Posted On: November 28, 2011 by Michael J. Hassen Email This Post

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Class Action Defense Cases–KPMG v. Cocchi: Supreme Court Reiterates Requirement That State Courts Follow Concepcion And Enforce Arbitration Agreements Under The Federal Arbitration Act (FAA)

State Courts Erred in Denying Defense Motion to Compel Arbitration Under FAA (Federal Arbitration Act) because They Failed to Consider Whether Any Claims were Subject to Arbitration

Plaintiffs filed a putative class action in Florida state court against various defendants, including KPMG LLP, for damages suffered as a result of investments made with Bernard Madoff; the class action named the investment funds, the entity that managed the funds, and KPMG as auditor. KPMG LLP v. Cocchi, 565 U.S. ___ (November 7, 2011) [Slip Opn., at 1-2]. With respect to KPMG, the class action alleged negligent misrepresentation, professional malpractice, aiding and abetting a breach of fiduciary duty, and violation of Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA). Id., at 2. KPMG moved to compel arbitration under the Federal Arbitration Act (FAA) on the grounds that the audit services agreement between it and the funds’ management company contained an arbitration clause. Id. The trial court denied the motion, and the state appellate court affirmed on the ground that “‘[n]one of the plaintiffs…expressly assented in any fashion to [the audit services agreement] or the arbitration provision.’” Id., at 2-3 (citation omitted). However, the state courts apparently found it sufficient to conclude that neither the FDUTPA claim nor the negligent misrepresentation claim were subject to arbitration, without analyzing whether the professional malpractice or breach of fiduciary duty claim were subject to arbitration. Id., at 3. The Supreme Court granted certiorari and reversed.

Despite its April 27, 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), some state courts have continued to find “creative” ways to avoid its mandate. “The Federal Arbitration Act reflects an ‘emphatic federal policy in favor of arbitral dispute resolution.’” KPMG, at 3 (citations omitted, italics added). “Agreements to arbitrate that fall within the scope and coverage of the [FAA]…must be enforced in state and federal courts.” Id., at 1 (italics added). Thus, “State courts…‘have a prominent role to play as enforcers of agreements to arbitrate.’” Id. (citation omitted). And because the FAA “has been interpreted 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,” id. (citation omitted), “[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,” id. (citation omitted).

The Florida state courts, however, failed to follow these rules. Rather, based solely on its conclusion that two of the four claims against KPMG were not subject to arbitration because they were “direct” rather than “derivative,” the Florida Court of Appeal affirmed the denial of KPMG’s motion to compel arbitration. KPMG, at 3. The Supreme Court set forth the rules summarized above, and noted that the “emphatic federal policy in favor of arbitral dispute resolution” as reflected in the FAA “‘requires courts to enforce the bargain of the parties to arbitrate’…and ‘cannot possibly require the disregard of state law permitting arbitration by or against nonparties to the written arbitration agreement.’” Id. (citations omitted). In this case, the issue is whether, under Delaware law, any of the claims against KPMG were “derivative” rather than “direct.” Id., at 3-4. Because the state courts failed to analyze that with respect to each claim against KPMG, the issue presented to the Supreme Court “is the Court of Appeal’s apparent refusal to compel arbitration on any of the four claims based solely on a finding that two of them…were nonarbitrable.” Id., at 4.

The Supreme Court concluded, “By not addressing the other two claims in the complaint, the Court of Appeal failed to give effect to the plain meaning of the [FAA] and to the holding of Dean Witter [Reynolds Inc. v. Byrd, 470 U.S. 213 (1985)].” KPMG, at 4. Accordingly, the Supreme Court vacated the decision of the state appellate court and remanded the matter for consideration of whether either the professional malpractice or breach of fiduciary duty claims was properly subject to arbitration. Id., at 4-5.

Download PDF file of KPMG LLP v. Cocchi