Despite parties mutually agreeing when a deal is made that they will arbitrate any disputes arising between them, often one party seeks to avoid arbitration when a dispute does arise. But on May 15, 2017, the United States Supreme Court reaffirmed a state court’s obligation to enforce arbitration rights in its Kindred Nursing Centers, L.P. v. Clark ruling. The opinion took note of, and rejected, some of the tactics used to invalidate vested, federally protected arbitration rights.
State Erosion of Arbitration Agreements
Parties that agreed to arbitration seek to avoid it when they believe litigation provides them with leverage over their opponent (i.e., cost, publicity, chances of a favorable jury decision, etc.). For years state courts have been developing state law arguments to avoid enforcing a party’s arbitration rights under the guise that such defenses are “generally applicable” to all types of contracts. Some state courts have used the right to a jury trial as the express foundation to invalidate arbitration provisions, or invalidate their inception, to justify allowing parties to litigate in court. Other examples are:
- Arkansas, Alltel Corp. v. Rosenow, 2014 Ark. 375, 2014 WL 4656609 (Ark. 2014) (finding the “doctrine of mutuality” applies to all contracts and, therefore, the arbitration clause at issue was invalid for lack of mutuality).
- Missouri, Baker v. Bristol Care, Inc., 450 S.W.3d 770 (Mo. 2014) (finding an arbitrator did not have authority to decide a party’s defenses to arbitration because they were based in contract formation rather than enforceability).
- New Jersey, Atalese v. U.S. Legal Servs. Group, 99 A.3d 306 (N.J. 2014) (finding an arbitration clause invalid because, by scoping arbitration as a waiver of the right to trial by jury, clear and unambiguous language is needed to waive the right to trial by jury).
- Oklahoma, Howard v. Nitro-Lift Technologies, 273 P.3d 20 (Okla. 2011), vacated, 133 S.Ct. 500 (2012) (invalidating an arbitration provision on the grounds that the contract as a whole was invalid, later overturned by the U.S. Supreme Court in Nitro-Lift Technologies, LLC v. Howard).
Supreme Court Protection of Arbitration Rights
In Kindred, the Kentucky Supreme Court used a “clear-statement rule” which required a principal to expressly provide his or her agent with the ability to “deprive” the principal of the right to access the courts and trial by jury through an arbitration provision. In the opinion authored by Justice Kagan, the Kindred Court reversed and ordered the Kentucky courts to enforce one arbitration provision at issue, remanding the other for further factual development.
The Kindred Court observed that the Federal Arbitration Act unequivocally applies to contract formation, not simply its validity. The Court stated: “the Act cares not only about the ‘enforce[ment]’ of arbitration agreements, but also about their initial ‘valid[ity]’ – that is, about what it takes to enter into them.”). The FAA “to be sure, requires a State to enforce all arbitration agreements … once they have come into being.” The Kindred Court made it clear that the waiver of a party’s right to a jury cannot be the basis for invalidation.
Parties considering whether to try to litigate a dispute that they previously agreed to arbitrate should be mindful of the force with which the Kindred Court rejected Kentucky’s attempt to “covertly . . . disfavor contracts that (oh so coincidentally) have the defining features of arbitration agreements.” General defenses applicable to all types of contracts are acceptable, but defenses that rely on the uniqueness of an agreement to arbitrate, without referring to arbitration by name, are not. This can be a costly lesson for parties wagering that they have some advantage over their opponent by filing suit in court rather than an arbitration demand.
The FAA continues, unsurprisingly, to apply in both state and federal courts. The federal law interpreting the FAA is also applicable in state and federal courts.