Implications of the NAF Fiasco for Nursing Home Agreements

April 6, 2014

Until recently, the National Arbitration Forum (NAF) was a designated arbitrator in thousands of nursing home agreements. When a nursing home resident complained about medical malpractice or other mistreatment, her complaint had to be arbitrated before NAF and according to NAF’s rules. If the resident or her successors were to sue the nursing home in court, the court would have to stay the proceeding and compel arbitration, as mandated by Section 2 of the Federal Arbitration Act (FAA) that deems written arbitration agreements “valid, irrevocable, and enforceable.”

Five years ago, things have changed dramatically. In July 2009, the Minnesota Attorney General filed a complaint against NAF and related entities, accusing them of violations of the Minnesota Prevention of Consumer Fraud Act. The complaint alleged that NAF held itself out to the public as an independent arbitration company, while at the same time working against consumers’ interests and that it “earns revenue when it convinces companies to place mandatory predispute arbitration agreements in their customer agreements and then to appoint the Forum to arbitrate any future disputes.” Shortly thereafter, the parties entered into a consent judgment under which NAF agreed that it would not administer, process, or participate in any consumer arbitration filed on or after July 24, 2009.

This judgment effectively annulled the arbitration clause in thousands of agreements between nursing homes and residents.

On a number of occasions, the nursing home claimed that the arbitration clause is still valid and that the parties are now obligated to substitute NAF by a different arbitral forum, pursuant to FAA, Section 5. This claim did not succeed. Courts have rejected it by applying the “ancillary/integral” distinction. Riley v. Extendicare Health Facilities, Inc., 826 N.W.2d 398 (Wis.App. 2012); Estate of Cooper v. Evangelical Lutheran Good Samaritan Soc., 2013 WL 4526274 (N.M.App. 2013); Miller v. GGNSC Atlanta, 746 S.E.2d 680 (Ga. App. 2013); Sunbridge Retirement Care Associates v. Smith, — S.E.2d —, 2014 WL 1227725 (Ga.App. 2014).

Specifically, the courts held that Section 5 only applies when “the agreement shows that the selection of a particular [arbitration] forum was merely an ‘ancillary logistical concern.’” Conversely, “If the selection of a particular forum is integral to the agreement, Section 5 does not apply, and the entire agreement is deemed impossible to enforce.” The nursing home agreements combined NAF’s designation as an arbitrator with a provision that the arbitration will follow the NAF’s Code of Procedure. Based on these two factors, the courts ruled that the choice of NAF was integral to the agreement. The aggrieved nursing home residents and their successors are now free to file their suits in court.

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