My Bar Access Spotlight: DR

Thursday, Dec. 8, 2016

Federal District Court Enjoins CMS Ban on Pre-Dispute Arbitration Agreements in Long Term Care Resident Agreements

By Conna Weiner

On September 28, 2016, the Center for Medicaid and Medicare Services (CMS) promulgated a lengthy final rule that, among many other things, banned pre-dispute binding arbitration agreements between nursing facilities in the Medicare or Medicaid programs and nursing home residents commencing November 28, 2016 (the "Rule"). The American Health Care Association, a long term care provider industry association, along with three of its members, quickly filed suit in federal district court in Mississippi seeking to preliminarily enjoin enforcement of the Rule in October. On November 7, a federal District Court judge issued the requested preliminary injunction. Am. Health Care Ass'n v. Burwell, No. 3:16-CV-00233 (N.D. Miss. Nov. 7, 2016).

On November 17, 2016, the Massachusetts Bar Association's Dispute Resolution and Health Law Sections jointly sponsored a comprehensive discussion of the background of the Rule and the court decision. I co-chaired the panel with Health Law Section member Patrick Sheehan of Whatley Kallas and we were ably assisted by panelist Melissa (Lisa) Thompson of Robinson & Cole. The discussion is now available by webcast and free to MBA members; please click here for further information.

This article very briefly summarizes some of the procedural issues resulting from Judge Mills' decision as well as highlights of the 40-odd page decision itself.

Procedural Status

CMS has 60 days from the order, which brings us into early January, to decide whether or not to seek an interlocutory appeal of the ban. They also might choose to seek to stay the preliminary injunction pending an expedited interlocutory appeal. The parties recently filed a joint motion seeking to cancel the scheduled federal Rule 16 case management conference on the grounds that cases of this type were exempt from this requirement; a magistrate judge denied the request on November 30.

For the time being, the current status quo is in place and the pre-dispute arbitration agreement ban is suspended. Nursing homes and their attorneys carefully should consider how to proceed in connection with resident contracts that will go into effect after the Rule's original effective date of November 28, 2016, bearing in mind that the ban could be reinstated; what would happen to the effective date upon reinstatement is not certain.

The Decision

Before discussing the applicable preliminary injunction standards and their application to the Rule, Judge Mills took the unusual step of describing in some detail some of his own experiences with nursing home arbitration litigation. In a section called "General Observations and Experiences with Nursing Home Arbitration," Judge Mills sought to address an argument that he said "permeates the plaintiffs' entire motion: the notion that nursing home arbitration is a fast and efficient process." Judge Mills expressed his concerns that, in making efficiency arguments, the industry association and other plaintiffs focused on the cases that actually went to arbitration, without considering nursing home arbitration litigation - including motions to compel - as a whole. Judge Mills highlighted his view that "one intractable problem affecting nursing home arbitration and no other form of arbitration is mental competency." Among other things, Judge Mills went on to observe that, in his experience: (a) nursing homes will obtain signatures from residents in spite of grave doubts about their mental competency or more often will choose to have relatives sign even when no power of attorney has been executed; (b) they would then file motions to compel arbitration based upon these "suspect agreements;" (c) these motions resulted in time-consuming litigation which significantly delayed resolution and ultimately served as a very significant incentive against filing suit in the first place.

Despite these concerns, Judge Mills, based upon his assessment of his authority in the context of the matter at hand, concluded he was limited to considering the adequacy of the administrative record before CMS in judging the Rule under the Administrative Procedure Act.

Likelihood of success on the merits

(a) The Rule is Likely Pre-empted by the Federal Arbitration Act.

Judge Mills found that the Rule likely was pre-empted by the Federal Arbitration Act ("FAA"), going through several analytical steps to reach this conclusion.

CMS contended that the Rule did not outright ban existing arbitration agreements, but merely provided strong financial disincentives to use such clauses since compliance with the Rule only would be a requirement for long term care entities wanting Medicare and Medicaid funding. Judge Mills did not accept this reasoning, finding that since nursing homes were so dependent on federal funds, a ban on the practice in this context effectively amounted to a complete ban on pre-dispute nursing home arbitration agreements.

The Judge also found that the FAA does not just protect arbitration agreements that are in existence as valid and enforceable, but prohibits the prospective banning of arbitration clauses unless appropriately overridden.

He then looked to recent Supreme Court precedent strongly supporting the enforceability of arbitration agreements, including AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) and CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012). A particularly important principal set forth in CompuCredit was that the FAA mandate that arbitration agreements be enforced according to their terms can be displaced only by a "contrary congressional command" in another statute. In this connection, Judge Mills also looked to his home circuit's decision in D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Circuit 2013) which concluded that the National Labor Relations Board had acted contrary to the FAA when it ruled that class action waivers in an employment contract should be banned because they interfered with an employee's right to engage in concerted activities under Section 7 of the NLRB. There was no clear "congressional command," the Fifth Circuit found, overriding the FAA's pro-arbitration policy in that context.

Finally, Judge Mills noted that the defendants' reliance on disparities in bargaining power and procedural unfairness arguments was difficult to accept in light of the Supreme Court's opinion in Am. Express Co. v. Italian Colors, 133 S. Ct. 2304 (2013).

The Judge then went on to castigate CMS for its sparse administrative record. In reading the record:

the Court does not get the impression that CMS appreciated the gravity of an attempt to ban entire form of arbitration, nor does it appear that the agency made the requisite efforts to actually prove that nursing home arbitration had the sort of negative effects which it quoted various commenters as saying it had.

Judge Mills hypothesized that if CMS had singled out mental competency as an issue and proven it was a problem, it might have had a better chance of harmonizing the Rule with FAA.

(b) CMS does not have the authority to issue a ban on pre-dispute binding arbitration agreements.

Judge Mills also found that CMS did not have the requisite regulatory authority to issue a pre-dispute arbitration agreement ban in the nursing home context, noting that: "A federal agency might wish to enact the most beneficial rule imaginable, and yet, if it lacked the authority to do so, then the rule would not be upheld," and later that:

While this court is sympathetic to the public policy considerations behind the rule, it places even greater importance upon the basic separation of powers principles set forth in the US Constitution.

Judge Mills was not moved by CMS's authority to issue regulations protecting the health and safety and well being of residents or protect and promote the rights of each resident. These powers were "broad but vague." Reliance on the "rights" language was in particular, he found, "a strikingly broad assertion of authority by a federal agency." He noted that Congress has failed to adopt a predispute arbitration agreement ban in the nursing home context despite many attempts to made to pass such legislation.

By way of contrast with the broad provisions cited by CMS, Judge Mills noted that in some cases Congress had expressly granted certain federal agencies the authority to regulate or prohibit the use of arbitration agreements and has done so with clear and direct language. He cited as an example Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provides that, if certain conditions are met, the Consumer Financial Protection Bureau "may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties.[.] 12 U.S.C. Sec. 5518(b). The CFPB has issued for comment a rule banning class actions waivers in consumer finance contracts.

In sum, Judge Mills found that the only arguable basis for authority to issue the ban was for CMS to demonstrate that this form of arbitration was so flawed that it negatively impacts health, safety and welfare - something it had not in any way attempted to prove with empirical evidence as opposed to the many comments the agency had received from the public.

Irreparable injury.

Judge Mills found that the nursing homes would indeed suffer irreparable injury if injunctive relief was not granted, observing that nursing homes would lose signatures on arbitration agreements from residents that could likely never be regained and incur immediate, substantial administrative expenses to revise admissions agreements and re-train staff on admissions and dispute resolution processed.

The threatened injury if the PI was denied outweighs any harm that would result if it was granted.

Judge Mills also made short work of the defendants' arguments here, observing that CMS was in a "poor position" to argue that the Rule had to go into effect immediately given its long history of permitting the use of arbitration agreements.

The grant of the PI will not harm the public interest.

Judge Mills found that the public interest would not be disserved by essentially preserving the long-standing status quo in connection with predispute arbitration agreements.

Many important constitutional, statutory and general legal principles are at stake in this matter that will doubtless influence how other regulatory attempts to ban pre-dispute arbitration agreements or class action waivers will be assessed. Stay tuned!

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Ms. Weiner,, is an independent mediator and arbitrator focusing on complex commercial and employment disputes, with a special expertise in the technology, life sciences and healthcare arenas. She serves on many DR panels, including the American Arbitration Association, the International Institute for Conflict Prevention and Resolution (CPR), the World Intellectual Property Organization, the American Health Lawyers Association, the Boston Law Collaborative and MWI. She is also a Fellow in the Chartered Institute of Arbitrators and a member of the MBA Dispute Resolution Section Council.