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Federal Arbitration Act Preempts Texas Health Law Invalidating Arbitration Clause


A woman was a patient and resident under the care and supervision of a nursing home at the time of her death. The nursing home resident’s wrongful death and survival beneficiaries filed suit against the nursing home for medical negligence and wrongful death.

 

The nursing home filed a motion to compel arbitration based on an arbitration clause contained in an agreement that the woman signed prior to her admission into the nursing home. The pre-admission agreement's arbitration clause did not comply with Tex. Civ. Prac. & Rem. Code Ann. § 74.451, which required that an agreement to arbitrate a health care liability claim must contain a written notice in bold-type, ten-point font that conspicuously warns the patient of several important rights. The nursing home asserted that federal law should determine the enforceability of the arbitration clause because the underlying patient-provider transaction involved interstate commerce, which made the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1–16, applicable to the pre-admission agreement. The nursing home argued that the FAA preempted section 74.451 because the two laws directly conflicted, and the FAA therefore prevented the arbitration clause from being invalidated.

 

The nursing home resident’s wrongful death and survival beneficiaries argued that section 74.451 was part of a state law enacted for the purpose of regulating the business of insurance and fell within the protection of the McCarran-Ferguson Act (MFA), 15 U.S.C.A. §§ 1011–1015. The beneficiaries asserted that the MFA provided an exemption for section 74.451 from the FAA preemption because Congress created an exemption from preemption for any federal law that could be “construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance.” 15 U.S.C.A. § 1012(b).

 

The 407th Judicial District Court, Bexar County, found that the MFA applied, triggering the exemption under which the FAA would not preempt section 74.451. The trial court denied the nursing home's motion to compel arbitration because the arbitration clause did not comply with section 74.451 and was therefore invalid. The San Antonio Court of Appeals affirmed the trial court’s denial of the nursing home’s motion to compel arbitration. The appellate court noted that section 74.451 was part of the Texas Medical Liability Act (TMLA) in finding that section 74.451 was part of a law enacted for the purpose of protecting and managing the performance of insurance policies in the area of medical malpractice and health care liability, and therefore fell within the MFA's protection.

 

The Supreme Court of Texas reversed. The court held that the FAA preempted the TMLA provision governing requirements for agreements to arbitrate health care liability claims unless the MFA applied to provide an exemption from preemption; in determining whether section 74.451 was a law enacted for the purpose of regulating the business of insurance, the court construed the statute in the context of the TMLA as a whole; the TMLA, as whole, had only a tenuous impact on the business of insurance, for the purposes of the MFA's exemption from federal preemption; and section 74.451 did not come within the MFA’s exemption from preemption for state laws enacted for the purpose of regulating the business of insurance.

 

The FAA preempted the TMLA provision governing requirements for agreements to arbitrate health care liability claims unless the MFA applied to provide an exemption from preemption. The FAA applied to arbitration clauses in contracts that affect interstate commerce. Generally, evidence of Medicare payments made to a health care provider on a patient's behalf is sufficient to establish interstate commerce and the FAA's application to a case. The court found that the nursing home received Medicare payments on behalf of the deceased patient. The court concluded that the FAA applied to this case unless the MFA applied. The court reasoned that section 74.451, which required that agreements to arbitrate health care liability claims contain written notice in bold-type, ten-point font that conspicuously warned patient of important rights, directly conflicted with the FAA, because the FAA did not contain this requirement. Therefore, the FAA preempted section 74.451 and the parties would be compelled to arbitrate—despite the arbitration clause's deficiencies under section 74.451—unless the MFA exempted section 74.451 from FAA preemption.

 

In determining whether section 74.451 was enacted for the purpose of regulating the business of insurance, the court construed the statute in the context of the TMLA as a whole. To determine whether the clause of the MFA relating to laws “enacted by any State for the purpose of regulating the business of insurance” applied to section 74.451 to provide an exemption from FAA preemption, the court applied a three part test. The MFA applied if (1) the federal statute did not specifically relate to the business of insurance; (2) the federal statute operated to invalidate, impair, or supersede the state law; and (3) the state law was enacted for the purpose of regulating the business of insurance. The court held that the FAA did not specifically relate to the business of insurance. The court also held that the FAA operated to invalidate, impair, or supersede section 74.451 because section 74.451’s requirement that agreements to arbitrate health care liability claims contain written notice in bold-type, ten-point font that conspicuously warned patient of important rights directly conflicted with the FAA that did not contain this requirement. The central question was whether section 74.451 was enacted by the State of Texas for the purpose of regulating the business of insurance. Generally, in discerning a statute's purpose, the court determined legislative intent from the entire act and not just isolated portions. When interpreting a statute, the court avoids construing a statutory provision in isolation from the rest of the statute. Courts should consider the act as a whole, and not just single phrases, clauses, or sentences.

 

The TMLA, as whole, had only a tenuous impact on the business of insurance, for the purposes of the MFA's exemption from federal preemption. The MFA focused on the relationship between the insurance company and its policyholders. Statutes aimed at protecting or regulating the relationship between the insurer and the insured, directly or indirectly were laws regulating the business of insurance. A state statute's tenuous connection to the ultimate aim of insurance was insufficient to escape federal preemption. The court found that the legislative goal of the TMLA was to place limitations on health care liability claims so that medical malpractice insurers would lower rates for health care providers in the hope that those cost savings would trickle down to patient policyholders and their insurers. The court reasoned that the only possible thread tying Chapter 74 to insurance contracts was the aspiration of lower premium rates, which was not enough to qualify for the MFA's protection. The court noted that once the parties to an insurance contract agreed upon a premium rate, Chapter 74 ceased to matter to the relationship between the insurer and the insured.

 

Section 74.451 did not come within the MFA’s exemption from preemption for state laws enacted for the purpose of regulating the business of insurance. In addition to considering whether the TMLA as a whole was enacted for the purpose of regulating the business of insurance, courts must also look to the specific provision of state law that conflicted with federal law to determine whether the clashing parts of the state law were enacted for the purpose of regulating the business of insurance. The court found that section 74.451 had little to do with the relationship between the insurance company and its policyholders. Section 74.451 concerned the relationship between the patient and the health care provider. Section 74.451 was an arbitration statute of specific applicability that applied to agreements to arbitrate health care liability claims, not insurance contracts. The court noted that the pre-admission agreement was not between an insurer and insured. The court concluded that the MFA did not apply to exempt section 74.451 from FAA preemption. Therefore, the trial court should have granted the nursing home's motion to compel arbitration.

 

The Supreme Court of Texas reversed the trial court’s denial of the nursing home’s motion to compel arbitration.

 

See: Fredericksburg Care Company, L.P. v. Perez, 2015 WL 1035343 (Tex., March 6, 2015) (not designated for publication).

 

 

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