Fighting mandatory arbitration clauses

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Representing the Elderly

October 2012, Volume 48, No. 10

Fighting mandatory arbitration clauses 

Paul Bland

Nursing home contracts usually contain mandatory arbitration clauses, but plaintiff lawyers can fight their enforceability on many grounds—if you know how to attack them.

Most nursing homes in the United States include mandatory predispute binding arbitration clauses in their admissions contracts. Notwithstanding the U.S. Supreme Court’s enthusiasm for mandatory arbitration,1 most advocates for both plaintiffs and defendants believe that arbitrators are much more likely than courts to favor nursing homes in their decisions. As a result, attorneys for residents who have been injured by medical malpractice or other nursing home torts frequently seek to challenge arbitration clauses’ enforceability.

While mandatory arbitration clauses in nursing home contracts generally are enforceable as a matter of federal law, specific clauses often are drafted or imposed in ways that make them unenforceable. Some theories and arguments have succeeded in defeating flawed or overreaching nursing home arbitration agreements.

Many lawyers have argued that state statutes or common law doctrines simply prohibit the use of arbitration clauses in nursing home admissions contracts, pointing to the vulnerability of elderly and disabled nursing home patients, strong state policies in favor of protecting the health and safety of nursing home residents, and the unfair ways in which nursing homes often structure their arbitration clauses.

However, the Supreme Court has flatly rejected such legal arguments as being preempted by the Federal Arbitration Act (FAA). For example, after West Virginia’s highest court struck a nursing home’s arbitration clause on the ground that mandatory arbitration in the nursing home setting is always unconscionable, the Supreme Court unanimously overturned the decision. In Marmet Health Care Center, Inc. v. Brown, the Court held that “a categorical rule prohibiting arbitration of a particular type of claim…is contrary to the terms and coverage of the FAA.”2

While agreements to arbitrate are generally enforceable, courts will decline to enforce an arbitration clause in a particular case for many reasons.3

The named arbitrator

Many nursing home contracts name the National Arbitration Forum (NAF) as the arbitrator. One reason is that the American Arbitration Association (AAA) generally refuses to arbitrate cases involving claims against health care facilities. Despite this, some nursing home contracts still specify the AAA as the arbitrator, and at least one court has struck an entire arbitration clause that named the AAA.4

The NAF, which aggressively courted corporate clients—including health care providers—became the default arbitration provider for most nursing homes. Then the NAF stopped handling consumer and medical claims in 2009 as part of a law enforcement action settlement with the attorney general of Minnesota.5 Although three years have passed, the NAF is still listed in a surprising number of nursing home contracts.

When an arbitration clause names an entity that is no longer handling arbitrations, under the FAA the court may appoint an alternative arbitrator unless the designation of a particular arbitrator in the contract was an integral feature of the agreement.6 Where the contract language and other factors (such as the NAF rules) indicate the selection of the NAF was integral to an arbitration agreement, the court should strike down the entire arbitration clause. Courts have done so in numerous cases.7

Some nursing homes have adopted clauses with structurally biased systems for selecting arbitrators. For example, some specify the American Health Lawyers Association (AHLA), a health industry trade group offering mandatory arbitration services for nursing homes, hospitals, and doctors. The arbitrators typically are lawyers who specialize in defending health care providers. Because the AHLA rules impose damages limitations that are illegal in some states, some courts have struck arbitration clauses that specify the use of the AHLA,8 and other courts have struck arbitration clauses in their entirety where the AHLA had stopped handling arbitrations of such claims.9

Finally, some nursing home arbitration contracts do not identify any institutional provider but simply state that the home itself may select the individual arbitrator. There is a variety of authority from other contexts that such clauses are unenforceable.10 Many nursing homes’ arbitration clauses are vulnerable to challenges based on the arbitration provider’s identity, and plaintiff lawyers should look closely at that issue.

Contract formation

A bedrock principle of federal arbitration law is that arbitration is a matter of consent, and nobody may be compelled into arbitration unless he or she has agreed to it. Accordingly, no court should enforce an arbitration clause unless it finds that both parties agreed to it.

Courts have refused to enforce arbitration clauses under a wide variety of circumstances on the grounds that there was no agreement in the nursing home setting. The most common defects involve improper uses of power of attorney (POA) documents. Many POAs delegate to a family member the power to make “medical decisions,” for example, and numerous courts have held that signing an arbitration clause is not a medical decision.11 Also, many POAs take effect only when the patient has lost his or her capacity. When homes have asked family members to sign arbitration clauses, even when the patient was perfectly capable, many courts have refused to uphold an agreement to arbitrate.12

Similarly, courts will not enforce arbitration clauses in nursing home contracts where the resident lacked the capacity to assent. When a Louisiana nursing home attempted to enforce an arbitration clause signed by a resident, the court held that the clause was not binding on the resident because the nursing home, charged with a duty to conduct a neurological and cognitive assessment of incoming residents, was aware she did not have the capacity to assent.13 A host of other, similar issues have led courts to conclude that no agreement to arbitrate was formed in various cases involving nursing homes.14

Unconscionability

Even if an agreement was validly formed and the arbitration clause covers the claims at issue, it may be unenforceable where it is unconscionable as a matter of state contract law. In most states, unconscionability typically involves two components.

While the tests vary by jurisdiction, procedural unconscionability relates to how the contract was formed. It tends to focus on whether there was inequity in bargaining power between the parties or whether the stronger party imposed a form contract on the weaker party in a way that prevented him or her from choosing freely.

Substantive unconscionability relates to the fairness of the terms themselves. It focuses on whether they unreasonably favor one party or may prevent a party from vindicating his or her rights. While some states require at least some showing of both kinds of unconscionability, other states invalidate contract terms on a showing of just one type.15

Many factors that courts consider in evaluating procedural unconscionability are easily located in nursing home admissions agreements. There is a vast disparity in power between the parties, as nursing home patients are generally among the most vulnerable people in the world. In many parts of the country, all or nearly all nursing homes have arbitration clauses in their admission agreements, so there is no meaningful choice. While many nursing home arbitration clauses are nominally optional and not adhesive, the reality is that nearly all patients or family members sign where they are asked to do so and have no knowledge of their supposed choice. Also, some patients may even be told that they must sign these forms, even though the agreements themselves purport to be optional.

Courts have held that particular terms added to arbitration clauses were substantively unconscionable under multiple circumstances. For example, many corporations have adopted one-sided arbitration clauses, where the individual must arbitrate all claims but the corporation reserves the right to take some or all of its claims to court. Most states that have considered the issue have struck this type of nonmutual arbitration clause that favors the stronger party as substantively unconscionable.16

Many courts have also struck arbitration clauses in nursing homes where the clauses effectively would prevent plaintiffs from holding the facilities accountable for wrongdoing. Nursing home arbitration agreements often include provisions that shorten limitations periods ridiculously (some to only 30 days), or require residents or their estates to travel long distances or pay prohibitive arbitration fees to pursue their claims. Other nursing home arbitration clauses expressly strip residents of rights they would have under law. For example, a Florida court struck a nursing home’s arbitration clause that barred the arbitrator from awarding attorney fees or punitive damages. The court held that the clause “would specifically deprive the resident of remedies that the legislature felt were important to the reduction of elder abuse in nursing homes.”17 In another Florida case, the court struck an arbitration clause in a nursing home contract where the rules of the designated arbitration provider—which were incorporated by reference into the contract—would have imposed a higher burden of proof for demonstrating intentional or reckless conduct. The court held that this was substantively unconscionable and refused to rewrite the clause by severing the offensive provision.18

The unconscionability issue generally is a fact-intensive one, and plaintiffs should be permitted to take discovery and build a factual record.19

One final issue to be alert to is whether a court or an arbitrator should decide an unconscionability challenge. While it may sound unfair or counterintuitive to many who first encounter this area of law, the U.S. Supreme Court held in Rent-A-Center v. Jackson that the arbitrator generally (but not always) should have this power if the arbitration clause “clearly and unmistakably” delegates to the arbitrator the authority to decide challenges to the arbitration clause’s enforceability.20 Lawyers who wish to challenge overreaching and unfair arbitration clauses as unconscionable need to approach such clauses directly but carefully.21

Other challenges

Courts may refuse to enforce arbitration clauses on various other grounds. For example, courts have held that even though two parties may have agreed to arbitrate some types of claims, disputes that arise outside the scope of the agreement to arbitrate cannot be forced into arbitration.22 Also, parties who are neither signatories to nor named in the clause often try to invoke arbitration clauses, and courts often refuse to compel arbitration in those cases.23

Courts will often refuse to enforce an arbitration clause where a corporation has chosen to litigate the case in court for some time, and then attempts to arbitrate the case when it appears that the case is going poorly. Courts have held that corporations that have engaged in such gamesmanship have waived their right to invoke the arbitration clause.24

In too many cases, the promise of fair and inexpensive arbitration for nursing home residents is not kept. Courts will strike down some of the more egregious abuses, and plaintiff lawyers should be vigilant about looking for opportunities to challenge unfair arbitration clauses.

Paul Bland is a senior attorney at Public Justice in Washington, D.C. He can be reached at pbland@publicjustice.net.

Notes:

  1. See AT&T Mobility LLC v. Concepcion, 131S. Ct. 1740, 1745 (2011) (FAA embodies a “liberal federal policy favoring arbitration”); see also Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam); Rent-A-Center, W., Inc. v. Jackson, 130 S. Ct. 2772 (2010).
  2. 132 S. Ct. at 1204.
  3. The National Consumer Law Center and the Public Justice Foundation have published a manual, Consumer Arbitration Agreements, which collects and discusses hundreds of cases where courts have refused to enforce arbitration clauses. The manual is available from www.publicjustice.net. Despite the word “consumer” in the title, by and large the same theories that would lead to a successful challenge of an arbitration clause in a consumer contract apply with equal force to clauses in nursing home or other contracts, and many cases cited in the manual involved nursing homes.
  4. See e.g. Covenant Health & Rehab. of Picayne, LP v. Est. of Moulds ex rel. Braddock, 14 So. 3d 695, 708-09 (Miss. 2009) (en banc).
  5. See Robin Sidel & Amol Sharma, Credit-Card Disputes Tossed into Disarray, Wall St. J. (July 22, 2009).
  6. Section 5 of the FAA provides that courts may select a substitute arbitrator in certain circumstances. Like most of the key law involving the FAA, the exception was a judge-made one in Brown.
  7. See e.g. Ranzy v. Tijerna, 393 Fed. App. 174 (5th Cir. 2010) (per curiam); Klima v. Evangelical Lutheran Good Samaritan Socy., 2011 WL 5412216 (D. Kan. Nov. 8, 2011); Carideo v. Dell, Inc., 2009 WL 3485933 (W.D. Wash. Oct. 26, 2009); Carr v. Gateway, Inc., 944 N.E.2d 327 (Ill. 2011); Geneva-Roth Capital, Inc. v. Edwards, 956 N.E.2d 1195 (Ind. App. 2011); Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803 (N.M. 2011); Stewart v. GGNSC-Canonsburg, L.P., 9 A.3d 215 (Pa. Super. 2010).
  8. See Shotts v. OP Winter Haven, Inc., 86 So. 3d 456 (Fla. 2011).
  9. See e.g. Grant v. Magnolia Manor-­Greenwood, Inc., 678 S.E.2d 435 (S.C. 2009).
  10. See e.g. Murray v. United Food & Commercial Workers Intl. Union, 289 F.3d 297, 303 (4th Cir. 2002); McMullen v. Meijer, Inc., 355 F.3d 485 (6th Cir. 2004); Harold Allen’s Mobile Home Factory Outlet, Inc. v. Butler, 825 So. 2d 779, 785 (Ala. 2002).
  11. See e.g. Flores v. Evergreen at S.D., LLC, 55 Cal. Rptr. 3d 823, 832–33 (Ct. App. 2007); Lujan v. Life Care Ctrs. of Am., 222 P.3d 970 (Colo. App. 2009); Blankfeld v. Richmond Health Care, Inc., 902 So. 2d 296, 300–01 (Fla. 4th Dist. App. 2005) (per curiam).
  12. See e.g. In re Est. of McKibbin, 977 So. 2d 612, 613 (Fla. 2d Dist. App. 2008) (per curiam); Tex. Citiview Care Ctr., L.P. v. Fryer, 227 S.W.3d 345, 352 (Tex. App. 2007).
  13. Landers v. Integrated Health Servs. of Shreveport, 903 So. 2d 609, 612 (La. App. 2005).
  14. See e.g. High v. Capital Senior Living Props. 2-Heatherwood, Inc., 594 F. Supp. 2d 789, 798 (E.D. Mich. 2008) (nursing home resident did not agree to arbitration clause where she did not sign the admission contract in which the clause was embedded); Bedford Care Ctr.-Monroe Hall, LLC v. Lewis, 923 So. 2d 998, 1001 (Miss. 2006) (where conservator did not sign in the space provided for signature, “it is clear that she did not accept the arbitration provision in the admission agreement, and, therefore, an enforceable arbitration agreement does not exist”).
  15. E.g. Fiser v. Dell Computer Corp., 188 P.3d 1215 (N.M. 2008) (argued by author); Scott v. Cingular Wireless, 161 P.3d 1000, 1006 n.4 (Wash. 2007) (argued by author) (finding it “unnecessary to address plaintiffs’ claims of procedural unconscionability” after holding that defendant’s class action ban was substantively unconscionable).
  16. See e.g. Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159, 169 (5th Cir. 2004); Armendariz v. Found. Health Psychare Servs., Inc., 6 P.3d 669, 692 (Cal. 2000); Iwen v. U.S. W. Direct, Inc., 977 P.2d 989, 994–96 (Mont. 1999); Cordova v. World Fin. Corp. of N.M, 208 P.3d 901, 907 (N.M. 2009) (argued by the author); Taylor v. Butler, 142 S.W.3d 277, 286 n.4 (Tenn. 2004) (“We find the majority view [that one-sided arbitration clauses are unconscionable] to be more persuasive”); Wis. Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155, 173 (Wis. 2006); Arnold v. United Cos. Lending Corp., 511 S.E.2d 854, 861 (W. Va. 1998).
  17. Romano ex rel. Romano v. Manor Care, Inc., 861 So. 2d 59, 63 (Fla. 4th Dist. App. 2003).
  18. Place at Vero Beach, Inc. v. Hanson, 953 So. 2d 773, 774–76 (Fla. 4th Dist. App. 2007).
  19. See Owens v. Natl. Health Corp., 263 S.W.3d 876, 889 (Tenn. 2007).
  20. 130 S. Ct. at 2777.
  21. Several cases and arguments addressing this issue are addressed in §6.2 of Consumer Arbitration Agreements, supra n. 3.
  22. See e.g. Rogers-Dabbs Chevrolet-Hummer, Inc. v. Blakeney, 950 So. 2d 170, 177 (Miss. 2007); Greenpoint Credit, L.L.C. v. Reynolds, 151 S.W.3d 868, 875 (Mo. App. 2004); Chassereau v. Global-Sun Pools, Inc., 644 S.E.2d 718, 7202 (S.C. 2007).
  23. See e.g. Westmoreland v. Sadoux, 299 F.3d 462, 465 (5th Cir. 2002) (courts should allow “a nonsignatory to invoke an arbitration agreement only in rare circumstances”).
  24. Among the many decisions reaching this result are two argued by the author: Lewallen v. Green Tree Servicing, L.L.C. 487 F.3d 1085 (8th Cir. 2007); Raymond James Fin. Servs., Inc. v. Saldukas, 896 So. 2d 707 (Fla. 2005).


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