United States: 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
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
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.
Carlton Fields recently published a survey (pdf) of 368 general counsel and other in-house counsel at major companies across more than 25 industries regarding the class actions they faced in 2012 and their expectations for 2013.