Arbitration: W. Va.'s Top Court, After Scotus FAA Reversal, Insists that Mandatory ADR Clause is Unconscionable. (July 10, 2012.)
July 10, 2012Are predispute binding arbitration clauses in nursing home contracts against personal injury or wrongful death claims per se unconscionable? The West Virginia Supreme Court of Appeals seems to suggest they are.
In its latest decision in a series of state opinions regarding predispute arbitration clauses in nursing home agreements, the Court strongly suggested that unconscionability could be used to invalidate predispute arbitration agreements for personal injury and wrongful death claims, notwithstanding the strong federal policy in favor of arbitration. Brown v. Genesis Health Care Corp., Docket Nos. 35494, 35546, 35635 (W. Va. June 13, 2012)(referred to here as Brown II)(available here).
The clauses may not be per se unconscionable, but in the Court’s view, they’re close.
This opinion was issued last month, about a year after West Virginia’s top Court had held that the nursing home compulsory arbitration agreement was unenforceable against public policy.
That case, Brown ex rel. Brown v. Genesis Health Care Corp., 724 S.E.2d 250 (W.Va. 2011) (referred to here as Brown I)(available here), was vacated and remanded by the U.S. Supreme Court.
In Brown I before the West Virginia Supreme Court of Appeals last year, family members of patients who died had brought appeals against the nursing homes after the lower courts dismissed their negligence claims, based on arbitration clauses included in nursing home admittance agreements.
The Brown I Court found that the West Virginia Nursing Home Act, Section 15(c) (W.Va.Code, 16-5C-15(c), 1997)--which says that “any waiver by a resident or his or her legal representative of the right to commence an action under this section, whether oral or in writing, shall be null and void as contrary to public policy”--was preempted by Federal Arbitration Act Section 2.
The Court nevertheless determined that “Congress did not intend for arbitration agreements, adopted prior to an occurrence of negligence that results in a personal injury or wrongful death, and which require questions about the negligence be submitted to arbitration, to be governed by the Federal Arbitration Act.”
Brown I held that “as a matter of public policy under West Virginia law, an arbitration clause in a nursing home admission agreement adopted prior to an occurrence of negligence that results in a personal injury or wrongful death, shall not be enforced to compel arbitration of a dispute concerning the negligence.”
The Court also found that the arbitration clauses were unconscionable as a matter of law.
First, the Court held that the arbitration clauses were procedurally unconscionable, because by definition, individuals admitted to nursing homes often lacked the capacity required for giving informed consent.
Moreover, the patients generally did not have any meaningful alternative other than signing the admission agreement, because other nursing homes might not have the bed spaces and the medical expertise required by the patients.
Therefore, after considering the arbitration agreements’ adhesive nature, the parties’ relative bargaining position, and the manner in which the agreements are generally adopted, the Brown I Court held the arbitration agreements to be procedurally unconscionable.
Second, the West Virginia Supreme Court of Appeals found the arbitration clause to be substantively unconscionable, because signing the agreement was required for admission—“there is no modicum of bilaterality.” It found that substantive unconscionability also existed because the initial arbitration filing fee was prohibitive compared to filing a civil lawsuit, and that the waiver of the right to commence a civil action was beyond the reasonable expectation of an ordinary person.
The Court therefore concluded that the predispute arbitration clause in the nursing home admission agreements were unconscionable and could not be compelled as a matter of law.
Not surprisingly, given its recent arbitration decisions, the U.S. Supreme Court granted certiorari and reversed. Marmet Health Care Center Inc. v. Brown, 132 S.Ct. 1201 (Feb.21, 2012)(per curiam)(available here).
Calling the West Virginia top court’s FAA interpretation “both incorrect and inconsistent with clear instruction in the precedents of this Court,” the Supreme Court reiterated its holding in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1747 (2011)(available here), noting that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”
AT&T Mobility was decided on April 27, 2011, and Brown I followed on June 29, 2011.
The U.S. Supreme Court therefore overruled the West Virginia Supreme Court of Appeals holding that predispute arbitration agreements that applied to personal injury or wrongful death claims against nursing homes were unenforceable as a matter of public policy.
On remand, the U.S. Supreme Court instructed the West Virginia Court to consider “whether, absent that general public policy, the arbitration clauses . . . are unenforceable under state common law principles that are not specific to arbitration and pre-empted by the FAA,” because West Virginia’s holding on the unconscionability issue seemed to have been influenced by the “invalid, categorical rule... against predispute arbitration agreements.”
The West Virginia Supreme Court of Appeals’ Brown II response last month—a 22-page unanimous opinion written by Chief Justice Menis Ketchum covering three consolidated cases--is provocative.
Ketchum was apparently dissatisfied with the reversal, noting that the “Supreme Court—without elucidating how and why the FAA applies to negligence actions that arise subsequently and only incidentally to a contract containing an arbitration clause—summarily concluded that the . . . holding in Brown I is a categorical rule that ‘is contrary to the terms and coverage of the FAA.’”
As a result, Brown II construes the Supreme Court’s Marmet Health Care Center order in extremely narrow terms.
With great reluctance, the West Virginia overruled its previous holding that “Congress did not intend for arbitration agreements, adopted prior to an occurrence of negligence that results in a personal injury or wrongful death, and which require questions about the negligence be submitted to arbitration, to be governed by the Federal Arbitration Act,” because this conclusion was explicitly rejected by the U.S. Supreme Court.
The West Virginia Court in Brown II otherwise reaffirmed all of its discussions and holdings from the long and complex 89-page Brown I opinion.
In a companion case, State ex rel. Johnson Controls Inc., et al., v. Tucker, Docket No. 11-1515 (W.Va. June 13, 2012)(available here), which was issued on the same day as Brown II, West Virginia reversed a circuit court order refusing to compel arbitration agreements in a construction context based on the principles outlined in Brown I & II.
The case involved a malfunctioning heating, ventilation and air conditioning system of a newly constructed office building. Of the seven defendants named in the complaint, three moved to enforce arbitration clauses incorporated in their respective contracts with the plaintiff.
The circuit court denied the motions, finding the arbitration provisions unconscionable because they were “adhesive” and “would result in an unnecessarily delayed ‘piecemeal’ resolution of this conflict and the waste of judicial resources.”
Despite finding the circuit court’s orders “eminently reasonable, logical and just,” Chief Justice Ketchum, again writing for a unanimous court, begrudgingly reversed the orders because they were “directly contrary to the United States Supreme Court’s interpretations of the Federal Arbitration Act.”
Neither did the orders meet the unconscionability criteria provided in Brown I, since adhesion contracts were not per se procedurally unconscionable as long as the arbitration clauses were not “hidden or unduly complex for commercial entities” that would deprive the contracting parties a reasonable opportunity to understand the terms.
Furthermore, the Court did not find the limits on consequential damage awards imposed by the arbitration clauses substantively unconscionable, because they were neither one-sided nor commercially unreasonable, recognizing the inclusion of such limits to be a widely accepted practice in the construction industry.
Even though Ketchum was willing to uphold the arbitration clause in the construction context, nursing homes apparently are a different matter.
To be precise, West Virginia Supreme Court of Appeals did not state that predispute arbitration clauses for negligence actions in nursing home agreements were per se unconscionable. The public policy issue upon which Brown I was decided, however, was raised as part of the overall unconscionability argument.
One could reasonably expect, therefore, that by abandoning only Brown I's conclusion but not its reasoning, Brown II would reach a similar conclusion as Brown I on the matter of unconscionability without making explicit reference to public policy.
That seems to be exactly what happened.
On its face, Brown II remanded two of the consolidated cases to the lower courts--answering a certified question on the third case--for further finding of facts. It ordered the lower courts to “assess whether a contract provision is substantially unconscionable on a case-by-case basis.”
It explained, “of course, in the discretion of the circuit courts, discovery may clarify the facts and circumstances surrounding the execution and fairness of the arbitration clauses.”
But in Brown I, the West Virginia Court already performed the unconscionability analysis in addressing the problems underlying the nursing home admission agreement process. Brown I seemed to have suggested that an arbitration agreement obtained in such a way was categorically unconscionable.
Therefore, although Brown I & II did not explicitly establish a per se rule on unconscionability, in reality West Virginia might well have effectively upheld its ban on nursing home predispute arbitration agreements.
This could hardly be the result anticipated by the U.S. Supreme Court. By ordering the state court in Marmet Health Care Center to consider “whether, absent that general public policy, the arbitration clauses . . . are unenforceable under state common law principles that are not specific to arbitration and preempted by the FAA,” the U.S. Supreme Court obviously did not intend only to overrule the portions of Brown I that made explicit reference to state public policy. It expected that West Virginia could adopt the strong federal policy in favor of arbitration.
By disregarding this suggestion, the West Virginia Supreme Court of Appeals seemed to have been only giving lip service to February's U.S. Supreme Court’s per curiam decision reversing Brown I.
The West Virginia Supreme Court of Appeals cases have now been remanded back to the trial courts for further factfinding. If arbitration remains stricken under the unconscionability analysis, it’s quite possible the U.S. Supreme Court will see the West Virginia cases again.
--Congsi Wu, CPR Intern