Common law judicial doctrines in almost every state discourage and restrict arbitration agreements covering personal injury or death claims. This is particularly true regarding admission contracts to nursing homes or assisted-living facilities, which have superior bargaining power and may offer services on a “take it or leave it” basis. The Federal Arbitration Act (FAA), on the other hand, encourages arbitration of claims.
Because the arbitration laws stack the deck against a facility, there is no foolproof way to draft an arbitration agreement; what may be found enforceable by one judge may be found unenforceable by another. With so many defenses available to plaintiffs, a bullet-proof agreement just doesn’t exist. Nevertheless, there are five ways a facility can improve the odds that a court will enforce the agreement.
1. The Agreement Must Be Governed by the Federal Arbitration Act and “Involve” Interstate Commerce
Under the South Carolina Uniform Arbitration Act, pre-injury agreements to arbitrate personal injury claims are unenforceable.[1] Thus, claims for personal injury must be brought under the Federal Arbitration Act, which preempts conflicting state law.[2] The arbitration agreement must specify that it is governed by the FAA. The stipulation by the parties alone, however, will not be sufficient to ensure the application of federal law.
The FAA applies to contracts “involving commerce.”[3] Although a simple residency agreement or admission contract may seem like a local transaction, it may “involve commerce” if the facility receives supplies from out-of-state vendors and then distributes them to its residents. For example, in Allied-Bruce Terminix, the U.S. Supreme Court held that an arbitration agreement involved interstate commerce in a case where the defendant was a multistate company that used termite-treating and house-repair materials from out-of-state.[4]
The agreement should specify that the facility receives goods from out-of-state that are then given to residents. Specific examples may be useful. The facility should keep records of its interstate contracts and deliveries as well as distribution of goods to residents. These records provide vital factual support to an affidavit of use in interstate commerce.
The facility must avoid a situation similar to Timms v. Greene.[5] In that case, the S.C. Supreme Court held that, although the facility received goods through interstate commerce, the FAA did not apply because nothing tied the interstate commerce to the arbitration agreement.
Although Timms’ narrow holding is questionable in light of Allied-Bruce Terminix, which was decided three years later, a facility should carefully create a sufficient link between interstate commerce and the goods and supplies given to the resident. The agreement should state, for example, that “the facility receives the medical supplies provided to the residents from Acme, Co., a Texas Corporation” or that “the facility receives its food from Food, Inc., a North Carolina company.”
Ensuring that the FAA governs the dispute is the first and most important step. Without the FAA, arbitration agreements are invalid in South Carolina when they cover claims for personal injury. The remaining steps protect against invalidity due to unfairness.
2. Avoid Designating a Specific Arbiter/Pro-Industry Arbiter
In Grant v. Magnolia Manor-Greenwood, Inc., the South Carolina Supreme Court invalidated an agreement because the selected arbitration panel no longer existed.[6] In that case, a nursing home admission contract stated that disputes would be decided by an arbitration panel from the American Health Lawyers Association (AHLA). The AHLA, however, stopped arbitrating disputes unless the parties entered into an agreement after the injury. The court held that the provision naming the AHLA was a material part of the agreement. Therefore, the parties lacked a meeting of the minds as to the particular arbiter, and the court voided the agreement.
Arbitration agreements, therefore, should not specify a particular group or person that will arbitrate the claims; if they do, they should have a provision for what happens if the designated arbiter or organization is not available. Instead, the agreements should use generic terms to select the arbiter – such as “any lawyer with 10 years or more of experience” – and make sure they include a substitute arbiter. If a specific group is used, such as the American Arbitration Association, be sure the agreement provides for what happens if that group is not available. The facility also cannot overreach in specifying who will decide the case in arbitration. A contract that allows the facility absolute control over the qualifications and selection of the arbiter(s) may be struck down as unconscionable, even under the FAA.[7] Even a provision providing that the facility controls the list of arbiters, but that each side gets to strike from the list, may be unconscionable.[8]
3. Avoid One-Sided Agreements
State courts will often search for reasons to void an arbitration agreement. So the agreement should be drafted to be as even-handed as possible. Although the lack of mutuality of remedies will not invalidate a contract,[9] the remedies should be reasonably comparable. For example, the agreement should not carve out special remedies available only to the facility. Actions for eviction are often unique and not appropriate for arbitration; however, excluding those claims alone from arbitration may lead a court to find the agreement unconscionable because it is too one-sided. If the facility wants to keep certain remedies such as eviction outside of the arbitration agreement, it should specify that all claims that may be brought in small claims or magistrate’s court, by either residents or the facility, are exempt from arbitration.
Courts often disapprove of arbitration agreements that minimize meaningful discovery,[10] provide a low cap compensatory damages or bar punitive damages,[11] or remove the right to appeal. It may require a cost-benefit analysis to determine whether it is worth removing some of these limitations. But the more open and even-handed the arbitration agreement is, the more likely it will be upheld.
Make discovery restrictions balanced, too. Allow each party to take the other’s deposition and to get a report and depose opposing experts. Do not severely limit document discovery. Trial courts view this as a one-sided limitation, as the resident only has a few documents and the facility holds all the files.
Allowing the applicant a thirty day period to rescind the arbitration agreement may also make a judge more favorable to enforcement. The rescission period does not impact legal enforceability in any manner. The Federal Arbitration Act does not require a rescission period. It may, however, soften a judge’s reluctance to enforce an arbitration clause and, based on client experience, residents and responsible parties rarely exercise the rescission right.
4. Have a Power of Attorney or Guardian Sign Jointly With the Resident
When a resident is incompetent or a third party must make payment, a “responsible party” who is a power of attorney or guardian should also sign the papers. This helps defeat challenges that plaintiff’s lawyers sometimes make as to whether a “responsible party” had the authority to bind the resident. Be sure to verify the “responsible party’s” authority as well. The facility should get a copy of the power of attorney, court order, or other document granting the authority.
5. Make Sure it is Severable
Finally, make sure the residency agreement or admission contract includes a provision that allows a court to sever offending portions of the arbitration clause specifically and enforce the rest. Without a severability clause, it may be “all or nothing.” Including a severability clause provides the court a way to give each party something and reach a compromise.
While these five tips do not guarantee an enforceable arbitration clause, they will provide strong arguments and increase the likelihood of enforcement.
[1] S.C. Code Ann. § 15-48-10(b)(4).
[2] Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 269 (1995).
[3] 9 U.S.C. § 2.
[4] 513 U.S. 265, 269 (1995).
[5] 310 S.C. 469, 427 S.E.2d 642 (1993).
[6] 383 S.C. 125, 678 S.E.2d 435 (2009).
[7] Hooters of America, Inc. v. Phillips, 173 F.3d 933, 938-39 (4th Cir. 1999).
[8] Murray v. United Food and Commercial Workers Intern. Union, 289 F.3d 297, 304-305 (4th Cir. 2002).
[9] See Munoz v. Green Tree Financial, 342 S.C. 531, 542 S.E.2d 360 (2001).
[10] Ostroff v. Alterra Healthcare Corp., 433 F.Supp.2d 538 (E.D. Pa. 2006).
[11] Alterra Healthcare Corp. v. Bryant, 937 So.2d 263 (Ct. App. Fla. 2006).
