Opinion analysis: Justices rebuff Kentucky rule invalidating arbitration agreements signed under power of attorney

For anybody who thought that the Supreme Court’s protective attitude toward arbitration agreements would differ in the absence of the late Justice Antonin Scalia, the decision this morning in Kindred Nursing Centers Limited Partnership v. Clark will come as a surprise. By a 7-1 margin, the court firmly rejected a Kentucky decision that adopted a clear-statement rule under which a general power of attorney, valid to authorize the execution of contracts generally, would not validly authorize execution of an arbitration agreement unless the power of attorney explicitly addressed that topic.

Resembling more than anything last term’s decision in DIRECTV, Inc. v. Imburgia, the opinion shows a Supreme Court bristling at the lack of candor shown by state courts that disagree with its favorable treatment of pre-dispute arbitration agreements. Doctrinally, the case is written as a routine application of the court’s existing rules holding that the Federal Arbitration Act obligates state courts to put arbitration agreements on an “equal footing” with other contracts and invalidates defenses that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

To the extent there is any new law in this case, it comes in the opinion’s explanation of the last point in the previous paragraph. As demonstrated in today’s decision, the court is now forbidding not only a law “prohibiting outright the arbitration of a particular type of claim,” but also “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” In this case, the Kentucky Supreme Court adopted a rule for all contracts that waive the “divine God-given right” to a jury trial, requiring “an explicit statement before an attorney-in-fact … could relinquish that right on another’s behalf.” Applying the rule summarized above, the Supreme Court held that the Kentucky decision must fall because the state court “adopt[ed] 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.” As the opinion puts it, “[s]uch a rule is too tailor-made to arbitration agreements—subjecting them, by virtue of their defining trait, to uncommon barriers.”

The Supreme Court’s emphatic quotation of the Kentucky court’s description of the religious underpinnings of the jury-trial right is just one indication that the justices are skeptical about the state court’s sincerity. For example, the opinion quotes the suggestion of the Kentucky court that the rule applied here “could also apply when an agent endeavored to waive other ‘fundamental constitutional rights’ held by a principal.” Writing for the majority, Justice Elena Kagan responds sarcastically: “But what other rights, really? 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.” Kagan also points out that “[n]othing in the decision below (or elsewhere in Kentucky law) suggests that explicit authorization is needed” for other agreements “relinquishing the right to go to court,” such as “a settlement agreement or consent to a bench trial.” The opinion takes that as “yet another indication that the [Kentucky] court’s demand for specificity in powers of attorney arises from the suspect status of arbitration rather than the sacred status of jury trials.” In summary, the opinion concludes, the Kentucky court’s unpersuasive protestations that its rule was neutral toward arbitration “only makes clear the arbitration-specific character of the rule, much as if it were made applicable to arbitration agreements and black swans.”

For me, the 7-1 vote was the most salient thing about this decision. All of the participating justices agreed except for Justice Clarence Thomas, who could not endorse the outcome based on his longstanding view that the FAA does not apply in state courts. By contrast, the vote last year in the quite similar case of Imburgia was 6-3. Perhaps the justices were motivated here less by their views about the FAA than by their views about the proper response to insincere state supreme courts.

Posted in: Analysis, Featured, Merits Cases

CLICK HERE FOR FULL VERSION OF THIS STORY