Friday, February 24, 2012

Arbitration Clauses and Public Policy - Marmet Health Care Center v. Brown

Marmet Health Care Center v. Brown was decided by the U.S. Supreme Court on Feb. 21, 2012 in a per curium  (meaning through the court) opinion  consolidating 3 arbitration clause cases from West Virginia.  The Supreme Court of Appeals of West Virginia had held that as a matter of public policy all arbitration agreements applying to personal injury or wrongful death negligence claims against nursing homes were unenforceable if they were entered into prior to occurence resulting in the claim.  Two of the arbitration clauses in question required the parties to arbitrate all disputes except for claims to collect late payments owed by patients and required the party filing the arbitration to be responsible for the filing fee with the American Arbitration Association. The third arbitration agreement required that all claims be submitted to arbitration.  

The U.S. Supreme Court reversed in an unsigned opinion and emphasized that state and federal courts must enforce the Federal Arbitration Act, 9 U.S.C. Section 1 (FAA) for all arbitration agreements.  The Supreme Court of West Virginia had considered the possibility that the FAA might preempt state policy considerations, but it concluded that congress did not intend the FAA to apply to injury or wrongful death suits that are only collaterally related to an agreement affecting interstate commerce.    The U.S. Supreme Court disagreed and found not exceptions to the application of the FAA existed.  It emphasized that a state law prohibiting arbitration of a certain kind of claim will always be preempted by the FAA. 

Another holding of the state court was that the arbitration clauses were unconcionable.  However, the U.S. Supreme Court vacated this portion of the state court ruling as well as it was unclear to how much this finding was influenced by the same general public policy considerations that underpinned the court's failure to apply the FAA.  The Supreme Court remanded the case to the Supreme Court of Appeals of West Virginia to decide whether state common law would render the arbitration claues unenforceable for unconcionability or any other grounds that "are not specific to arbitration and pre-empted by the FAA."

This case serves to underline the fact of life that arbitration agreements are always going to be enforced by courts to bar any other forum for resolving disputes covered by the agreement unless there is some other contractual issue that renders the agreement unenforceable such as unconcionability.  This is significant as arbitration awards are very difficult to overturn in most states unless you can show the arbitrator was biased.  If you have an enforceable contract then public policy will not render an arbitration clause unenforceable as the FAA preempts that public policy.  For instance arbitration agreements that require the application of religious or cultural laws or norms would be enforceable regardless of any public policy disapproving of or disfavoring those religious or cultural laws as the FAA would preempt that public policy.  However, if those underlying rules of arbitration could be shown to be unconscionable or some other precept of contract law applied in a particular case to render the agreement unenforceable for reasons not specific to arbitration then the clause might be unenforceable in that instance. 

Generally people enter into contracts assuming that nothing will go wrong and that no disputes will arise.  This leads them to overlook arbitration clauses. Of course, disputes will happen at some point and become inevitable if you enter into enough contracts over the course of time.  The lesson here is that you might want to closely review the arbitration clause in any contract you enter into that has one.  You will most likely be bound by it.  Depending on who you are dealing with some aspects of an arbitration agreement may be negotiable.

Marmet Health Care Center v. Brown is located at

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

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