N.D.Okla.: Limit on nursing home arbitration preempted

An Oklahoma federal district court held that a state statute prohibiting arbitration agreements in nursing home admission contracts is preempted by the Federal Arbitration Act (FAA). Rainbow Health Care Center, Inc. v. Crutcher, 2008 WL 26831 (N.D.Okla. Jan. 29, 2008) (No. 07-CV-194-JHP).

The court held that the defendant nursing home’s admission contract constituted a transaction involving interstate commerce to which the FAA applied, and that Congress had shown no intent that nursing homes be exempted from the FAA.

 

                This suit was brought by Rainbow, a nursing home, following the State’s attempts to force it to remove the arbitration clause from its admission agreements. Oklahoma’s Nursing Home Care Act, Okla. Stat. tit. 63, § 1-1900.1 et seq., states that a nursing home resident cannot waive his or her right to a jury trial in an action brought under the Act’s provisions. The State threatened to revoke Rainbow’s license if it did not remove the arbitration provision from its agreements.

 

                Rainbow argued that the FAA preempted the state law. The FAA provides that an arbitration clause in any “contract evidencing a transaction involving [interstate] commerce” is presumptively valid. 9 U.S.C. § 2. The first question, therefore, was whether the FAA applied to Rainbow’s agreements. Surveying the Supreme Court’s Commerce Clause jurisprudence, the court concluded that “the FAA reaches the broadest amount of commercial activity allowed by the Constitution – which can include a local business buying supplies from a company procuring those supplies out of state.” Although Rainbow provided nursing home care only within Oklahoma, it necessarily relied on goods and services procured from out of state. Moreover, the court noted that Rainbow had many interstate contacts in the course of evaluating resident applications from out of state, e.g. receiving applications, medical records, and payments and performing assessments out of state.

 

The State had argued that application of the FAA to Rainbow’s agreements would exceed the limits of Congress’s commerce power under U.S. v. Lopez, 514 U.S. 549 (1995) (Gun-Free School Zones Act exceeds Commerce Clause) and U.S. v. Morrison, 529 U.S. 598 (2000) (civil remedy provision of Violence Against Women Act exceeds Commerce Clause), since Rainbow only provided care in-state. The court distinguished those cases on the ground that both involved regulation of “non-economic activity,” while nursing home care was clearly a commercial transaction.

 

                The court also distinguished a case in which the Oklahoma Supreme Court held that the state anti-arbitration provision for nursing homes was not preempted by the FAA. See Bruner v. Timberland Manor Ltd. Partnership, 155 P.3d 16 (Okla. 2006). The court read Bruner narrowly, noting that it concerned a contract that was explicitly governed by Oklahoma law, whereas Rainbow’s contracts are explicitly governed by the FAA. These differing choice-of-law clauses, the court concluded, made Bruner inapplicable. The court also indicated, however, that it disagreed with Bruner’s Commerce Clause analysis insofar as it “held that buying supplies from out of state vendors did not constitute interstate commerce.”

 

                The court rejected the State’s arguments that Congress, in enacting Medicaid, intended to exempt nursing homes from the FAA. The State first argued that the requirement that it create “health standards” for nursing homes, 42 U.S.C. § 1396a(9), must permit it to bar arbitration provisions, because they negatively impact patient care. The court responded that “this argument simply perpetuates the historical prejudice against arbitration agreements that Congress sought to eradicate when it enacted the FAA some 80 years ago.” The court likewise concluded that the prohibition on demanding “consideration” from Medicaid recipients, 42 U.S.C. § 1396r(c)(5)(A)(iii), was inapplicable here because Rainbow’s arbitration agreements were not mandatory; they allowed residents to revoke them within ten days of signing. Finally, the court concluded that Medicaid’s requirement that providers by licensed under state law, 42 C.F.R. § 483.75, did not bar preemption of state licensing requirements by the FAA. The court stated that nursing homes “must only comply with state requirements that are valid under federal law.”

 

                The court therefore held the state law preempted by the FAA, and permanently enjoined its enforcement against Rainbow.

 

                Although not mentioned by the district court, the high courts of other states have applied the FAA to nursing home admissions contracts. See Owens v. Coosa Valley Health Care, Inc., 890 So.2d 983 (Ala. 2004); Vicksburg Partners, L.P. v. Stephens, 911 So.2d 507 (Miss. 2005); In re Nexion Health at Humble, Inc., 173 S.W.3d 67 (Tex. 2005) (FAA preempted state law requiring signature of counsel on arbitration agreements in personal injury cases). The Oklahoma Supreme Court in Bruner court had disagreed with these courts’ conclusion that interstate Medicare payments provided a sufficient interstate nexus for application of the FAA.