Arbitration is an effective means of resolving disputes. However, judicial response to arbitration has been mixed. While both the United States Supreme Court and federal district courts have resoundingly accepted arbitration, state court response has been less receptive. The result is that there is a lack of uniformity at the federal and state levels concerning the validity of arbitration agreements. This uncertainty has placed providers who utilize arbitration contracts in the predicament of not knowing whether they will still be subject to lawsuits in state court despite having signed arbitration agreements.
The reason for this discrepancy largely stems from the fact that federal courts are guided by the Federal Arbitration Act. Enacted nearly a century ago the FAA was passed by Congress to reverse the long-standing judicial hostility to arbitration agreements and place them on equal footing with other contracts. The FAA, in pertinent part, provides that an agreement to arbitrate “shall be valid, irrevocable, and enforceable.” This statement of intent has been the driving force behind some of the most important arbitration decisions from the U.S. Supreme Court and the federal courts, who time and again, have reiterated that the FAA will pre-empt any state law that is either expressly or implicitly hostile to arbitration.
One would expect that with the weight of the FAA behind it, a signed arbitration agreement between a residential healthcare facility and a resident or his/her agent would easily withstand a challenge. This, however, is seldom the case as arbitration clauses are routinely attacked and defeated at the State level. This is because the FAA contains a savings clause where an agreement to arbitrate can be invalidated “… upon such grounds as exist in law or equity for the revocation of any contract.” This language permits state courts to adjudicate the enforceability of arbitration agreements by applying basic principles of contract law, for example: fraud, duress and mutual mistake.
Whenever a state court invalidates an arbitration agreement in the long-term care setting, critics invariably argue that the broad reach of FAA is being eroded or curtailed.For example, in June 2018, a Nebraska state court held that a wrongful death claim must be adjudicated in state court and was not subject to arbitration as the contract was procured by fraud and therefore, invalid. The court reasoned that despite the clear provisions of the FAA and the preemption doctrine, the FAA did not apply as Nebraska state law governed the formation of contracts.
Around the same time as the aforementioned Nebraska decision, a federal district court in Massachusetts concluded that wrongful death claimants were required to arbitrate their disputes despite plaintiff’s argument that the contract was procured by fraud and was unconscionable.
The consequence of the state vs. FAA arbitration dichotomy is that the door remains ajar for expansive, burdensome and protracted legal challenges to arbitration agreements – the very outcome the FAA was designed to circumvent and that long-term care providers hoped to avoid by utilizing arbitration agreements. Besides delay, expense and the unnecessary wasting of judicial resources there are other effects.
For example, unfortunately, a long-term care facility using arbitration agreements does not decrease the premiums for professional liability insurance. Historically, long-term care facilities could obtain insurance premium credits for including arbitration agreements. The credit was provided because claims subject to arbitration would have lower total cost of approximately 10% and would typically result in settlement three months earlier than claims without arbitration agreements.
However, in 2015 when the Centers for Medicare & Medicaid Services promulgated a rule that would have prohibited long-term care facilities that accept Medicare or Medicaid payments from requiring residents to agree to binding arbitration, insurance companies stopped offering the credits. Insurance companies feared that without arbitration agreements, more lawsuits would be filed and there would be an increase in liability claims.
Under the Trump administration, the CMS issued revisions removing the arbitration ban. However, insurance companies are still not providing a premium credit for inclusion of an arbitration agreement because of the unsettled political environment. In fact, insurance companies writing long-term care policies generally do not even inquire about utilization of arbitration agreements in their applications for coverage.
Notwithstanding challenges to arbitration at the state court level, the well-established precedent concerning the scope of the FAA and federal policy favoring arbitration should not be ignored. Both must provide the starting framework for the enforcement of any arbitration agreement when challenged. In a best case scenario, the FAA’s pro-arbitration mandate would be broadly interpreted and universally applied by both federal and state courts. The only way to maintain the integrity of contractual agreements and the arbitration process, and to comply with Congressional intent, is to reconcile this critical issue.
Mario C. Giannettino is a partner at Kaufman Borgeest & Ryan, LLP. Scott W. Bates is a claims expert and vice president at Healthcare Claims Corporate Solutions.