had found the arbitration agreements for both families to be unenforceable because of the Kentucky rule of decision that a power of attorney, no matter how broadly drafted, does not entitle a representative to enter into an arbitration agreement unless the power of attorney specifically refers to the authority to enter into such an agreement. That rule, which the Supreme Court characterized as a “clear statement” rule, derived from the “sacred” right to a jury trial, enshrined within the Kentucky Constitution. A power of attorney delegates the authority to waive that sacred right, Kentucky courts had reasoned, only if it clearly says so.

In an 8-1 opinion authored by Justice Kagan, the Supreme Court rejected Kentucky’s clear-statement rule, reasoning that it singles out arbitration for special treatment. The ruling is thus unremarkable as just another example of the Court finding inconsistent with the Federal Arbitration Act state laws that single out arbitration. While the Kentucky rule did not specifically refer to arbitration, it “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.”

The plaintiff had argued that the clear-statement rule is a general rule of applicability, immune from FAA protection, because it applies to all contracts regarding “fundamental” rights. But the Supreme Court considered this framing to be disingenuous. Some “fundamental” rights are clearly not covered by the clear-statement rule, and will be extraordinarily unlikely to arise in any case, particularly one involving a power of attorney.

For example, the Kentucky Constitution protects the right to alienate property, but no one argued that a power of attorney needed to be specific to allow a representative to sell a principal’s furniture. Instead, Kentucky courts had “hypothesized a slim set of both patently objectionable and utterly fanciful contracts that would be subject to its rule,” like contracts relating to a “principal’s right to worship freely” or “consent to an arranged marriage” or “bind [her] principal to personal servitude.” Both the narrowness and repugnance of the set of contracts to which Kentucky’s rule applied suggested that it was singling out arbitration agreements for disfavor.

The Court also rejected the argument that the Kentucky rule escaped preemption because it concerned contract formation as opposed to contract enforceability. The Court has in the past been clear that contract formation rules that single out arbitration also are preempted by the FAA, see, e.g., Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), and it reiterated that position even more forcefully in Kindred.

Significantly, while the Court found the clear-statement rule preempted, it returned one of the cases before it to the Kentucky courts. The power of attorney documents in one of the cases before it was broad enough to cover the authority to enter into an arbitration agreement, and the Court enforced the arbitration agreement in that case. But in the other case, Kentucky courts had thought it possible that the arbitration requirement was unenforceable not only because of the clear-statement rule, but because the power of attorney was too narrow to authorize the representative to enter into an arbitration agreement.

The Status of the Federal Rule Limiting Long-Term Care Arbitration Agreements

On September 29, 2016, Department of Health and Human Services’ Center for Medicare and Medicaid Services (CMS) announced a new rule covering a wide range of subjects. One important provision, 42 C.F.R. § 483.70(n), cuts off Medicare and Medicaid funding to nursing homes and other long-term care facilities that enter into pre-dispute arbitration agreements with their residents. The arbitration provision was to have been effective for any new agreement entered into starting November 28, 2016.

Nevertheless, on November 7, 2016, a Mississippi federal court preliminarily enjoined the November 28 effective date. See American Health Care Association v. Burwell, 2016 WL 6585295 (N.D. Miss. Nov. 7, 2016). The judge found arbitration in nursing home agreements troubling, but was more concerned with the “incremental ‘creep’ of federal agency authority beyond that envisioned by the U.S. Constitution.” This ruling is now up on appeal, but the Trump Administration has initiated actions to withdraw the rule. See Revision of Requirements for Long-Term Care Facilities: Arbitration Agreements, Pending EO 12866 Regulatory Review, RIN 0938-AT18 (April 26, 2017).

Is Resident Bound by Family Members’ Signature?

Kindred holds that a broad power of attorney is sufficient to allow the representative to bind the resident to an arbitration requirement, even if the power of attorney does not expressly mention arbitration. It also holds, however, that courts must determine whether more narrowly drawn powers of attorney authorize the representatives to bind the resident to the arbitration requirement. For example, where the family member is serving as a health care decision maker under state law, that authorization may not apply to the ability to bind the resident to an arbitration agreement. See the cases collected at NCLC’s Consumer Arbitration Agreements § 7.6.4.3.

Moreover, a state power of attorney statute may provide that a power of attorney only becomes effective when the resident is incapable of making health care decisions. Even if there is a written power of attorney, it may not provide authority for the resident to sign an admissions agreement if the resident is still capable of making health care decisions. See id. § 7.6.4.3.

Further, in some cases, a family members may sign an enrollment contract with a long-term care facility without a power of attorney or any other apparent authority. Many courts have ruled that the family member’s signature is not binding on the resident under agency principles unless there is a durable power of attorney or similar delegation under state law. See the cases collected at NCLC’s Consumer Arbitration Agreements § 7.6.4.2. A familial relationship alone does not create an agency relationship.

If the resident is mentally incapacitated, the resident cannot ratify a contract or grant an agent to act on the resident’s behalf. And even if there is an agency relationship, signing an arbitration agreement may not be within the scope of that agency relationship.

Moreover, if an arbitration agreement does bind the resident, it may not personally bind the signatory who is signing under a power of attorney. Then that family member may have his or her own claim against the facility and the arbitration requirement may not apply. For more on these issues, see id. § 7.6.4.2.

Nursing homes may argue that the resident is bound because the resident is a third party beneficiary to the agreement. To be so, there must be a binding contract. But if the contract is between the resident and the facility, but signed by a family member, it may not be a binding contract at all. Similarly, equitable estoppel arguments may not help the nursing home. See generally id. § 7.6.4.3.

Where the Resident Signs the Admissions and Arbitration Agreement

Where a resident is the one signing an admissions agreement with an arbitration clause, a different set of challenges present themselves. Does the resident lack the capacity to assent? Even if the resident meets the state’s legal standard of being able to assent to a contract, the resident’s status may assist in showing procedural unconscionability in creation of the arbitration requirement. Then if aspects of the arbitration clause are also substantively unconscionable, this may be grounds to refuse to enforce the arbitration agreement. See id. ch 6.

Status of State Legislative Efforts in this Arena

The Kindred decision reiterates that a state law or rule of decision does not escape preemption merely because it does not expressly mention arbitration. If it appears on its face to cover a more general category of contracts but is designed to regulate arbitration in particular, it is preempted by the FAA.

This is not to say that states cannot draft legislation that regulates more general categories of agreements that include arbitration agreements—the question in most cases will be whether the category of contracts covered by the rule is sufficiently broad to conclude that the state is not targeting arbitration in particular. For example, rules targeting contracts of adhesion generally or material terms in such contracts should be sufficiently general to avoid FAA preemption. See NCLC, Model State Consumer and Employee Justice Enforcement Act Titles III and IV.

Additionally, while the CMS rule is in danger of never becoming effective, states can arguably enact similar rules to protect their limited health care budgets. Through Medicaid and Medicare, states provide substantial funding to long-term care facilities. But they do not have the resources to ensure that the long-term care facilities benefiting from state funds operate effectively and safely. States depend on private complaints and private litigation to monitor these facilities. Under the “market participant” exception, they are thus arguably authorized to protect their limited resources by cutting off state funding for facilities that enter into pre-dispute arbitration agreements. See NCLC, Model State Consumer and Employee Justice Enforcement Act, Title II.