Michael P. Mills, U.S. DISTRICT COURT NORTHERN DISTRICT OF MISSISSIPPI.
Plaintiffs
In July 2015, CMS proposed to revise the regulations governing participation of long term care ("LTC") facilities in Medicare and Medicaid. 80 Fed. Reg. 42,168, 42,169 (July 16, 2015). The changes were meant, among other things, "to improve the quality of life, care, and services in LTC facilities, optimize resident safety, [and] reflect current professional standards." Id. In the proposed rule, CMS expressed a number of concerns about the use of agreements requiring residents of LTC facilities to submit any disputes with the facility to binding arbitration. In light of these concerns, CMS proposed, and requested public comments on, several requirements regarding the execution and content of arbitration agreements, including a requirement that admission to a facility "not be contingent upon the resident or the [resident's] representative signing a binding arbitration agreement." Id. at 42,265. The agency also expressed concern that the requirements it contemplated might be insufficient and therefore solicited comments on whether arbitration agreements should be prohibited entirely. Id. at 42,211, 42,242.
CMS received more than 9,800 public comments on the comprehensive revision of the regulations, almost 1,000 of which related to arbitration. After considering those comments, as well as conducting research into scholarly articles and court decisions, CMS became "convinced that requiring residents to sign pre-dispute arbitration agreements is fundamentally unfair because, among other things, it is almost impossible for residents or their decision-makers to give fully informed and voluntary consent to arbitration before a dispute has arisen." Id. at 68,792.
Thus, the agency decided to promulgate a regulation — now codified at 42 C.F.R. § 483.70(n)(1) — providing that, effective November 28, 2016, LTC facilities that participate in Medicare or Medicaid "must not enter into a predispute agreement for binding arbitration with any resident or resident's representative nor require that a resident sign an arbitration agreement as a condition of admission to the LTC facility." 81 Fed. Reg. at 68,867. The agency characterized this approach as a middle ground, writing that "[w]hile some commenters have requested that we ban all arbitration, we have determined, at this
Concerned by the planned restrictions on nursing home arbitration, the plaintiffs in this case formally presented their objections to the Rule by letter to the Secretary of HHS and the Acting Administrator of CMS. Compl. Ex. 5. Cognizant of the fact that the Rule was nevertheless set to go into effect on November 28, plaintiffs filed, on October 17, 2016, the instant complaint in this court. The complaint, which is filed pursuant to the Administrative Procedure Act, 5 U.S.C. § 500 et seq. ("APA"), seeks the "entry of a declaratory judgment that the Arbitration Rule is unlawful and entry of orders preliminarily and permanently enjoining the Secretary and the Acting Administrator from enforcing the Arbitration Rule when it is scheduled to take effect on November 28, 2016."
On November 3, 2016, this court conducted a hearing on the motion for preliminary injunction, and, having considered the parties' arguments, is prepared to rule.
Prior to discussing the preliminary injunction factors, this court will first address an argument which permeates plaintiffs' entire motion: the notion that nursing home arbitration is a fast and efficient process. In so arguing, plaintiffs appear to focus selectively on the nursing home cases which actually go to arbitration, without considering nursing home arbitration litigation as a whole. Given that plaintiffs have emphasized the issue so much in their motion, this court considers it proper to discuss its experiences with the broader subject of nursing home arbitration litigation. As discussed below, this court will not rule based on these experiences but does consider the recent history of arbitration-related litigation in this court useful in providing a fuller picture than that set forth in plaintiffs' briefing.
It is submitted that there is one intractable problem affecting nursing home arbitration, and no other form of arbitration, namely mental competency. This court has previously discussed this issue at some length, most recently in Jackson v. GGNSC, ___ F.Supp.3d ___, 2016 WL 1104492 (N.D. Miss. 2016). This court would hasten to add that the mental competency problem is "nobody's fault;" it simply reflects the reality that, according to the National Center for Health Statistics, 50.4% of nursing home residents have been diagnosed with Alzheimer's or other dementias. See
In a 2015 letter brief to CMS, plaintiff AHCA addressed the mental competency concerns raised by the American Trial Lawyers Association (ATLA) as follows:
(AHCA letter at 9). This is, in this court's experience, a very selective description of the impact of the mental competency issue on nursing home arbitration litigation. While it is true that courts will invalidate arbitration agreements signed by residents they find to be incompetent, the AHCA letter omits the facts that, in this court's experience: 1) Many nursing homes will obtain signatures from residents in spite of grave doubts about their mental competency, or, more often, they will choose to have relatives of the residents sign the agreements, even when no power of attorney has been executed; 2) Many of these same nursing homes will later file motions to compel arbitration on the basis of those suspect arbitration agreements; and 3) The litigation of these arbitration actions can only be resolved in time-consuming litigation, which serves as a very significant incentive against filing suit in the first place. This court has repeatedly seen these facts play out in its courtroom, and it has seen these fact patterns repeatedly arise in published decisions from other Mississippi courts.
Arbitration-related issues such as mental competency sometimes involve disputes which can only be resolved by an actual trial. In Liberty Health & Rehab of Indianola, LLC v. Howarth, 11 F.Supp.3d 684, 687 (N.D. Miss. 2014), for example, this court conducted a bench trial to determine whether an elderly nursing home resident who signed a nursing home arbitration contract had the mental competency to do so. This court concluded that he did not, based largely upon a contemporaneous medical exam which revealed, among other things, that he was unable to even state what year it was at the time he signed the agreement. Needless to say, any plaintiff's attorney who fears that he might have to conduct a trial (and possible appeal) on arbitration issues before even starting discovery in the underlying lawsuit must give great pause before agreeing to accept the case. As this court sat on the bench in Howarth, attempting to decipher the mental state of a long-deceased individual, in the context of an arbitration action which was producing nothing but expense and delay, it could not help but harbor doubts about the efficiency and fairness of the nursing home arbitration system. Howarth was hardly unique in producing such doubts in this court's mind.
In Mississippi, nursing homes very frequently choose to deal with the mental competency issue by simply having relatives sign on behalf of a nursing home resident at the time of admission. Of course, this is perfectly appropriate if a power of attorney or conservatorship has been created, but that is generally not the case. In recent years, the Mississippi Supreme Court has repeatedly rejected, in unanimous decisions, arguments which nursing homes have made in favor of allowing relatives to sign arbitration agreements on behalf of mentally incompetent residents, absent a power of attorney. See, e.g. Tarvin v. CLC of Jackson, LLC, 193 So.3d 633 (Miss. 2016); Hattiesburg Health & Rehab Center, LLC v. Brown, 176 So.3d 17, 22-23 (Miss. 2015); GGNSC v. Johnson, 109 So.3d 562 (Miss. 2013); Adams Community Care Center, LLC v. Reed, 37 So.3d 1155 (Miss. 2010); Mississippi Care Center of Greenville, LLC v. Hinyub, 975 So.2d 211, 218 (Miss. 2008).
While the plaintiffs ultimately prevailed in these Mississippi Supreme Court cases, their victories may fairly be regarded as pyrrhic, considering the time and expense
For those nursing homes inclined to use it, this court is unaware of any form of litigation which provides as effective a tool for pure delay, while not advancing the underlying litigation, as nursing home arbitration litigation. This is partly due to the inherent difficulty in deciding nursing home arbitration-related issues, such as mental competency and agency. In resolving such issues, the most important witness, the resident, will generally have died by the time the lawsuit is filed, making it exceedingly difficult to determine, after the fact, the decedent's level of mental competency or whether he authorized a relative to sign on his behalf (particularly since the relevant agency standards are quite vague). Moreover, the surviving witnesses testifying in these matters usually find themselves aligned with either the plaintiff or the nursing home, and thus often have a motive for selective memories. Considered together, these factors frequently make it nearly impossible for courts to reliably resolve nursing home arbitration issues.
While this court has the above views regarding nursing home arbitration and is sympathetic to the issues presented, in chambers research suggests that the court's decision must be based on the administrative record, as opposed to prior experience. It is well established that, in an action under the APA, the court's analysis should be limited to the administrative record that was before the agency when it promulgated the challenged regulation. See Kappos v. Hyatt, 566 U.S. 431, 132 S.Ct. 1690, 1696, 182 L.Ed.2d 704 (2012) ("Under the APA, judicial review of an agency decision is typically limited to the administrative record.").
Ordinarily, one might expect that a court could take judicial notice of its own experiences, and of the Mississippi Supreme Court, as set forth in published opinions. This court initially intended to do so. This court's review of precedent suggests, however, that even the use of judicial notice is highly restricted in the context of APA actions. In Silver State Land v. Beaudreau, 59 F.Supp.3d 158 (D.D.C. 2014), for example, a federal district court in the District of Columbia refused to take judicial notice of a Nevada court order which was favorable to the plaintiff, writing that:
Silver State Land, 59 F.Supp.3d at 172. This court has reviewed potential exceptions to the general rule stated above, but
APA actions challenging federal agency rules may be filed in district courts throughout the United States, and it is clear that the results of those proceedings should not depend upon the experiences of whatever district judge happens to hear the case. Federal agencies would likely find it difficult to function effectively if such were the case. Federalism is bottomed on the rule of law, rather than the experiential-based notions of one judge. This court therefore will limit its analysis to the record before CMS when it acted upon the Rule.
The Fifth Circuit has stated that the four elements a plaintiff must establish to secure a preliminary injunction are:
Byrum v. Landreth, 566 F.3d 442, 445 (5th Cir. 2009). The court now turns to the first preliminary injunction factor, which asks whether plaintiffs have demonstrated a likelihood of succeeding on the merits in this case.
In determining which party is likely to prevail in this action, this court first addresses the issue of whether the Rule enacted by CMS in this case is barred by the FAA. Defendants argue that the Rule in this case does not bar arbitration agreements already in existence, but merely provides strong financial disincentives (by withholding federal funding) for nursing homes to enter into new arbitration contracts, thus allowing the Rule to withstand FAA scrutiny. This argument has two parts, and this court will first address defendants' assertion that the Rule merely provides "incentives" against nursing home arbitration contracts.
In addressing this issue, plaintiffs insist that "the rule does much more than provide an incentive to stop using arbitration agreements — it coerces providers into giving up their right to enter into arbitration agreements by threatening to withdraw Medicare and Medicaid funding entirely from any facility that continues to use arbitration." [Plaintiffs' brief at 10]. Plaintiffs further argue that "an agency may not use its spending power to engage in `economic dragooning' that leaves parties with `no real option but to acquiesce to the government's preferred policy.'" Id. citing Nat'l Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519, 132 S.Ct. 2566, 2605, 183 L.Ed.2d 450 (2012).
Defendants counter that Sebelius has a number of distinguishing facts, and they appear to be correct. Nevertheless, this court believes that plaintiffs' basic point still stands: that nursing homes are so dependent upon Medicare and Medicaid funding that the Rule in this case effectively amounts to a ban on pre-dispute nursing home arbitration contracts. This court believes that the Rule should, and likely will be, treated as what it effectively is (i.e. a de facto ban), in determining whether it conflicts with the FAA. Moreover, it should be noted that, even if the Rule in this case is interpreted as a mere "incentive" against arbitration, this does not necessarily mean that singling out a form of arbitration for such disincentives allows it
That brings the court to the second part of defendants' argument, namely that the fact that the Rule in this case does not negate existing arbitration contracts allows it to be harmonized with the FAA. Defendants might well have a point, if only the specific language of the FAA were considered. Section 2 of the FAA provides that:
9 U.S.C. § 2. On its face, this language merely states that arbitration contracts which are already in existence are valid and enforceable, save for grounds generally applicable to contracts as a whole. This court cannot exclude the possibility that the Fifth Circuit would interpret this language as permitting the prospective banning of nursing home arbitration contracts, but it seems unlikely that it will do so.
In so concluding, the court notes that plaintiffs are able to cite powerful persuasive authority in favor of their position on this issue. In Saturn Distribution Corp. v. Williams, 905 F.2d 719, 723 (4th Cir. 1990), for example, the Fourth Circuit rejected the argument "that the scope of FAA preemption is limited to laws covering existing arbitration agreements, and does not extend to laws that prohibit or regulate the formation of arbitration agreements." Striking down a Virginia law "that prohibit[ed] automobile manufacturers and dealers from entering into agreements that contain mandatory alternative dispute resolution provisions," the Saturn court explained that "[t]o restrict the FAA to existing agreements would be to allow states to `wholly eviscerate Congressional intent to place arbitration agreements upon the same footing as other contracts.'" Id. at 722, 723 (internal quotation marks omitted). In reaching its decision, the Fourth Circuit wrote that "[w]e have not discovered a single authority which squarely addresses the issue and adopts the Commissioner's narrow interpretation of the scope of FAA preemption," and noted that "[t]he First Circuit recently rejected the Commissioner's interpretation in Securities Indus. Ass'n v. Connolly, 883 F.2d 1114, 1123-24 (1st Cir. 1989)." Very recently, a federal district court in this circuit reached the same conclusion, writing that "in the absence of any congressional command" to the contrary, the FAA bars not only "a rule prohibiting enforcement of existing agreements," but also a rule "prohibiting new arbitration agreements." Mem. and Order at 28, Assoc. Builders & Contractors of Se. Tex. v. Rung, No. 16-cv-00425 (E.D. Tex. Oct. 24, 2016).
This authority aside, there is something fundamentally illogical about the notion that, while grave FAA concerns would be raised if CMS invalidated a single clause in a single arbitration contract, no such concerns are raised by a Rule which might conceivably prevent nursing homes from executing millions of arbitration contracts with their residents. This court frankly doubts that this will be held to be the law. In arguing otherwise, defendants note that the U.S. Supreme Court has written that the Federal Arbitration Act "does not confer a right to compel arbitration of any dispute at any time" and "does not require parties to arbitrate when they have not
Neither side cites a single decision which clearly establishes that it is likely to prevail in this case. However, it is apparent that plaintiffs have managed to bring forth a considerably greater amount of helpful authority. It is no doubt true that every decision relied upon by plaintiffs can be distinguished from this case in one or more important ways. Nevertheless, this court believes that the cumulative effect of these decisions makes it unlikely, particularly in light of the rather sparse administrative record, that CMS will be found to have offered sufficient justification for banning nursing home arbitration.
The decisions relied upon by plaintiffs present significant legal hurdles for defendants. While this court cannot say with any high degree of confidence that the Rule will fall victim to a particular legal maxim, the overall state of authority in this context makes it seem unlikely that defendants will prevail. One decision relied upon by plaintiffs is the U.S. Supreme Court's decision in AT&T Mobility v. Concepcion, 563 U.S. 333, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011). In Concepcion, the Supreme Court overturned a California Supreme Court decision which had held as unconscionable under California law a provision in an arbitration contract which required customers to submit disputes to individual arbitration rather than filing class action lawsuits. In so holding, the U.S. Supreme Court wrote that "[a]lthough § 2's saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives." Concepcion, 563 U.S. at 343, 131 S.Ct. 1740.
The Supreme Court concluded in Concepcion that, even though unconscionability was a generally applicable defense, the California Supreme Court's decision did, in fact, stand as such an obstacle to arbitration. Concepcion did not involve an action by a federal agency, and there are a number of other facts which distinguish it from this case in important ways. Nevertheless, the Supreme Court made a number of statements in Concepcion helpful to plaintiffs in this case. The Supreme Court stated, for example, that "our cases place it beyond dispute that the FAA was designed to promote arbitration." Concepcion, 563 U.S. at 345, 131 S.Ct. 1740. Moreover, the Supreme Court held the California rule invalid because it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Id. In this court's view, Concepcion's generalized statement that the FAA was "designed to promote arbitration" and its ruling on the basis of the "objectives of Congress" makes it seem likely that the Supreme Court would provide some significant degree of scrutiny to CMS' decision to ban a particular form of arbitration, even if that ban did not affect existing contracts.
[Defendants' brief at 20]. In their rebuttal brief, plaintiffs maintain that this argument is non-responsive, writing that "[t]he government does not even attempt to show that the Medicare and Medicaid Acts contain the `contrary congressional command' (CompuCredit) required for another federal statute to override the FAA — because there is no credible argument that the test is met here." [Rebuttal brief at 1-2]. This motion for preliminary injunction is not the proper occasion for this court to make a definitive choice between these competing arguments, but it does seem clear that CompuCredit presents further significant difficulties for defendants.
Another adverse decision confronting defendants in this case is the Fifth Circuit's decision in D.R. Horton, Inc. v. NLRB, 737 F.3d 344, 360-62 (5th Cir. 2013). In D.R. Horton, a divided Fifth Circuit panel concluded that the National Labor Relations Board had acted contrary to the FAA when it ruled that an arbitration provision in an employment contract interfered with employees' rights under the National Labor Relations Act ("NLRA"). Id. at 362. In so ruling, the Fifth Circuit first noted that:
D.R. Horton, 737 F.3d at 358. In concluding that the Board had failed to give adequate consideration to the FAA's pro-arbitration policy, the Fifth Circuit wrote that:
Id. at 362. In D.R. Horton, the NLRB refused to apply a provision in an existing arbitration agreement, and this is an important distinguishing factor. Nevertheless, D.R. Horton does appear to advance plaintiffs' arguments in this case, since it involved the application of the FAA's policy provisions to a federal agency. This court regards this fact as significant, since it suggests that the same pro-arbitration FAA policies which the Supreme Court has applied to private parties and states likewise apply to federal agencies.
While plaintiffs are thus able to rely upon a considerable amount of authority in this case, this court's conclusion that they are likely to prevail has as much to do with the state of the administrative record as it does with the bolus of authorities presented. In reading the record, this court does not get the impression that CMS appreciated the gravity of an attempt to ban an 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. In the court's view, accumulating and reading from public comments is a questionable method of proving anything, and yet most of CMS' rationalization for banning arbitration was based on such comments, often from interested parties. Even assuming this is how CMS ordinarily conducts its business, a rule banning nursing home arbitration is not ordinary CMS business (assuming it has the authority to take this action at all). In the court's view, it would have been far preferable for an agency with the resources of CMS to conduct its own independent and reliable investigation of issues relating to nursing home arbitration, in order to justify a step which, it must have known, would raise serious concerns in light of the FAA.
The state of the law in this context is less than clear, but it seems likely that the U.S. Supreme Court would require a federal agency applying a generalized statutory mandate to, at a minimum, demonstrate a strong basis in fact for concluding that a particular form of arbitration should be effectively banned. This court does not believe that CMS created such a strong factual record in enacting the Rule, even though, in the court's view, it potentially could have. In particular, this court believes that, if CMS had singled out the mental competency issue discussed in section I for special attention, then it might have used that as a possible justification for distinguishing nursing home arbitration contracts from other arbitration contracts, thus harmonizing the Rule with the FAA.
In light of the foregoing, it seems likely to this court that CMS will ultimately be held to have presented insufficient justification for banning nursing home arbitration in this case, even assuming (as is far from clear) that it might have demonstrated a right to take such a step under any scenario. This court therefore concludes that the first preliminary injunction factor favors plaintiffs on the FAA issue, and it now turns to the question of whether the Medicare or Medicaid Act gave CMS authority to enact the Rule.
This court now turns to the issue of CMS' statutory authority to enact the Rule. It should be emphasized that "public policy" per se plays no role in this court's analysis of this issue, except insofar as the same factors which relate to public policy may also relate to the statutory mandate given to CMS by Congress. Indeed, 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 could not be upheld. Thus, even if this court could consider its own views and experiences with regard to nursing home arbitration litigation in this case (which, once again, it cannot) then those views would not impact its analysis at this point. Indeed, it should be apparent that, if authority is created authorizing an agency to enact a positive rule, then that same authority may later be used to enact a harmful rule. While there is undoubtedly a great deal of Congressional gridlock, Congress' failure to enact positive legislation should not serve as an excuse for the executive branch to assume powers which are properly reserved for the legislative branch. It appears to this court that the Rule enacted by CMS in this case crosses the line.
Defendants argue that the Rule was validly enacted based partly upon Congress's authorization for the Secretary to impose "such other requirements relating to the health and safety [and the well-being] of residents ... as [she] may find necessary," 42 U.S.C. §§ 1395i-3(d)(4)(B), 1396r(d)(4)(B), and to establish "other right[s]" to "protect and promote the rights of each resident," in addition to those expressly set forth in the statutes and regulations. Id. §§ 1395i-3(c)(1)(A)(xi), 1396r(c)(1)(A)(xi).
In their brief, plaintiffs note that Congress specifically considered, yet declined to adopt, legislation which would have done essentially the same thing as the Rule in this case. Plaintiffs note, for example, that:
[Complaint at 8]. After citing other occasions where Congress considered banning nursing home arbitration provisions but declined to do so, plaintiffs argue that:
[Complaint at 9].
In their brief, defendants do provide a substantial response to this argument, writing that:
[Defs' brief at 21].
Defendants' arguments on this issue raise valid points, but this court does not believe that it is precluded from considering the legislative history cited by plaintiffs. Indeed, this court's reading of Pension Ben. Guar. Corp. and similar cases indicates that courts should exercise caution in inferring intent from Congressional inaction, since a failure to enact a law constitutes "a particularly dangerous ground on which to rest an interpretation of a prior statute." 496 U.S. at 650, 110 S.Ct. 2668. In light of this admonition, this court will not place excessive weight upon the fact that Congress repeatedly rejected bills similar in effect to the Rule, but it is not required to ignore this fact either. In this case, plaintiffs' legislative history argument strikes this court as being particularly strong, and this history certainly seems relevant in determining whether a federal agency which asserts extraordinarily broad powers, pursuant to a vague
Rendering the legislative history relied upon by plaintiffs even stronger is the fact that Congress has, in fact, expressly granted certain federal agencies the authority to regulate or prohibit the use of arbitration agreements, and it has done so with clear and direct language. For example, Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 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. § 5518(b); see also, e.g., 15 U.S.C. § 78o(o)(authorizing the Securities and Exchange Commission to, "by rule, * * * prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws"). Thus, Congress has made it clear that it knows how to grant a federal agency the authority to limit arbitration agreements, and it has done so with plain and unambiguous language. This causes this court to regard CMS' argument that certain vague language in its own enabling legislation has the same effect with considerable skepticism.
In the court's view, defendants actually buttress the relevance of the above legislative history through their statement that "[a]mong other comments, CMS received several items of correspondence from members of Congress and other public officials, including a letter from thirty-four Senators urging the agency to prohibit pre-dispute arbitration agreements." [Defendants' brief at 9]. In the court's view, the fact that thirty-four U.S. Senators wrote CMS urging that it adopt the Rule increases, not decreases, the separation of powers concerns in this context. A view expressed by thirty-four Senators is, obviously, a minority view which is incapable of becoming law. The fact that those Senators urged CMS to adopt the Rule raises concerns in this court's mind that they were attempting to accomplish by agency fiat what they could not accomplish through the legislative process, namely abolish nursing home arbitration. However much sympathy this court might have with the public policy considerations which motivated that desire, the basic concept of separation of powers is far more fundamental and important than the pending arbitration issue.
Returning to the issue of CMS's statutory authority, neither side cites precedent which establishes whether a generalized mandate such as that enjoyed by the agency to promote resident "health" and "safety" encompasses the power to ban nursing home arbitration agreements. It appears that this case may well make "new law" on this point. For its part, this court believes that an appellate court may be hesitant to make a categorical holding that CMS could never bar nursing home arbitration contracts, no matter what facts it could present in support of such a decision. Indeed, in the context of Constitutional rights, courts generally do not bar governmental entities outright from taking particular actions, but, rather, require that those actions be supported by sufficiently strong reasons. There are good reasons behind this approach, since it is difficult for courts to envision all facts that might come before a particular entity. This court suspects that appellate courts might take a similar approach in this context, and if so, it doubts that the administrative record in
In arguing that the record in this case does, in fact, support adoption of the Rule, defendants write that:
[Defendants' brief at 14]. CMS cited other similar views in its comments to the Rule, and its position is not without logical appeal. This court is unable to regard the administrative record in this case as a strong one, however, since CMS's comments consist, in large part, of its discussion of views sent in by interested parties, as supplemented by a handful of court decisions and law journal articles. CMS does not appear to have conducted its own independent study of whether arbitration agreements harm resident health. Such a study would clearly be helpful in this context.
Weaknesses in its methodology aside, this court does not believe that CMS focused nearly enough on the statutory mandate which it has to fulfill and which serves as its only arguable basis for banning nursing home arbitration. As quoted above, for example, CMS relied heavily upon the fact that the admissions process is "an extremely stressful time for the [prospective] resident and his or her family," but this court does not believe that it had much success in tying this stress, in a practical way, to negative health and safety effects impacting residents. For example, this court regards the notion that being asked to sign arbitration agreements during a stressful admissions process will cause residents to make incorrect health care decisions or that the agreements will reduce the flow of "information related to serious quality of care issues" as being quite speculative assertions which are unsupported by objective proof. It is also not clear to this court that, even if these effects were reliably proven, they would be considered sufficiently important to ban the practice of nursing home arbitration entirely.
Having said that, this court does agree with defendants that the practice of executing arbitration contracts during the nursing home admissions process raises valid concerns, on a public policy level, since many residents and their relatives are "at wit's end" and prepared to sign anything to gain admission. This court believes that Congress might very reasonably conclude that this fact, along with the inefficiencies in nursing home arbitration
This court believes that, in the next portion of their brief, defendants essentially put their cards on the table and accurately describe the power they are asking to be given in this case. Moving on from their argument that the Rule promotes resident "health" and "safety," defendants next argue that CMS' statutory authority to establish and protect resident "rights" encompasses the Rule in this case, writing that:
[Defendants' brief at 14-15]. Defendants further argue, with considerable candor, that in deciding whether the vague language quoted above grants CMS the authority to ban nursing home arbitration, the federal courts should defer to its conclusion that it does. Specifically, defendants write that:
[Defendants' brief at 16].
Of the stated bases for enacting the Rule in this case, defendants' citation of their authority to "protect and promote the rights of each resident" and to establish "other rights" arguably has the strongest basis in statutory language, since the Rule can, in fact, reasonably be regarded as establishing important rights on behalf of nursing home residents. It should also be clear, however, that seeking to ban nursing home arbitration agreements on the basis of extremely vague language such as this represents a breathtakingly broad assertion of authority by a federal agency. It strikes this court that most enactments can be said to establish "rights" of some sort, and if mandates of the sort quoted above were deemed sufficient to authorize them, then agency power would likely grow exponentially. In its amicus brief, the Chamber of Commerce cites a number of other federal agencies which have vague statutory mandates similar to the ones enjoyed by CMS, and it seems likely that upholding the Rule in this case would open the door to similarly broad assertions of agency power in other contexts. As if to confirm that they are, in fact, seeking such a broad grant of agency power, defendants expressly request that this court defer to the HHS Secretary's understanding of her authority. For its part, however, this court believes that this case raises serious separation of powers concerns and that the federal courts have a duty to ensure that defendants are not seeking to exercise power that is properly reserved for Congress.
In the court's view, CMS's statutory authority to establish "rights" on behalf of residents is simply too vague and tenuous a grant of authority to justify the Rule in this case. This court is of the view that CMS' only arguable basis for banning nursing home arbitration is if it can be demonstrated that this form of arbitration is so flawed that it negatively impacts residents' "health, safety and welfare." Moreover, this court believes that CMS would be required to actually prove that this negative impact is occurring, with proof considerably more reliable than comments received from the public. Empirical evidence, rather than anecdotes, may (or may not) establish that a greater good is served by arbitration in most cases. The record established by CMS in this case may well be sufficient for ordinary agency business, but the agency is seeking to engage in a rather unprecedented exercise of agency power in this case. This court believes that more is required to justify the Rule in this case.
While CMS may find it difficult to demonstrate a factual basis for its authority to ban nursing home arbitration, this court does not believe that this is an issue where the courts can allow an agency to take shortcuts. Indeed, if the statutory boundaries of agency authority are not rigorously enforced by the courts, then it seems likely that federal agency power will, inevitably, grow beyond that envisioned by the U.S. Constitution. It thus seems likely to this court that an appellate court will conclude that, when extraordinary authority is sought by an agency, it should provide an extraordinary (or at least a quite strong) showing of need for it to exercise such authority. This court does not see a strong showing of need in the administrative record in this case, and it therefore considers it unlikely that CMS will be held to have properly exercised its authority in deciding to ban nursing home arbitration in this case.
Did CMS act arbitrarily and capriciously in enacting the Rule in this case?
In considering this issue, this court will not, in effect, count the statutory authority issue twice, since this is the third alternative argument raised by plaintiffs in support of the Rule being set side. This court has already found that plaintiffs are likely to prevail on two of them. For the purposes of this issue, however, this court will assume that the Rule does not contravene the FAA and that it fell within CMS's statutory authority to promote resident health and welfare. With these assumptions, this court does not believe that CMS's action can validly be characterized as arbitrary or capricious.
In so concluding, the court notes that, while it does not view the administrative record in this case as being particularly strong, it does regard it as being more than sufficient to survive scrutiny under the highly deferential "arbitrary and capricious" standard. In arguing otherwise, plaintiffs note that CMS changed its prior stated position on this issue, which was to not oppose nursing home arbitration contracts. While a relevant factor, this court regards this as insufficient to demonstrate that the agency acted arbitrarily or capriciously in changing its mind in this regard. This court finds the other arguments raised in plaintiffs' brief on this issue to be similarly unavailing, and it therefore concludes that, in the unlikely event that this issue does become relevant in this case, defendants will likely succeed on it.
Have plaintiffs demonstrated a likelihood that they will succeed on their argument that the Rule violates the Regulatory Flexibility Act, 5 U.S.C. § 601 et seq? The RFA requires agency rules to contain a "regulatory flexibility analysis" — "a description of the steps the agency has taken to minimize the significant economic impact on small entities consistent with the stated objectives of applicable statutes, including a statement of the factual, policy, and legal reasons for selecting the alternative adopted in the final rule and why each one of the other significant alternatives to the rule considered by the agency which affect the impact on small entities was rejected." 5 U.S.C. § 604(a)(6). The agency may omit this analysis if "the head of the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities." Id. § 605(b).
In enacting the Rule in this case, the Secretary did, in fact, certify that no regulatory flexibility analysis was needed. 81 Fed. Reg. at 68,846. CMS and HHS asserted that they had calculated the costs of complying with the entire regulation containing the Arbitration Rule and determined that the average impact would amount to "less than 1 percent" of a nursing home's revenue. Id. In their brief, plaintiffs argue that
[Plaintiffs' brief at 19].
This court acknowledges the coherence of these arguments; however, plaintiffs have failed to demonstrate a likelihood of prevailing on this issue. In so concluding, this court notes that, as defendants argue in their brief, the RFA "is a procedural rather than substantive agency mandate," prescribing no specific outcome and imposing no requirement that an agency adopt substantive measures to reduce the impact of regulations on small business. See Ass'n of Am. Physicians & Surgeons, Inc. v. HHS, 224 F.Supp.2d 1115, 1128 (S.D. Tex. 2002). A court reviews agency compliance with the RFA "only to determine whether an agency has made a reasonable, good-faith effort to carry out [the statute's] mandate." Alenco Commc'ns, Inc. v. FCC, 201 F.3d 608, 625 (5th Cir. 2000) (internal quotation marks omitted). The court's review of an agency's certification under 5 U.S.C. § 604(b) is "highly deferential, `particularly ... with regard to an agency's predictive judgments about the likely economic effects of a rule.'" Helicopter Ass'n Int'l, Inc. v. FAA, 722 F.3d 430, 432-33 (D.C. Cir. 2013) (quoting Nat'l Tel. Coop. Ass'n v. FCC, 563 F.3d 536, 541 (D.C. Cir. 2009)).
Based on this authority, defendants argue in their brief that:
[Defendants' brief at 25-26 (citations omitted)].
For the purposes of the preliminary injunction motion, this court believes that defendants' brief, which is supported by far more authority than plaintiffs' brief, has the better of the arguments on this issue. This court acknowledges that it has no prior experience in interpreting the RFA, and it does not exclude the possibility that its initial conclusion in this regard will later change. In ruling upon the preliminary injunction motion, however, this court is necessarily forced to make a quick evaluation of these issues, and, having done so, finds that plaintiffs have failed to demonstrate a likelihood of succeeding on
This court now turns to the second preliminary injunction factor, namely that of irreparable harm. The U.S. Supreme Court has stated that "[o]ur frequently reiterated standard requires plaintiffs seeking preliminary relief to demonstrate that irreparable injury is likely in the absence of an injunction." Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 22, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008) (emphasis in original). The Fifth Circuit has similarly written that "[t]here must be a likelihood that irreparable harm will occur. Speculative injury is not sufficient...." Morrell v. City of Shreveport, 536 Fed. Appx. 433, 435 (5th Cir. 2013)(emphasis in original).
In this case, this court considers it virtually certain that plaintiffs will, in fact, suffer at least some irreparable harm if the Rule goes into effect on November 28 and is later held unlawful. Indeed, it is difficult to imagine that a Rule requiring nursing homes across the country to change their business practices in important ways would not produce at least some harmful effects which are incapable of being remedied after the fact.
In arguing that irreparable harm has not been demonstrated, defendants contend that some of the injuries cited by plaintiffs in their brief are speculative and unlikely to occur. While this may be true, it seems virtually certain that a significant amount of irreparable harm will, in fact, occur. On the most obvious level, nursing homes will lose signatures on arbitration contracts which they will likely never regain. Moreover, this court agrees with plaintiffs that "provider Plaintiffs and other SNFs/NFs would incur immediate, substantial administrative expenses. Admission agreements would need to be revised, and staff would require retraining on admissions and dispute-resolution procedures." While one can quibble with some of the expenses and harms cited by plaintiffs in their brief, this court believes that this factor clearly favors them.
The court now turns to the third preliminary injunction factor, which asks whether the threatened injury if the injunction is denied outweighs any harm that will result if the injunction is granted. Based upon the administrative record in this case, this court finds that the third preliminary injunction factor supports plaintiffs' position. In their brief, plaintiffs offer the following arguments on this issue:
[Plaintiffs' brief at 22-23]. This court agrees.
It should be emphasized that, in discussing the third and (very similar) fourth preliminary injunction factors, this court is balancing harms and considering the public interest in the context of the preliminary injunction motion. In the preliminary injunction context, the balance of the harms and the public interest are determined in terms of whether it would be better to give the courts an opportunity to consider the merits of a Rule which sharply alters the pre-existing status quo, before it goes into effect. In this vein, this court believes that CMS' position on the third and fourth preliminary injunction factors is significantly weakened by the fact that, until recently, it declined to oppose nursing home arbitration as a matter of agency policy. As stated previously, this court does not believe that the fact that CMS changed its position in this regard renders the Rule arbitrary and capricious. This court does believe, however, that CMS' change in position weakens its argument that it has now realized that nursing home arbitration is harmful and that its new Rule must go into effect right now.
In arguing to the contrary, defendants write that:
[Defendants' brief at 29-30].
It should be clear from section I that this court agrees with defendants on many of the policy issues relating to nursing home arbitration, even though it believes that CMS should have taken a much more reliable and thorough approach to documenting its concerns in this area, particularly where relevant to establishing its authority to correct them. In deciding these preliminary injunction issues, however, this court is dealing with a Rule which
In the court's view, CMS might easily have quoted very similar descriptions of deficiencies in nursing home arbitration years ago when it accepted the practice. And yet it fails to offer an adequate explanation as to why the Rule addressing its newfound concerns on this issue must go into effect immediately. This court therefore does not regard defendants' arguments quoted above (which represent their entire arguments on this issue) as providing sufficient reason for preventing the courts from making a careful evaluation of the Rule before it goes into effect. This court believes that defendants are in a particularly poor position to expect the Rule in this case to go into effect immediately, considering that, in using vague language in its enabling legislation to ban arbitration contracts, CMS is attempting to do something quite unprecedented. In the court's view, a federal agency which seeks to use its authority in an unprecedented manner to enact a Rule which raises serious concerns under both the FAA and under general separation of powers principles should reasonably expect the courts to carefully examine it before it goes into effect.
Also relevant to both the third and fourth factors are the facts that, as noted previously, Congress repeatedly failed to enact proposed legislation similar in effect to the Rule, and thirty-four U.S. Senators wrote to CMS asking that it take the action it did. These facts, along with the sheer breadth of the Rule, raise concerns in this court's mind that this case involves an attempted expansion of federal agency power in such a manner as to raise separation of powers concerns. This court frankly believes that these issues are even more important than the arbitration issues, and the potential that the Rule might serve to violate the basic separation of powers principles in the U.S. Constitution seems a quite relevant factor in deciding whether to allow the federal courts to resolve any concerns in this regard before allowing it to go into effect. This court therefore concludes that the balance of harms supports granting the preliminary injunction.
In the court's view, the inquiry under the fourth preliminary injunction factor is very similar to that applicable to the third in this case, and it believes that a similar analysis as that stated above applies here. With regard to this issue, plaintiffs argue in their brief as follows:
[Defendants' brief at 23]. For its part, this court would not characterize defendants' case on the fourth preliminary injunction factor as "non-existent," but it does agree with plaintiffs that defendants have failed to sufficiently make a case that the public
Particularly in light of these considerations, this court does not see evidence in the administrative record which would support a finding favorable to defendants on this factor.
In arguing that the public interest would be served by the grant of a preliminary injunction, the entirety of defendants' arguments is as follows:
[Defendants' brief at 30-31].
This court frankly regards defendants' arguments on this issue as less persuasive than those set forth in their discussion of the third preliminary injunction factor, and it finds them similarly unavailing. Once again, the Rule in this case changes a practice which CMS accepted for many years, and this court does not believe that its above-stated concerns with confidentiality clauses and generalized citations to agency discretion constitute sufficient reason to prevent the courts from making a careful evaluation of the Rule before it goes into effect. This court therefore concludes that the fourth preliminary injunction factor, like the other three, favors plaintiffs.
This case places this court in the undesirable position of preliminarily enjoining a Rule which it believes to be based upon sound public policy. As discussed in section I of this order, this court believes that nursing home arbitration litigation suffers from fundamental defects originating in the mental competency issue, rendering it an inefficient and wasteful form of litigation. This court believes that Congress might reasonably consider this inefficiency, as well as the extreme stress many nursing home residents and their families are under during the admissions process, as sufficient reason to decide that arbitration and the nursing home admissions process do not belong together. Nevertheless, Congress did not enact the Rule in this case; a federal agency did, and therein lies the rub. As sympathetic as this court may be to the public policy considerations which motivated the Rule, it is unwilling to play a role in countenancing the incremental "creep" of federal agency authority beyond that envisioned by the U.S. Constitution. While this court does not exclude the possibility that CMS could, in the future, make a sufficiently strong showing that it had the authority to enact the Rule it did, it seems unlikely, based on the administrative record in this case, that it will be held to have done so here. Moreover, given that the enactment of the Rule raises serious legal questions extending well beyond the arbitration issue, this court concludes that the balance of harms and the public interest support holding it in abeyance until the doubts regarding its legality can be definitively resolved by the courts.
It is therefore ordered that the motion for preliminary injunction is granted.
So ordered, this the 7th day of November, 2016.
