Defuse disputes with arbitration clauses

[Editor’s note: On Sept. 28, 2016, the Centers for Medicare & Medicaid Services released its final rule, “Medicare and Medicaid Programs; Reform of Requirements for Long-Term Care Facilities,” which contains new regulations concerning arbitration agreements that could affect the information in this article.]

Following a debilitating stroke, a man receives a feeding tube through the abdominal wall into his stomach. Two days later, the man is admitted to a skilled care facility (SNF), and, in a confused state, he pulls out the tube. The attending physician at the SNF directs the charge nurse to cover the opening with a bandage until the resident can be examined the following day. But, the feeding tube is reinserted and is placed in his abdominal cavity instead of his stomach. No one claimed responsibility for reinsertion.

The next day, the resident suffers severe abdominal pain and is transported to a hospital. He dies an hour later. His family sues, which requires that the facts of the case and its resolution be a matter of public record.

Notably, if the facility’s admission contract had contained an arbitration clause, a lawsuit may have been avoided and the facts and case resolution could have been kept out of the public eye by processing the case through a confidential arbitration. The Federal Arbitration Act states that arbitration clauses are valid and irrevocable, except upon such grounds as exist for revocation of any contract (9 U.S.C. §2). That exception, however, means it is imperative to draft arbitration clauses in a way that will enable them to withstand challenges to their contractual validity.

Alternative dispute resolution in long-term care cases is gaining ground because of the current litigious climate and the rising demographics. In 2013, according to the latest records from the Department of Health and Human Services, senior citizens made up 14.1 percent of the U.S. population, up 24.7 percent since a decade earlier. By 2018, the population of people older than 65 years of age could exceed the population below age five for the first time in the history of census data collection. This upward trend means that the frequency of legal flare-ups in long-term care facilities, like the above scenario, can be expected to increase.

Avoiding contract-based challenges

The question of whether an arbitration clause violates principles of contract law is generally one for the courts to decide, since a clause that is illegal at the time it is drafted is totally unenforceable, including the question of whether the case can be arbitrated.

There is no “standard” arbitration clause, since each state has its own laws about conditions that may make contracts unenforceable, including unfair terms, unequal bargaining positions and one-sided arbitration terms. Facilities may try to shield themselves against these kinds of claims by including an “opt-out provision”—exercisable at the time that the contract is signed—which permits parties to reject the arbitration clause with a mark, like an “X” across the clause.

But anyone challenging referral to arbitration may still claim that the arbitration clause was hidden in the contract, and that as a result, the resident did not know that the option for a jury trial was being waived. Most clauses try to anticipate this by specifically stating that the right to a trial by jury is being waived. The best practice is clearly to highlight the arbitration clauses by presenting them in boldfaced and upper-case type, and by providing instructions to read the clauses carefully before signing.

The breadth of arbitration clauses may also be used to exclude controversies. If a specific controversy is not identified as a covered issue in the arbitration clause, it may be excluded from arbitration. So, drafting an arbitration clause to cover all disputes requires the use of broad language to ensure the dispute is indeed arbitrable. A broad definition of the realm of arbitrable disputes may include language such as “any and all controversy(ies) or claim(s)” and “all claims arising out of or related to the Resident’s stay, care, or treatment.” The goal is to ensure that the arbitration clause will be applied to all disputes that may arise.

Challenges based on authority to sign

Challenges to the arbitration clause may also revolve around the question of who actually signed the agreement and whether the signer had the capacity/authority to waive the resident’s right to a jury trial. When a resident signs the agreement, a challenge may be made about the resident’s competency and lucidity at the time the admission paperwork was completed. The facility will be required to prove competency using the circumstances surrounding the signing of the admission agreement. Proof of competency may include evidence that the resident made multiple rational decisions while completing the admission paperwork.

If an incompetent resident signs the agreement, the facility may face an uphill battle to enforce the arbitration clause. Although arguments can be made that performance under the contract and payment of the monthly fee requires enforcement of the entire agreement (including the arbitration clause), plaintiffs can claim that the performance was by the responsible party, and not by the incompetent resident who signed the agreement. Consequently, if a resident is identified as incompetent, the facility may want to consider who should sign the agreement.

When a person claiming to be the resident’s responsible party signs the agreement, it is important to verify their authority. If the signer does not have the proper authority, many courts will refuse to uphold the arbitration clause. Even if the signer does have authority, courts may consider how the authorized person signed the admission agreement. Some state courts have held that failure to sign on the appropriate responsible party line prohibits enforcement because the person did not actually sign as the responsible party. So care should be taken to ensure that the agreement is executed with precision.

The best practice is to obtain a copy of the authority-granting document to verify authority to sign contracts on behalf of the resident. Use of properly executed arbitration clauses may make a difference in reducing the value of a case and may promote early resolution without incurring the significant costs of litigation. Arbitration clauses may also keep cases away from a jury trial, where plaintiff’s counsel tend to use biases and emotions to drive up verdicts. But even when good arbitration clauses are in place, a facility may be discouraged from using them because management companies and insurance claims managers are not familiar with the process.

Because plaintiffs want to exploit jury biases against facilities, they do not usually request enforcement of arbitration clauses, and the facility must choose whether to enforce arbitration. It is important to note that if a facility does not assert its rights initially, there will likely be a “point of no return” in the litigation, after which the facility will be deemed to have waived the right to enforce arbitration. So while it is important to carefully design and execute arbitration agreements, it’s also vital to exercise them in a timely manner.

Nancy Reynolds, JD, is a shareholder in LeClairRyan’s Roanoke, Virginia office and is a co-leader for the national law firm’s long-term care industry team. She can be reached at nancy.reynolds@leclairryan.com.