Courtyard Gardens Health and Rehabilitation, LLC v. Arnold, — S.W.3d — (Ark. 2016)
As I reported a year ago, 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.”
Six and a half 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.
Based on caselaw, I estimated that this judgment effectively annulled the arbitration clause in thousands of agreements between nursing homes and residents. See, e.g., 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, 757 S.E.2d 157 (Ga.App. 2014).
Against this estimation, the Arkansas Supreme Court has recently ruled that the arbitration clause in nursing home agreements is enforceable conditional on the substitution of NAF by a different arbitrator. The new arbitrator, the Court held, will decide the parties’ dispute by applying the NAF procedural code for arbitration. Courtyard Gardens Health and Rehabilitation, LLC v. Arnold, — S.W.3d — (Ark. 2016).
The Court based that decision on the severability doctrine of contract law, on the public policy that favors arbitration, and on the Supreme Court’s requirement that arbitration agreements be placed “on equal footing with all other contracts” (DIRECTV, Inc. v. Imburgia, 136 S.Ct. 463, 468 (2015)). Under these rules—it explained—the plaintiffs had to establish that arbitration was completely impossible, but they failed to do so.
This decision fails to take into account the purpose underlying the NAF arbitration clause. When the nursing home had the resident and his/her family sign the residency agreement, it knew well that the chosen arbitrator was going to be biased in its favor. For that reason, the Court ought to have voided the entire arbitration clause on unconscionability grounds, instead of salvaging it in the NAF-free format. See FAA, s. 2, that authorizes state courts to set aside arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract,” and the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011), that FAA “permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability [as opposed to] defenses that apply only to arbitration.”