United States: Supreme Court Decision Alert - May 15, 2017

Today, the Supreme Court issued two decisions, described below, of interest to the business community.


Federal Arbitration Act—Preemption of State Law

Kindred Nursing Centers L.P. v. Clark, No. 16-32

The Federal Arbitration Act (FAA) requires courts to place arbitration provisions on an equal footing with other contract terms.  In the decision under review, the Kentucky Supreme Court had refused to enforce two arbitration provisions executed by individuals holding powers of attorney, because the power-of-attorney documents did not specifically mention arbitration or the ability to waive the principals' right to trial by jury. The Kentucky court reached that conclusion even though Kentucky law permitted an attorney-in-fact to enter into other types of contracts without a specific mention of those contracts in the power of attorney documents.

Today, the Supreme Court held that Kentucky's rule violates the FAA by singling out arbitration agreements for disfavored treatment.  In an opinion for seven Justices authored by Justice Kagan, the Court held that the FAA not only preempts any state-law rule that discriminates against arbitration on its face, but also "any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements."   The Kentucky rule failed that test: while phrased in terms of the right to a jury trial, "the waiver of the right to go to court and receive a jury trial" is a "primary characteristic of an arbitration agreement."

The Court also underscored that the FAA applies to rules governing contract formation, not just rules governing contract enforcement.  The Court explained that the FAA "cares not only about the 'enforce[ment]' of arbitration agreements, but also about their initial 'valid[ity]'—that is, about what it takes to enter into them."  And the Court pointed out that a contrary interpretation would make it "trivially easy" for courts hostile to arbitration to undermine the FAA—"indeed, to wholly defeat it."

Justice Thomas dissented, adhering to his view that the FAA does not apply in state courts.  Justice Gorsuch did not participate in the case.

Mayer Brown represented the petitioner in the Supreme Court.


Fair Debt Collection Practices Act—Time-Barred Debts

The Fair Debt Collection Practices Act (FDCPA) prohibits a debt collector from using a "false, deceptive, or misleading representation or means in connection with the collection of any debt" and prohibits a debt collector from using "unfair or unconscionable means to collect or attempt to collect any debt." 15 U.S.C. §§ 1692e, 1692f.  Today, the Supreme Court issued a 5-3 ruling that a debt collector does not violate the FDCPA by knowingly attempting to collect a debt in bankruptcy proceedings after the statute of limitations for collecting that debt has expired.

In the opinion for the Court, Justice Breyer looked to state law to determine whether the creditor had a right to payment.  Under Alabama law, which applied to the case before the Court, a creditor has the right to payment of a debt even after the limitations period has expired.  Accordingly, a creditor may legitimately claim the existence of a debt even if the debt is no longer enforceable in a collection action.  Likewise, the streamlined rules of bankruptcy proceedings mean that it is not obviously "unfair" for a creditor to inject an additional claim into the proceedings, even if it would be unfair for a creditor to file a standalone civil action to collect a time-barred debt.

Justice Sotomayor dissented, in an opinion joined by Justices Ginsburg and Kagan.  In her view, when debt collectors file stale claims in bankruptcy proceedings, they are seeking to profit on the inadvertent inattention of others, who need only to raise the limitations period to effect the disallowance of the claims.  Such conduct, in her opinion, is not good-faith conduct, and qualifies as "unfair" and "unconscionable" under the FDCPA.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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