The demise of arbitration agreements in long-term care contracts.

• Author: Bailey, Laura K.
• Position: NOTES

1. INTRODUCTION

   In the past few decades, the use of pre-dispute binding arbitration provisions in a wide array of consumer contracts has increased exponentially. (1) one of the industries that has seen a particularly significant increase in the use of arbitration agreements is the nursing home industry. In fact, individuals entering nursing homes and the families of those individuals will more likely than not come across these clauses when signing contracts of admission with long-term care providers. (2) While the use of arbitration agreements has traditionally been supported by the united States congress, most state legislatures, and the judiciary, the use of these provisions in the context of nursing home contracts has been the subject of great debate over the past ten years.

   The prospect of arbitration is very appealing to those in the nursing home business. Through the eyes of the industry, arbitration is a logical and cost-effective means of resolving future claims between nursing homes and individuals residing in the facilities. (3) By including these clauses in their contracts, nursing home administrators claim that they are avoiding exorbitant damage awards by juries. (4) The facilities are also discouraging future claimants from filing suit against them. (5) However, mandatory pre-dispute arbitration clauses may not be so helpful to nursing home residents. More and more frequently, people seeking the assistance and shelter of a long-term care facility are forgoing their rights to have future disputes against care providers heard by a judge or jury, simply because they have no choice. Nursing home admission contracts are offered on a "take-it-or-leave-it" basis, and incoming residents either sign the agreements or are not admitted to the nursing home. (6) This proves to be particularly troubling when one considers the vulnerable condition most people are in when entering nursing homes and signing the agreements.

   The decision to enter a long-term care facility is not an easy one for potential residents, nor is it an easy decision for their families. In signing a long-term care admission contract containing a compulsory arbitration provision, people are often unknowingly relinquishing their rights to hold that facility accountable in the unfortunate circumstance that the nursing home fails to provide adequate care for the patient. (7)

   This Article argues that pre-dispute compulsory arbitration provisions in nursing home contracts should not be enforced and encourages the elimination of such clauses in long-term care contracts. (8) This Article will lay out the historical background and development of arbitration and then will address the use of arbitration clauses in nursing home admission contracts. Finally, this Article will explore recent developments of arbitration law in long-term care contracts, both federally and in the state of Missouri, with particular attention given to the Supreme Court of Missouri's decision in Lawrence v. Beverly Manor. (9)

2. LEGAL BACKGROUND

   1. Historical Background of Arbitration & the Federal Arbitration Act of 1925

      Historically, the judiciary was very critical of arbitration agreements. (10) The courts' disfavor of such agreements emanated from English common law and was reflective of the English courts' disapproval of pre-dispute binding arbitration. (11) However, arbitration provisions became increasingly popular in the beginning of the twentieth century, (12) and the United States Congress put an end to the early condemnation of these agreements by adopting the Federal Arbitration Act of 1925 (FAA). (13)

      The FAA expressly confirms the binding nature of arbitration agreements (14) and conveys Congress's support of using alternative means of dispute resolution. (15) The pertinent section, 9 U.S.C. [section] 2, provides,

      A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (16) By implementing the FAA, Congress's goal was essentially to give arbitration agreements the same weight as other types of contracts. (17) Additionally, Congress hoped to overcome the longstanding judicial opposition to enforcing arbitration. (18) In looking beyond Congress's intent in implementing the FAA, many courts have interpreted the Act as being "a congressional declaration of a liberal federal policy favoring arbitration agreements." (19) In a practical sense, "[t]he effect of [Section 2] is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." (20) The Supreme Court of the United States, in an apparent effort to eliminate any chance that the objective of Congress in adopting the FAA be misconstrued, also has noted that

      [t]he Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability. (21) Ultimately, the enactment of the FAA transformed the approach of both the federal and state court systems when addressing controversies involving pre-dispute binding arbitration clauses. (22)

   2. Arbitration Law & Long-Term Care Contracts

      Many issues arise with respect to arbitration clauses in long-term care contracts, and there are consequently several matters that one should consider when confronted with such provisions. This Section will discuss which laws --federal or state--govern arbitration, the growth of arbitration clauses in nursing home contracts, and challenging the validity of such clauses under both common law and state statutory law.

      1. Issue of Preemption: FAA or State Law?

         As previously mentioned, no uniform body of law governed arbitration prior to the enactment of the FAA. (23) Different states took various approaches to the matter, and these approaches were rarely consistent with each other. (24) one of the goals of the federal legislation was to remedy these inconsistencies by establishing a uniform law on arbitration. (25) Following the adoption of the FAA, courts had to consider which law to apply to arbitration contests filed in state courts--the existing state statutes or the new federal law. The question therefore became, and still remains, whether the FAA is applicable to arbitration agreement disputes in both the federal and state court systems.

         The FAA was enacted under the authority granted to Congress by the Commerce Clause (26) and is therefore a "body of substantive law [that] is enforceable in both state and federal courts." (27) Preemption thus becomes a major concern to the states enacting their own arbitration statutes, (28) and the FAA has been found to preempt state law in most circumstances. (29) However, the Supreme Court has recognized that a state may implement legislation concerning arbitration agreements that governs general standards of contract law, such as "validity, revocability, and enforceability...." (30) Additionally, "generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening [section] 2." (31) State law will therefore apply to arbitration agreements on certain issues. In conjunction with the idea that state law governs cases addressing the violation of the basic principles of contract, there has been a boom in litigation regarding arbitration clauses in state courts over the past decade. (32) This is particularly noticeable in disputes involving long-term care contracts. (33)

         Within the past several years, nursing homes have substantially increased their use of arbitration provisions in the contracts provided to residents entering their facilities. (34) The question of whether these arbitration agreements are governed by federal or state law can arise whenever a suit challenging one of these clauses is filed in a state court. The FAA validates any "contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction." (35) If the FAA is to govern the arbitration agreement, the agreement must involve commerce. (36) That leads to the question of whether a nursing home contract is considered a "transaction involving commerce" so as to be covered by the federal statute. In most situations, the answer is yes. The FAA typically will govern these arbitration agreements, as "courts have generally held nursing home contracts to be transactions involving 'interstate commerce.'" (37) However, if the claim is one involving the violation of general contract principles, the FAA will not govern, and the court will apply state law. (38)

      2. Rapid Growth of Arbitration in Nursing Home Contracts

         As noted above, binding arbitration has become the norm in long-term care admission contracts. (39) Some believe that there are "substantive advantages" for a nursing home to have cases heard before an arbitrator, as opposed to a judge or jury. (40) Unsurprisingly, one of the advantages cited is the "lack of publicity associated with arbitrated cases." (41) Arbitration is a private proceeding; the process is closed to the public, and the decisions are unpublished and are only given to the parties involved in the dispute. (42) This is beneficial to the nursing home industry because people will not be deterred from entering nursing homes based on the media's reporting of substandard care provided by the...