U.S. Supreme Court: Individual States Cannot Treat Arbitration Agreements Different From Contracts

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May 15, 2017

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The U.S. Supreme Court has reaffirmed its strong support of the Federal Arbitration Act (“FAA”) by remanding a recent Kentucky Supreme Court decision that targeted arbitration agreements.  The U.S. Supreme Court stated that the FAA requires all states to treat arbitration and other types of contract agreements equally, and any state regulations that disfavor or discriminate against arbitration are invalid under the FAA.

The Kentucky case, Kindred Nursing Center L.P. v. Clark, emerges from a consumer context.  Plaintiffs were relatives of elderly individuals who resided at a Kindred Nursing Center location.  The plaintiffs signed arbitration agreements with Kindred on behalf of the elderly individuals, for whom they had also executed powers of attorney in order to manage the elderly individuals’ affairs.  Upon the death of their relatives, plaintiffs sued Kindred.  The Kentucky Supreme Court invalidated the arbitration agreement, announcing a new rule: any agreements that waive the “divine God-given right” to a jury trial must be explicitly stated before an attorney-in-fact.  According to the Kentucky Supreme Court, the plaintiff’s power of attorney was too broad and did not grant the authority to execute arbitration agreements.

The Supreme Court disagreed.  In a 7-1 ruling, the Supreme Court stated that laws designed to single out and disfavor arbitration agreements—such as the Kentucky Supreme Court’s new rule—defy the FAA’s requirement that arbitration agreements are treated equally with all other contracts.

As a result of Kindred, the Supreme Court forbids not only any local laws that outright prohibit arbitration of any particular type of claim, but also any regulations that attempt to “covertly accomplish the same objective.”  This decision indicates the Supreme Court’s continued support of FAA provisions in preempting state regulations that seek to alter or interfere with enforcement of arbitration agreements.

 Action Items

  1. Look for potential changes to arbitration agreement rules as this is currently a hot topic in the courts; ManagEase will continue to report on new developments.
  2. Subscribers can call our HR On-Call Hotline at (888) 378-2456 for further assistance.

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.

© 2017 ManagEase, Incorporated.

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