Supreme Court Affirms Supremacy of Arbitration Agreements Over State Law

Nicholas Fortuna, May 17, 2017

On Monday, the Supreme Court ruled by a surprise 7-1 margin that the Federal Arbitration Act (FAA) preempts states from passing laws to restrict the use of arbitration. The decision came in Kindred Nursing Centers L.P. v. Clark, overturning the Kentucky Supreme Court which held that a general power of attorney does not authorize the holder to enter into arbitration agreements.

The wife and daughter of Joe Wellner and Olive Clark held a power of attorney with broad authority. When Joe and Olive moved to a nursing home operated by Kindred, the holders of the power of attorney completed all necessary paperwork. As part of the process, each signed an arbitration agreement on her relative’s behalf providing claims arising from the relative’s stay at the facility would be resolved through arbitration. After Joe and Olive died, their estates filed wrongful death suits against Kindred. Kindred sought to dismiss the cases arguing that the claims had to be arbitrated. The state courts ruled in favor of the estates and the U.S. Supreme Court reversed and found the FAA prevented the Kentucky state courts from blocking the enforcement of arbitration agreements.

The Court reiterated that an arbitration agreement may be invalidated only on generally accepted contract defenses, such as that the agreement was made under duress, or it lacked consideration. Those defenses, however, may not make it harder to form arbitration agreements than any other contract.

The Supreme Court’s decision was derived from the Court’s landmark ruling in AT&T Mobility LLC v. Concepcion, in which the Court held that the FAA prevents states from interfering with arbitration agreements. Concepcion was decided in a 5-4 decision. The Court has moved to near universal acceptance of the principles stated in Concepcion.  The only dissent in Kindred came from Justice Clarence Thomas, who holds a longstanding view that the FAA does not apply to state courts.

The next big decision in this area will come later this year in three Supreme Court cases that will be consolidated. The National Labor Relations Board (NLRB) has ruled that employers who require workers to sign arbitration agreements waiving their right to file class actions as a condition of employment violate workers’ collective action rights under the National Labor Relations Act (NLRA), (known as the D.R. Horton rule). This conflicts with the FAA, which holds arbitration agreements valid unless the contract underlying them is illegal. There is a split between the circuits over the viability of the NLRB’s stance. The Seventh and Ninth Circuits have found the NLRA’s guarantee of worker’s right to engage in concerted activity supersedes the FAA, rendering an agreement to arbitrate which impedes on such rights unenforceable. The Fifth Circuit has said the NLRA does not override the dictates of the FAA.

The interaction between the FAA, a federal law, and state law – Kindred – will not necessarily indicate how the Court will decide the interaction of the FAA and the NLRA, both federal laws.

In the meantime, the Court’s decision in Kindred is considered a victory for employers.