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Health Care LawThe newsletter of the ISBA’s Section on Health Care Law

December 2010, vol. 27, no. 2

Arbitration clauses in nursing home contracts: FAA preempts Illinois state law restrictions

Even though arbitration provides an efficient alternative to litigation, nursing homes have been reluctant to place arbitration provisions in contracts with residents because of Illinois state laws such as the Nursing Home Care Act and the Health Care Arbitration Act. These laws restrict arbitration and mandate the terms of arbitration agreements. However, the Illinois Supreme Court’s recent decision in Carter v. SSC Odin Operating Co. holds that the Federal Arbitration Act (“FAA”) preempts Illinois state law restrictions on arbitration agreements and they are enforceable, as long as they do not run afoul of the state’s laws that apply to any contract.

The April 2010 decision in Carter invalidated the anti-waiver provision of the Nursing Home Care Act, which voids any agreement of a nursing home resident to waive his or her right to trial by jury. In light of this decision, a properly drafted arbitration agreement will eliminate the arbitration prohibition under the Nursing Home Care Act, as well as the restrictions under the Health Care Arbitration Act. Therefore, nursing homes and other health care providers must follow only general state contract law when drafting arbitration agreements.

Enforceability

Section 2 of the FAA provides that an agreement to arbitrate is “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract [emphasis added].”1 State laws that restrict arbitration or mandate the terms of arbitration agreements conflict with the FAA, and the FAA preempts conflicting state law when interstate commerce is involved.2 In Carter, the Illinois Supreme Court held that the anti-waiver provisions of the Nursing Home Care Act did not apply to arbitration agreements, because the Act is aimed at arbitration agreements specifically, not at contracts generally, which is inconsistent with Section 2 of the FAA.3 In Doctor’s Associates v. Casarotto, the Supreme Court held that the FAA preempted a restrictive Montana statute that required an arbitration clause to appear in a specific format.4 Furthermore, in Fosler v. Midwest Care Center II, Inc., an Illinois appellate court held that a nursing home arbitration agreement sufficiently involved interstate commerce for FAA purposes, because the nursing home received Medicare and Medicaid payments and out-of-state insurance payments and purchased medical equipment and supplies from outside of Illinois.5 Thus, the FAA governs arbitration agreements in nursing homes and other health care settings, and the drafters of these agreements should look to general contract law for guidance in drafting. Drafters seeking arbitration should reiterate that the FAA governs the arbitration provisions in their contracts, because the FAA will not apply if the parties expressly agree that state law governs all sections of the arbitration agreement.6

Delegation provisions. Like choice of law provisions, delegation provisions affect the enforceability of arbitration agreements. Generally, if a contract contains a “delegation provision” that expressly gives an arbitrator the authority to decide whether the agreement is enforceable, the matter of enforceability will go before an arbitrator, not a court.7 In Rent-A-Center West, Inc. v. Jackson, an employee contended that an arbitration agreement was substantively and procedurally unconscionable, because he signed it as a condition of employment, it was non-negotiable, and the provisions for fee splitting and limitations on discovery were unfair.8 Since the contract contained a delegation provision, the Supreme Court held that an arbitrator would decide the question of unconscionability.9 Drafters promoting arbitration must therefore balance the usefulness of delegation provisions with the precedent of judicial decisions.

Possible State-Law Defenses Against Arbitration Agreements

1. Substantive Unconscionability

Illinois courts may find a portion of a contract unenforceable, because it is substantively or procedurally unconscionable or a combination of both.10 A clause or term in a contract is substantively unconscionable if it is unreasonably one-sided or overly harsh.11 If particular terms of an arbitration agreement are unconscionable, Illinois courts will sever the unconscionable terms and enforce the remainder of the arbitration agreement.12 Thus, drafters of arbitration agreements should eliminate provisions for biased arbitrators, prohibitive administrative costs, option clauses, and distant arbitral venues. They should also make clear there is a mutual promise to arbitrate.

a. Biased Arbitrators. A provision in an arbitration agreement may be substantively unconscionable if it names arbitrators with a clear, pre-existing bias in favor of the drafting party.13 The bias may be small, but it must be direct, definite, and capable of demonstration. Id. When an institution drafts an arbitration agreement or includes an arbitration clause in a larger agreement, it might create business for arbitrators with a particular, relevant background.14 If there is a consistent relationship between the institution and specialized arbitrators, charges of partiality on the part of the arbitrators might follow.15

There is a presumption of bias where an arbitrator and one of the parties to the arbitration meet separately to negotiate on a different matter.16 In Drinane v. State Farm Mutual Insurance Company, the arbitrator overcame the presumption of bias, even though he failed to disclose that he had a pending case against an individual whose insurer was a party to the arbitration.17 The sworn statements of the arbitrator and other key personnel revealed that the disputed issues in the arbitration were not discussed, thus overcoming the presumption of bias.18 However, arbitrators are now required to disclose any dealings that might create an impression of possible bias.19 Furthermore, in Anderson v. Prab Conveyors, Inc., the court held that the defendant company could not itself arbitrate a dispute to which it was a party, in spite of a provision to that effect in a signed arbitration agreement.20 The court found that it would be unconscionable to compel the opposing party to submit its claim to the company itself.21

Health care providers should ensure that arbitration agreements do not name particular arbitrators and should require arbitrators to disclose dealings that might create an impression of bias. They should also confirm that they are not arbitrating disputes internally and that they allow opposing parties to submit claims in a neutral forum.

b. Prohibitive Administrative Costs and Arbitral Venues. Parties to arbitration must pay the administrative costs of arbitration, including any arbitration fees.22 Some arbitration agreements specify that the party drafting the agreement must pay the arbitrators.23 Courts might find such agreements substantively unconscionable, because arbitrators might be inclined to favor the drafting party, if such a payment provision generates continued business.24 On the other hand, courts might find a clause requiring a non-drafting party to pay some or all of the costs of arbitration to be substantively unconscionable, because such a clause could discourage dispute resolution.25

The party seeking to invalidate a provision on the theory that arbitration is prohibitively expensive has the burden of proving the likelihood of incurring prohibitive costs.26 In Illinois, the party may meet this burden with evidence of the prohibitive costs and proof of incapability of meeting those costs.27 To help ensure that arbitration agreements are enforceable and that the costs of arbitration are not prohibitively expensive, drafters can divide the administrative costs equally among the parties. Statements such as “[Provider] and [Resident] shall equally bear all fees and expenses of the arbitration,” will most likely survive in court. Agreements that require arbitration far from the non-drafting party’s home might also be substantively unconscionable.28 Health care organizations should ensure that arbitration agreements provide for arbitration in venues that are reasonable for non-drafting parties, even if the agreements require a particular arbitral forum.

c. Option Clauses. Some arbitration agreements require non-drafting parties to arbitrate claims but allow drafting parties to choose between litigation and arbitration.29 Others require non-drafting parties to litigate claims but allow drafting parties to arbitrate.30 Illinois courts could find these option provisions unconscionable, because they give the drafting party a post-dispute choice of forum and lack mutuality.31 Although courts will not necessarily find option provisions unconscionable, organizations should avoid drafting arbitration agreements with these clauses, without providing clear exceptions to bind both parties to arbitration.

d. Lack of Consideration. If one party must agree to arbitrate, but the other retains an option to sue, the arbitration agreement might be unconscionably one-sided and void for lack of consideration. Under Illinois law, “a mutual promise to arbitrate is sufficient consideration to support an arbitration agreement.”32 However, the promises to arbitrate need not be identical.33 For example, in General Motors Acceptance Corp. v. Johnson, the court upheld an agreement to arbitrate, where the parties made a mutual promise to arbitrate, but one of the parties also forfeited its right to participate in a class action.34 A drafter of an arbitration agreement should ensure that both parties are agreeing to arbitration, or that there is valid consideration for the entire contract if the arbitration clause is part of a larger agreement.

2. Procedural Unconscionability

Procedural unconscionability exists if a contractual term is so difficult to see, read, or understand that the non-drafting party could not have been aware of it.35 Unequal bargaining power and hidden or confusing contractual terms suggest procedural unconscionability.

a. Contract of adhesion. Illinois courts will not deny the enforcement of an arbitration agreement solely because it is a contract of adhesion, where the drafting party has all of the bargaining power.36 If a court were to do so, it would be applying the unconscionability doctrine more aggressively to arbitration agreements than to contracts generally, an application that the FAA prohibits. The party in a superior bargaining position can prepare a valid contract, without allowing the other party to negotiate any terms.37 A “take-it-or-leave-it” provision in a contract does not automatically make the agreement unconscionable; one would have to show fraud or other wrongdoing to invalidate the clause.38

Health care providers will often have superior bargaining power in comparison to parties signing arbitration agreements. While one may attack these agreements as contracts of adhesion, that reason alone will not be enough to invalidate them. Providers should ensure that no fraud or wrongdoing occurs in contract formation. To this end, they can confirm that residents or patients have time to reflect about the arbitration provision, point out the provision, and explain the consequences of signing.

b. Hidden Contractual Terms. Although Illinois courts are reluctant to find arbitration clauses procedurally unconscionable where notice of the clause appears in contractual text, courts will not enforce arbitration provisions that are so difficult to find and to read that non-drafting parties cannot be aware of them.39 In Bunge Corp. v. Williams, the court did not find an arbitration clause that appeared on the back of a soybean sales contract procedurally unconscionable where notice of the clause appeared on the front of the contract.40 The court reasoned that the non-drafting party had the ability and opportunity to read all provisions of the contract and therefore could not claim ignorance of its terms and conditions.41 Nursing home providers should confirm that residents are able to read and understand all arbitration provisions in nursing home contracts before executing agreements.

3. Mental Capacity

In order to form a valid contract, both parties must be of sufficient mental ability to appreciate the effect of the contract, and they must be able to exercise free will in forming the contract.42 In order to void a contract on the grounds of mental incapacity, at least one of the parties must possess a degree of mental weakness that renders that party incapable of protecting his or her interests.43 Because arbitration agreements are on the same footing as other contracts, these agreements will be invalid if one of the parties does not possess the requisite mental capacity to form a valid contract. Although Illinois case law does not provide guidance on how Illinois courts will resolve issues related to mental capacity and arbitration agreements, case law from other jurisdictions provides some guidance. In 2003, the U.S. Court of Appeals for the Tenth Circuit determined that challenging the enforceability of a contract must involve challenging the entire contract rather than individual provisions in the contract.44 This suggests that a court would invalidate an arbitration agreement or an arbitration provision in a larger contract if one of the parties lacks the mental capacity to form a valid contract. Additionally, the court in this case held that a judge, not an arbitrator, must decide a mental capacity challenge to an arbitration agreement.45 However, the recent decision in Rent-a-Center suggests that this choice of forum might not be possible if an arbitration agreement contains a delegation provision requiring an arbitrator to determine the enforceability of the contract.

Nursing homes that use arbitration agreements should be aware that residents and patients must possess sufficient mental capacity in order to execute valid contracts. This is particularly important in nursing homes and hospitals where a resident or patient might have a significant mental impairment. When a third party signs an arbitration agreement on behalf of a resident or patient, health care organizations should confirm that the third party has the authority to bind the party to the agreement.

Additional Recommendations

Health care providers can use the following checklist to create arbitration agreements that are enforceable under the FAA and general state contract law.

Recommendations for Drafting

• State that the FAA governs the arbitration agreement.

• Consider the costs and benefits of enforceability issues reaching the courts.

• Avoid naming an arbitrator in an arbitration agreement if there is a question of neutrality.

• Specify that arbitration costs be divided equally among parties.

• Provide for arbitration in venues that are reasonable for non-drafting parties.

• Indicate that both the resident or patient and the provider are bound to arbitrate their claims.

• Use plain language to avoid unintended awards of attorneys’ fees.

Recommendations for Execution

• Confirm that the resident or patient has mental capacity to execute a valid contract.

• If a third party signs for the resident or patient, require proof of the third party’s authority, such as a signed Power of Attorney document.

• Provide the resident or patient adequate time to read and comprehend the arbitration provision or agreement.

• Point out an arbitration provision in a larger agreement and explain the consequences of signing.

• Ask the patient to initial next to the arbitration provision if it is within a larger contract.

• Ask the patient to sign the arbitration agreement if it is a separate document. ■

__________

Edward Clancy is a partner in the Chicago office of the law firm of Ungaretti & Harris and a member of the ISBA Health Care Section Council. He specializes in health care law including representing long term care and assisted living facilities. Mr. Clancy may be contacted at 312-977-4487 or eclancy@uhlaw.com. The author thanks Michelle Garvey, a 3L at Loyola University Chicago, for her assistance with this article.

1. 9 U.S.C. §2.

2. See Doctor’s Associates v. Casarotto, 517 U.S. 681, 116 S. Ct. 1652 (1996).

3. See Carter v. SSC Odin Operating Co., 237 Ill. 2d 30, 927 N.E.2d 1207 (2010).

4. Doctor’s Associates, 517 U.S. at 688.

5. Fosler v. Midwest Care Center II, Inc., 398 Ill.App.3d 563, 578, 928 N.E.2d 1, 14 (2nd Dist. 2010).

6. See Glazer’s Distributors v. NWS, 376 Ill.App.3d 411, 876 N.E.2d 203 (1st Dist. 2007) and Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S. Ct. 1248 (1989).

7. See Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772 (2010).

8. Id. at 2781.

9. Id.

10. Razor v. Hyundai Motor America, 222 Ill. 2d 75, 99, 854 N.E.2d 607, 622 (2006).

11. Zobrist v. Verizon Wireless, 354 Ill.App.3d 1139, 1147, 822 N.E.2d 531, 540 (5th Dist. 2004).

12. Wigginton v. Dell, Inc., 382 Ill.App.3d 1189, 1198, 890 N.E.2d 541, 549 (5th Dist. 2008).

13. Giddens v. Board of Ed. of City of Chicago, 398 Ill. 157, 167, 75 N.E.2d 286, 291 (1947).

14. Stephen J. Ware, Arbitration and Unconscionability after Doctor’s Associates v. Casarotto, 31 Lake Forest L. Rev. 1001, 1022 (1996) (quoting S. Gale Dick, ADR at the Crossroads, Disp. Resol. J., Mar. 1994 at 47, 55 (1994)).

15. Id.

16. Drinane v. State Farm Mutual Ins. Co., 153 Ill. 2d 207, 215, 606 N.E.2d 1181, 1185 (1992).

17. Id.

18. Id.

19. Rosenthal-Collins Group, L.P. v. Reiff, 321 Ill.App.3d 683, 687, 748 N.E.2d 229, 233 (1st Dist. 2001).

20. Anderson v. Prab Conveyors, Inc., 69 Ill.App.2d 224, 231, 216 N.E.2d 252, 256 (1st Dist. 1966).

21. Id.

22. Ware at 1023, quoting Sarah R. Cole, Incentives and Arbitration: The Case Against Enforcement of Executory Arbitration Agreements Between Employers and Employees, 64 UMKC L. Rev. 449, 478 (1996).

23. Id.

24. Id.

25. Id.

26. Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 92, 121 S. Ct. 513, 522 (2000).

27. Bess v. DirecTV, 381 Ill.App.3d 229, 240, 885 N.E.2d 488, 498 (5th Dist. 2008).

28. Ware at 1026.

29. Id. at 1024.

30. Id. at 1025.

31. Id.

32. Aste v. Metropolitan Life Insurance Co., 312 Ill.App.3d 972, 975, 728 N.E.2d 629, 632 (1st Dist. 2000).

33. General Motors Acceptance Corp. v. Johnson, 354 Ill.App.3d 885, 894, 822 N.E.2d 30, 37 (1st Dist. 2004).

34. Id.

35. Razor, 854 N.E.2d at 622.

36. Zobrist, 822 N.E.2d 531 at 541.

37. Id.

38. Id.

39. Bunge Corp. v. Williams, 45 Ill.App.3d 359, 364, 359 N.E.2d 844, 847 (5th Dist. 1977).

40. Id.

41. Id.

42. Thatcher v. Kramer, 347 Ill. 601, 609, 180 N.E. 434, 437 (1932).

43. English v. Porter, 109 Ill. 285 (1884).

44. Spahr v. Secco, 330 F.3d 1266, 1273 (10th Cir. 2003).

45. Id.


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