Reverse pre-empting the Federal Arbitration Act: alleviating the arbitration crisis in nursing homes.

AuthorPavlic, Jana
  1. INTRODUCTION II. HISTORY & LEGISLATION III. SUPREME COURT DECISIONS INTERPRETING THE FAA IV. THE AFTERMATH OF PREEMPTION: UNREGULATED ARBITRATION IN NURSING HOMES A. Unregulated Arbitration in Nursing Homes Creates a Multifaceted System of Deterrence 1. Procedural Unconscionability 2. Substantive Unconscionability 3. Prohibitive Costs 4. Slanted Outcomes B. The Deterrent Effects of Arbitration are Magnified in Nursing Homes 1. The Typical Claimant 2. The Typical Claim V. THE FUTURE PLIGHT OF NURSING HOME RESIDENTS VI. PROPOSED LEGISLATION: A PARALLEL TO THE MCCARRAN ACT A. Congress Should Consent to State Regulation VII. PROPOSED GUIDELINES FOR STATES VIII. CONCLUSION I. INTRODUCTION

    In 1925, Congress enacted the Federal Arbitration Act (FAA), (2) which codified the enforceability of arbitration agreements (3) in expansive, wholesale language. (4) "The Federal Arbitration Act rests on the authority of Congress to enact substantive rules under the Commerce Clause." (5) The FAA provides that "a contract evidencing a transaction involving commerce to settle by arbitration a controversy ... arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (6) In a series of later cases, the United States Supreme Court interpreted the FAA's broad rule of enforceability as applying to both consumers and merchants in federal and state courts. (7) Most recently in Doctor's Associates, Inc. v. Casarotto, (8) the Court held that states were preempted from enacting substantive legislation regarding arbitration, and that even legislation concerning a simple notice requirement (9) would be invalidated as conflicting with the "goals and policies" of the FAA. (10)

    By preempting the states from regulating certain aspects of arbitration, specifically the process associated with agreeing to arbitration, the Court has left a gaping hole of unregulated territory in this alternative adjudicatory forum. (11) The Court's acquiescence and restrictions on state legislation, although once intended to "make arbitration agreements as enforceable as other contracts," (12) has "elevate[d] arbitration provisions [to a standing] above all other contractual provisions." (13) The consequence is that state legislatures are foreclosed from enacting even minimal safeguards to protect unwary consumers, and courts can only cure unconscionable arbitration agreements on a case-by-case basis.

    In nursing homes, preemption has created an arbitration crisis, (14) whereby potential residents are passively compelled to sign contracts that contain binding, pre-dispute arbitration clauses as a condition of being admitted to the facility. This unregulated process is wrought with insurmountable obstacles (15) which collectively deter residents from obtaining redress in either a court of law or the arbitral forum. (16) Federal legislation is essential to restore fundamental principles of contract law (17) and fairness to nursing home admission agreements which, due to the lack of regulation, have been abandoned in favor of "administrative convenience." (18)

    Section II provides a brief history of arbitration in consumer contracts, and the development of federal and state legislation condoning the practice of arbitrating consumer disputes. Section III analyzes United States Supreme Court decisions that have interpreted the FAA to preempt state legislation regarding arbitration. Section IV discusses the aftermath of preemption and unregulated arbitration in nursing homes. Section V considers the future plight of nursing home residents if the system is permitted to continue without regulation. Section VI of this Note proposes a solution to alleviate the arbitration crisis in nursing homes that will maintain the viability of arbitration as an alternative to litigation. Finally, section VII suggests state guidelines to regulate the process of agreeing to arbitrate in nursing homes that will protect the interests of both nursing home facilities and residents, while more adequately fulfilling the original intent of Congress when it enacted the FAA.

  2. HISTORY & LEGISLATION

    Historically, arbitration agreements between merchants were utilized to ensure an efficient forum for dispute resolution (19) regarding recurrent business issues. (20) Common law courts were hesitant, however, to permit pre-dispute arbitration agreements to infiltrate the business dealings of merchants and consumers. (21) The common law courts distrusted arbitration agreements between merchants and consumers because it "meant [a] loss of the right to litigate." (22) Moreover, "courts were worried that a stronger party might take advantage of a weaker party by forcing the latter to agree to arbitration instead of litigation." (23)

    Despite these concerns, modern arbitration steadily progressed and in 1925 the FAA codified the enforceability of arbitration agreements in expansive terms. (24) The FAA was enacted to guarantee that courts would enforce arbitration agreements. (25) Critics argue that when Congress enacted the FAA, it "did not intend to enforce arbitration agreements that had been foisted [upon] ignorant consumers, and it did not intend to prevent states from protecting weaker parties." (26) Therefore, although the FAA was originally "intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power, a series of United States Supreme Court decisions changed the meaning of the Act." (27)

    Today, (28) the FAA has been interpreted by the Supreme Court to "extend to disputes between parties of greatly disparate economic power." (29) Moreover, Supreme Court decisions have forced states to enact compliant legislation regarding arbitration in consumer contracts as opposed to carving out exceptions to effectively protect consumers from certain types of contracts. (30) Critics argue that these consequences are not an accurate representation of Congress' initial intent when it enacted the FAA. (31)

    The Ohio Arbitration Act (Act) (32) is one example of a compliant state statute modeled after the provisions of the FAA. The language of the Act is representative of other state arbitration statutes (33) and is indistinguishable from that of the FAA. (34)

    However, history (35) and recent case law suggest that state compliance with the FAA's broad enforceability rule is not at will. (36) Recognizing the inequity of pre-dispute arbitration agreements in nursing homes, states have enacted nursing home bills of rights which generally provide residents with a statutory civil cause of action against violations of a multitude of enumerated residents' rights. (37) Nursing homes, however, have circumvented this protection by requiring residents to waive these causes of action in the admissions agreement. (38) Moreover, state statutes that have attempted to codify exceptions to protect the weaker party in transactions have been invalidated (39) by a string of Supreme Court decisions interpreting the FAA to preempt any substantive state legislation in this field. (40)

  3. SUPREME COURT DECISIONS INTERPRETING THE FAA

    The first significant Supreme Court decision interpreting the FAA as preempting state legislation arose in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., (41) where the parties to a dispute, challenging the validity of an arbitration agreement, arrived in federal court upon diversity jurisdiction. In Prima Paint,

    one party ... alleged that the other had committed fraud in the inducement of the contract, although not of [the] arbitration clause in particular, and sought to have the claim of fraud adjudicated in federal court. The Court held that, notwithstanding a contrary state rule, consideration of a claim of fraud in the inducement of a contract 'is for the arbitrators and not for the courts.' (42) The Supreme Court also held that "a federal court may consider only issues relating to the making and performance of the agreement to arbitrate," (43) thus prohibiting federal courts from considering the merits. Essentially, the Court declared that the FAA "creates federal substantive law requiring the parties to honor arbitration agreements," (44) and that this law is "applicable in state and federal court." (45) Additionally, the majority emphasized that "the purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so," (46) and to provide a "speedy [forum] ... not subject to delay and obstruction in the courts." (47)

    Justice Black, writing for the dissent in Prima Paint, argued that the majority's position "approve[d] a rule which is not only contrary to state law, but contrary to the intention of the parties and to accepted principles of contract law--a rule which ... elevates arbitration provisions above all other contractual provisions." (48) Justice Black's dissent in Prima Paint accurately predicted the future impact of a federal statute broadly endorsing arbitration and preempting states from narrowing the force of that breadth. Justice Black's concerns are embodied in the obstacles that nursing home residents face today in obtaining redress as a result of unregulated pre-dispute arbitration agreements. (49)

    The second landmark Supreme Court decision interpreting the FAA occurred in Southland Corp. v. Keating, (50) in which the Court spoke more specifically about the issue of explicitly preempting state legislation. In Keating, franchisees brought an action against the franchisor "alleging ... fraud, breach of contract and violation of disclosure requirements." (51) The Court held that section 2 of the FAA "withdraws the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." (52) Moreover, the Court noted that "Congress intended to foreclose state legislative attempts to...

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