Ask the Legal Expert about ... mandatory pre-dispute arbitration clauses

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John Durso, Esq.  Nixon Peabody LLP
John Durso, Esq. Nixon Peabody LLP

Is it legal to insert or attach pre-dispute mandatory and binding arbitration clauses in our resident contracts?

An Aon study showed that from 1995 to 2000, there was a dramatic increase in nursing home litigation. To spread the costs of the judgments and this litigation, insurance companies substantially increased premiums for providers, including for providers who had had no claims. 

Providers responded by creating self-insurance structures such as offshore insurance captives or risk retention groups. At the same time, providers increased use of arbitration agreements with their residents. 

After 1999, the average damage award against providers decreased 55%, from $226,000 to $146,000 in 2006. Arbitration can be a less expensive process than a jury trial in civil courts, and arbitrators generally award less in damages than juries do. In October 2016, HHS announced a “final rule” that prohibited arbitration agreements, effective November 28, 2016. 

In AHCA v. Burwell, a federal District Court enjoined enforcement of this, prohibiting arbitration agreements in all U.S. jurisdictions. On Jan. 5, the Obama administration filed an appeal in the 5th U.S. Circuit Court of Appeals trying to overturn the District Court decision. 

HHS has issued directions to its surveyors to not enforce the anti-arbitration rule in the survey process until court considerations have been completed. 

Until the Trump administration announces its position or until the 5th Circuit acts on the appeal, providers seem to still be able to use pre-dispute mandatory binding arbitration agreements — if they follow their state case law and if they carefully implement such agreements with residents.