In its unanimous November 7, 2011, per curiam decision in KPMG LLP v. Cocchi, the U.S. Supreme Court once again admonished state and federal courts that there is an “emphatic federal policy in favor of arbitral dispute resolution.” When a complaint contains both arbitrable and nonarbitrable claims, the justices said, courts must identify and compel arbitration of each of the arbitrable claims, and cannot refuse to compel arbitration simply because of the presence of nonarbitrable claims.
Investors in three funds that lost millions of dollars in the Bernard Madoff Ponzi scheme sued KPMG, the auditor of the funds, claiming that its alleged failure to use proper auditing standards resulted in the fraud remaining undetected. The investors asserted claims against KPMG in Florida state court for negligent misrepresentation; violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA); professional malpractice; and aiding and abetting a breach of fiduciary duty.
KPMG moved to compel arbitration, citing the arbitration clause in its audit services agreement with the funds. The trial court and Florida Court of Appeal rejected the arbitration demand, holding that the investors were not parties to the audit services agreement, and that the investors’ negligent misrepresentation and FDUTPA claims were direct claims against KPMG, not merely derivative of the work performed pursuant to the audit services agreement.
Significantly, the Florida courts did not address the arbitrability of the professional malpractice and breach of fiduciary duty claims. Now the Supreme Court has ruled that their failure to do so was error, and that the decision denying arbitration must therefore be vacated and remanded for consideration of whether those two claims were subject to arbitration.
The Supreme Court first emphasized that, under the Federal Arbitration Act (FAA), arbitration agreements “must be enforced in state and federal courts,” and that state courts “have a prominent role to play as enforcers of agreements to arbitrate.” This is noteworthy because some attorneys and commentators have incorrectly suggested that the Supreme Court’s watershed arbitration decision in AT&T Mobility LLC v. Concepcion does not apply in state courts.
The Supreme Court went on to hold that the Florida Court of Appeal erred by denying arbitration solely on the basis that two of the claims were not arbitrable, without considering the arbitrability of the other two claims. More than a quarter century ago, the order said, the FAA was interpreted by the Supreme Court to require that if a dispute presents multiple claims – some arbitrable and some not – the former must be sent to arbitration even if this will lead to piecemeal litigation.
The Court’s edict was terse and emphatic: “From this it follows that state and federal courts must examine with care the complaints seeking to invoke their jurisdiction in order to separate arbitrable from nonarbitrable claims. A court may not issue a blanket refusal to compel arbitration merely on the grounds that some of the claims could be resolved by the court without arbitration.”
The fact that the Supreme Court summarily reversed the Florida Court of Appeal, and did so in a unanimous, per curiam opinion, sends a loud and clear message to state and federal courts across the country that the Supreme Court remains vigilant in its commitment to the enforcement of arbitration clauses.
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Copyright © 2011 by Ballard Spahr LLP.
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