Although courts have, for years, routinely enforced arbitration agreements contained in commercial contracts and as part of business transactions, there has been growing concern about the widespread acceptance of the agreements contained in consumer transactions and healthcare-provider service agreements.1 In a three-part series published in October and November 2015, for example, the New York Times examined the growing trend in which companies have required customers, employees, investors, patients, and other consumers to agree in advance to arbitrate rather than litigate their disputes, and the series culminated in an editorial by the newspaper’s board that denounced the trend.2
In general, no one appears to dispute that arbitration can offer a swift and effective method for resolving contractual disputes between businesses, but many fear that the blanket enforcement of arbitration agreements buried in form contracts will result in the coercive loss of rights and remedies to individuals in other contexts.3
The situation involving arbitration agreements in the admission contracts of nursing-home and long-term care residents is one particularly controversial example.4 On one hand, industry representatives believe that arbitration agreements are a useful tool for saving patients and facilities time and money, resources they feel are better spent on patient care.5 On the other hand, resident advocates argue that a host of circumstances and policy justifications make enforcement of pre-admission arbitration agreements inappropriate in the context.6 The intensity of the debate has spurred proposed legislation and prompted the Centers for Medicare & Medicaid Services (CMS) to begin considering rules designed to resolve the issue.7
Given the level of attention surrounding the enforceability of arbitration agreements and the development of the enforcement dispute in the context of resident admission agreements, this article explores the issues involved in challenging the application of arbitration provisions.
The Overall Framework: Enforceability of Arbitration Agreements
Meant to be a quick and inexpensive process guided by contractual agreement,8 the goal of arbitration is to resolve controversies without the formality and expense that normally attaches to the judicial process.9
Historically, courts were reluctant to enforce agreements to arbitrate,10 but federal and state legislation reversed the trend. Adopted in 1925, the Federal Arbitration Act (FAA) was enacted in response to “the longstanding judicial hostility to arbitration agreements” and intended “to place arbitration agreements upon the same footing as other contracts.”11 The FAA provides that contracts or transactions containing arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”12
In light of that context and purpose, the U.S. Supreme Court has often observed that the FAA “reflects an emphatic federal policy in favor of arbitral dispute resolution.”13 The Wisconsin Arbitration Act (WAA) contains terms virtually identical to the FAA,14 and similar to the U.S. Supreme Court’s interpretation of the FAA, the Wisconsin Supreme Court has found that the WAA codifies a “policy of encouraging arbitration as an alternative to litigation” as a matter of state law.15 Thus, federal and state law are coextensive.
Although the FAA and the WAA require arbitration agreements to be “valid, irrevocable, and enforceable,” each also permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” The U.S. Supreme Court has found that, under the FAA, agreements to arbitrate may therefore be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.16
In AT&T Mobility LLC v. Concepcion, for example, the Supreme Court held that the FAA preempts a California state law that deemed class-arbitration waivers in consumer adhesion contracts unconscionable in disputes over small amounts of damages.17 The Court struck down the California rule on the ground that it “interferes with fundamental attributes of arbitration” to an extent not tolerated by the FAA.18 General contract defenses may therefore apply to invalidate a particular arbitration agreement, but no state law can categorically prohibit the arbitration of a particular type of claim.19
Of the contract defenses available under state law, the unconscionability defense is often raised in the context of arbitration provisions. A finding of unconscionability requires “a ‘procedural’ and a ‘substantive’ element, the former focusing on ‘oppression’ or ‘surprise’ due to unequal bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results.”20 Whether procedural unconscionability exists requires examining factors that bear on whether there was a “real and voluntary meeting of the minds” of the contracting parties:
The experience of the parties;
The relative bargaining power of the parties;
Who drafted the contract;
Whether the terms were explained to the weaker party;
Whether alterations in the terms would have been permitted by the drafter; and
Whether there were alternativeproviders of the subject matter of the contract.21
While procedural unconscionability bears on the formation of the contract, substantive unconscionability “addresses the fairness and reasonableness of the contract provision subject to challenge.”22 Substantive unconscionability is determined on a case-by-case basis.23
To summarize, federal and state law require arbitration agreements to be enforced, but do allow for generally applicable contract defenses to render arbitration provisions unenforceable in any specific case.
Nursing-home Residents: A Special Situation?
In the context of nursing-home and long-term care admission contracts, resident advocates believe that arbitration provisions should be subjected to extra scrutiny.24 They contend that, in the admission-agreement context, several factors combine to create a situation in which a resident seeking admission to a facility will have substantially less ability to understand and bargain over an arbitration agreement.25 Further, they believe that policy reasons militate against the enforcement of the agreements.26 Those circumstances and justifications are summarized below.
Jeffrey A. Pitman, Marquette 1990, is a founding member of Pitman, Kalkhoff, Sicula & Dentice, Milwaukee, and focuses his practice on representing residents and their families in cases against nursing homes and long-term care facilities. He is a former president of the Wisconsin Association for Justice. He is certified as a Civil Trial Advocate by the National Board of Trial Advocacy and is licensed to practice in Wisconsin, Illinois, Iowa, and New Mexico.
Michael J. Cerjak, Marquette 2008 cum laude, is with Pitman, Kalkhoff, Sicula & Dentice. He focuses on representing residents and their families in disputes against nursing homes and long-term care facilities and has experience handling complex personal injury, insurance coverage, and commercial disputes. He has tried dozens of cases to juries, courts, and arbitrators, and appeared in appeals before the U.S. Court of Appeals for the Seventh Circuit and the Wisconsin Supreme Court and Court of Appeals.
William C. Gleisner III, Marquette 1974, is with Pitman, Kalkhoff, Sicula & Dentice. He has been a member of the Wisconsin Judicial Council since 2008 and was one of the principal drafters of Wisconsin’s new e-discovery rules. He is also coauthor of a leading national treatise, eDiscovery & Digital Evidence, with Marquette Law School Professor Jay Grenig. He has extensive appellate experience, having authored or coauthored numerous briefs in the Wisconsin Supreme Court and Court of Appeals.
First, the admission decision is a stressful event that occurs when the individual seeking admission typically will be vulnerable. The decision is usually made in the midst of a crisis “brought on by an abrupt increase in disability level, precipitous deterioration in health, or the deterioration in health (or death) of a spouse or caregiver.”27 When seeking admission, an individual will usually exhibit frail health, progressed age, and diminished capacity.28 As one judge put it:
“The fact that a resident is signing an arbitration agreement contemporaneously with being admitted into a nursing home is troubling. By definition, an individual being admitted into a nursing home has a physical or mental detriment that requires them to need the assistance of a nursing home. Further, the reality is that, for many individuals, their admission to a nursing home is the final step in the road of life. As such, this is an extremely stressful time for elderly persons of diminished health. In most circumstances, it will be difficult to conclude that such an individual has equal bargaining power with a corporation that, through corporate counsel, drafted the form contract at issue.”29
In short, elderly individuals in diminished health may not be in the right frame of mind to contemplate the effect of a provision relinquishing the right to a jury trial.
Second, admission decisions must be made quickly. The need to find a long-term care placement often arises suddenly, “leaving little time to investigate options or to wait for an opening at a facility of one’s choice.”30 This is particularly true for individuals being admitted immediately from a hospital, where – due to reimbursement restrictions and policies imposed by insurers and governmental payers – discharge happens “quicker and sicker.”31 Decision-makers (such as the resident, family members, and agents under powers of attorney who are authorized to make decisions) are left with little time to find and carefully consider alternatives.32 Consequently, time pressure often becomes a significant impediment to a reasoned placement decision.
Third, admission decisions are often the result of a variety of practical considerations. A resident’s elderly spouse may not be capable of driving, other family members may or may not be in the vicinity, and many communities have only one or a few options to choose from. Moreover, some facilities are filled to capacity, do not offer the type of services or care necessary, or are not otherwise available.33 The availability of a facility or the proximity of the facility to the home of the resident or his or her loved ones therefore might be the deciding factor in where the resident is placed.34 In those circumstances, a resident’s placement decision might be based simply on the necessity for care and a few other practical considerations.
Fourth, based on when an agreement is executed and where the arbitration provision is contained, residents may not be aware of the rights they are relinquishing. Arbitration provisions can be buried in hundreds of pages of paperwork as part of a facility’s admission agreement and disclosures. In the time leading to admission, residents and their families are focusing on the availability of care, range of services available, and cost, but might not be thinking about how possible future disputes will be resolved.35
Residents and their families often do not learn until much later that the admission contract includes a provision requiring the resident to forego the use of courts to resolve potential future disputes, including ones concerning abuse, assault, malnutrition, neglect, or death.36 Potentially compounding the problem is that neither the resident nor the facility representative explaining an admission agreement might fully understand the significance of the arbitration provision contained within the admission paperwork.37 In some situations, residents can give up their right to a jury trial without even knowing it.
Fifth, through Medicare and Medicaid, federal and state governments provide billions of dollars for the care of many residents, and they also strictly regulate nursing-home operations administratively.38 It would seem to be anomalous to allow facilities, which are largely funded and regulated by public institutions, to unilaterally opt out of the judicial process simply by incorporating arbitration provisions into their form admission contracts. If the private parties to a nursing-home dispute agree that their differences should be resolved through the arbitration process for whatever reason, the decision, resident advocates argue, can be made after a dispute has occurred rather than as part of a form admission agreement.39
Sixth, confidential arbitration proceedings are not the best vehicle through which to increase quality of care. In other words, pretrial hearings and trials are conducted in public, all information obtained in discovery and presented in court is publicly available, and court proceedings and jury verdicts often inform and influence industry practice as well as develop the law. Arbitration hearings, on the other hand, are usually conducted in private, any material presented at an arbitration hearing is often subject to confidentiality requirements, and – as a result – private arbitration proceedings do not influence industry practice or develop law.40 Resident advocates therefore contend that public, rather than private, forums are most appropriate for disputes arising in the context of nursing homes.41
Given the condition that residents are in on admission, the litany of practical considerations bearing on an admission decision, and the disparity in bargaining power and knowledge between facility operators and residents, resident advocates maintain that arbitration agreements contained in admission contracts should be heavily scrutinized.42
Judicial Decisions in Cases Involving Nursing-home Residents
With resident advocates challenging the enforceability of arbitration provisions contained in admission agreements, industry representatives have defended the application of conspicuous, routine provisions by relying on the very reasons to arbitrate rather than litigate and the purposes of the FAA. In other words, arbitration offers the benefits of an expedited and inexpensive dispute-resolution process, and the history and purpose of the FAA demonstrate that the act specifically prohibits any rule of law expressing any hostility toward arbitration provisions.43
In grappling with the issue, courts have reached mixed results and trended toward invalidating the provisions when the circumstances of an individual case so warrant.
Against Public Policy Per Se. Relying on the history, purpose, and interpretation of the FAA, industry representatives obtained a significant victory before the U.S. Supreme Court.
The case, Brown v. Genesis Healthcare Corp.,began in the West Virginia state courts, where a group of plaintiffs urged the West Virginia Supreme Court of Appeals to adopt a rule declaring arbitration clauses in nursing-home admission agreements unconscionable per se.44 The plaintiffs relied heavily on practical considerations and policy justifications.45 Ultimately, the state high court accepted the plaintiffs’ arguments, finding that, as a matter of public policy under West Virginia law, arbitration clauses in nursing-home admission contracts were unenforceable.46
In a unanimous, per curiam decision, however, the U.S. Supreme Court reversed.47 Reasoning that the FAA’s text includes no exception for personal-injury or wrongful-death claims, the Supreme Court found the West Virginia court’s decision to be a categorical rule prohibiting arbitration of a particular type of claim contrary to the terms and scope of the FAA.48 The Supreme Court’s decision emphatically established that no rule or law could categorically apply to prohibit the arbitration of a nursing-home claim and that enforcement decisions must be made on a case-by-case basis.
Unconscionable. Although no rule or law may outright prohibit the arbitration of claims against nursing homes or long-term care facilities, resident advocates have successfully argued for state courts to invalidate specific arbitration provisions in a variety of situations, including provisions that:
Excluded access to courts for claims most likely to be brought by a resident, but not those claims more likely to be brought by a facility;49
Limited the amount of damages or claims available to a resident;50 and
Required the use of rules favorable to facilities or the use of arbitrators no longer available for the process.51
Accordingly, the developing law demonstrates that state courts are willing to invalidate specific arbitration provisions on unconscionability grounds based on a variety of reasons.
Lack of Authority. Resident advocates have also successfully argued that arbitration provisions in healthcare-service agreements should be invalidated based on authority concepts.
State appellate courts in Oklahoma,52 Arizona,53 Kentucky,54 Illinois,55 Washington,56 Missouri,57 Utah,58 and Ohio59 have held that arbitration agreements executed by individuals were not binding on claims pursued by surviving family members. Similarly, other state cases show that family members often lack authority to consent to arbitration rather than litigation on behalf of the resident.60
The results have not been uniform, however. Recently, the Florida Supreme Court held that a nursing-home resident’s agreement to arbitrate claims against a nursing home bound that resident’s estate and heirs in any subsequent wrongful-death action against the nursing home as a matter of Florida law.61
As the circumstances involving nursing-home and other long-term care facilities demonstrate, an arbitration agreement may be challenged based on whether a specific provision is unconscionable and whether the provision was executed by someone with proper authority. Facts showing that a resident was in a diminished state of mind, was not fully informed, lacked meaningful opportunities to negotiate, or did not have viable alternatives may form the basis for the finding of an unconscionable provision.
In July 2015, the CMS proposed a rule that would revise the requirements that long-term care facilities must meet to participate in the Medicare and Medicaid programs and included a provision restricting the use of binding arbitration agreements by nursing homes.62 The question, in the nursing-home context, may therefore ultimately be resolved by federal rule.
Regardless of how the issue is resolved for nursing-home residents, the various approaches that have been taken to challenge arbitration provisions in the context of resident admission contracts can serve as a guide for how disputes can be framed in other consumer contexts.
1 See, e.g., Editorial, Arbitrating Disputes, Denying Justice, N.Y. Times, Nov. 7, 2015.
2 Id.; see also Jessica Silver-Greenberg & Robert Gebeloff, Arbitration Everywhere, Stacking the Deck of Justice, N.Y. Times, Oct. 31, 2015; Jessica Silver-Greenberg & Michael Corkery, In Arbitration, a “Privatization of the Justice System”, N.Y. Times, Nov. 1, 2015; Michael Corkery & Jessica Silver-Greenberg, In Religious Arbitration, Scripture Is the Rule of Law, N.Y. Times, Nov. 2, 2015.
3 See generally sources cited in note 2, supra.
4 Silver-Greenberg & Corkery, supra note 2; see also Lisa Schencker, An End to Mandatory Arbitration Agreements in Nursing Homes?, Modern Healthcare, July 17, 2015; Michelle Andrews, Signing a Mandatory Arbitration Agreement with a Nursing Home Can Be Troublesome, Wash. Post, Sept. 17, 2012.
5 See Lisa Schencker, Nursing Homes’ Use of Binding Arbitration Comes Under Fire, Modern Healthcare, Aug. 8, 2015.
7 H.R. 6351, 112th Cong. (2012) (known as “Fairness in Nursing Home Arbitration Act of 2012”); Medicare and Medicaid Programs; Reform of Requirements for Long-Term Care Facilities, 80 Fed. Reg. 42,168 (July 16, 2015).
8 Employers Ins. of Wausau v. Jackson, 190 Wis. 2d 597, 610-11, 527 N.W.2d 681 (1995) (“The conclusion that one draws from these assertions is that arbitration is meant to be a swift and inexpensive process that is guided by a contractual agreement.”).
9 Borst v. Allstate Ins. Co., 2006 WI 70, ¶ 61, 291 Wis. 2d 361, 717 N.W.2d 42 (“Additionally, the goal of arbitration is ‘to resolve the entire controversy out of court without the formality and expense that normally attaches to the judicial process.’”).
10 Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270 (1995).
11 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991).
12 9 U.S.C. § 2.
13 See, e.g., KPMG LLP v. Cocchi, 132 S. Ct. 23, 25 (2011) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 631 (1985)).
14 See Wis. Stat. § 788.01.
15 Cirilli v. Country Ins. & Fin. Servs., 2009 WI App 167, ¶ 11, 322 Wis. 2d 238, 776 N.W.2d 272; Kemp v. Fisher, 89 Wis. 2d 94, 100, 277 N.W.2d 859 (1979).
16 Doctor’s Assocs. Inc. v. Casarotto, 517 U.S. 681, 687 (1996); see also Perry v. Thomas, 482 U.S. 483, 492-93, n.9 (1987).
17 AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011).
18 Id. at 344.
19 See generally Marmet Health Care Ctr. Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam).
20 Concepcion, 563 U.S. at 340.
21 Wisconsin Auto Title Loans Inc. v. Jones, 2006 WI 53, ¶ 34, 290 Wis. 2d 514, 714 N.W.2d 155.
22 Id. ¶ 35.
23 See Pietroske Inc. v. Globalcom Inc., 2004 WI App 142, ¶ 6, 275 Wis. 2d 444, 685 N.W.2d 884.
24 Schencker, supra note 5; David S. Schwartz, Mandatory Arbitration and Fairness, 84 Notre Dame L. Rev. 1247, 1247 (2009) (“[T]here is no ‘fairness’ justification for imposing a dispute resolution system through adhesion contracts.”); Fairness in Nursing Home Arbitration Act of 2008: Hearing on S. 2838 Before the Subcommittee on Antitrust, Competition and Consumer Rights of the S. Comm. on the Judiciary, 110th Cong. (2008).
25 Scheneker, supra note 5; Schwartz, supra note 24; Hearing on 5. 2838, supra note 24.
26 Lauren Gaffney, The Circle of Assent: How “Agreement” Can Save Mandatory Arbitration in Long-Term Care Contracts, 62 Vand. L. Rev. 1017, 1019 (2009).
27 Kelly Bagby & Samantha Souza, Ending Unfair Arbitration: Fighting against the Enforcement of Arbitration Agreements in Long-Term Care Contracts, 29 J. Contemp. Health L. & Pol’y 183 (2013).
28 Manley v. Personacare of Ohio, 2007 Ohio 343, ¶ 29 (Ohio Ct. App. 2007).
30 Bagby & Souza, supra note 27, at 187.
31 Brown v. Genesis Healthcare Corp., 724 S.E.2d 250, 269 (W. Va. 2011).
33 National Consumer Voice for Quality Long-Term Care, The Real Life Consequences of Mandatory Arbitration Clauses in Nursing Home Contracts.
35 Bagby & Souza, supra note 27, at 186.
37 Schencker, supra note 5.
38 See, e.g., Beverly Enters. v. Spilman, 661 So. 2d 867, 873 (Fla. Dist. Ct. App. 2005).
39 Schencker, supra note 5.
40 Andrews, supra note 4.
42 See, e.g., Bagby & Souza, supra note 27, at 187.
43 See, e.g., THI of N.M. at Hobbs Ctr. LLC v. Patton, 741 F.3d 1162 (10th Cir. 2014).
44 724 S.E.2d 250, 269 (W. Va. 2011).
45 Id. at 268-70.
46 Id. at 292.
47 Marmet Health Care Ctr., 132 S. Ct. at 1203-04.
49 Bargman v. Skilled Healthcare Grp., 292 P.3d 1, 4-5 (N.M. Ct. App. 2012). But see THI, 741 F.3d 1162.
50 Lacey v. Healthcare & Ret. Corp. of Am., 918 So. 2d 333, 334-35 (Fla. Dist. Ct. App. 2005); Blankfeld v. Richmond Health Care Inc., 902 So. 2d 296, 299-300 (Fla. Dist. Ct. App. 2005).
51 Riley v. Extendicare Health Facilities Inc., 2013 WI App 9, ¶ 44, 345 Wis. 2d 804, 826 N.W.2d 398; Fletcher v. Huntington Place Ltd. P’ship, 952 So. 2d 1225, 1226-27 (Fla. Dist. Ct. App. 2007).
52 Boler v. Sec. Health Care L.L.C., 336 P.3d 468, 477 (Okla. 2014).
53 Dueñas v. Life Care Ctrs. of Am. Inc., 336 P.3d 763, 772 (Ariz. Ct. App. 2014).
54 Extendicare Homes v. Whisman, 2015 Ky. LEXIS 1867 (Ky. Sept. 24, 2015).
55 Carter v. SSC Odin Operating Co., 976 N.E.2d 344, 360 (Ill. 2012) (“Our holding in the present case that plaintiff, as a nonparty to the arbitration agreements, cannot be compelled to arbitrate a wrongful-death claim that does not belong to the decedent is not contrary to Marmet.”).
56 Woodall v. Avalon Care Ctr.-Fed. Way LLC, 231 P.3d 1252, 1261 (Wash. Ct. App. 2010).
57 Lawrence v. Beverly Manor, 273 S.W.3d 525, 528-29 (Mo. 2009).
58 Bybee v. Abdulla, 189 P.3d 40, 50 (Utah 2008).
59 Peters v. Columbus Steel Castings Co., 873 N.E.2d 1258, 1262 (Ohio 2007) (“[The decedent] could not restrict his beneficiaries to arbitration of their wrongful-death claims, because he held no right to those claims; they accrued independently to his beneficiaries for the injuries they personally suffered as a result of the death.”).
60 See, e.g., Whisman, 2015 Ky. LEXIS 1867.
61 Laizure v. Avante at Leesburg Inc., 109 So. 3d 752, 762 (Fla. 2013).
62 Medicare and Medicaid Programs; Reform of Requirements for Long-Term Care Facilities, 80 Fed. Reg. 42, 168 (July 16, 2015).