November 7, 2011

Today the Supreme Court issued one decision, described below, of interest to the business community.

• Federal Arbitration Act—Disputes Involving Both Arbitrable and Nonarbitrable Claims

Federal Arbitration Act—Disputes Involving Both Arbitrable and Nonarbitrable Claims

KPMG LLP v. Cocchi, No. 10-1521

In a per curiam summary decision, issued without merits briefing or oral argument, the Supreme Court reaffirmed today in KPMG LLP v. Cocchi, No. 10-1521, that, when “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.” Slip op. 1.

The respondents, plaintiffs below, brought claims against several investment partnerships and KPMG (which had audited one of the partnerships), alleging a scheme to defraud investors. KPMG moved to compel arbitration, invoking the arbitration provision in its audit services agreement with the investment partnerships it audited. The Florida trial court denied the motion, and the Florida Court of Appeal affirmed. The Court of Appeal held that, because the respondents had not expressly assented to the arbitration provision, the clause could be enforced against them only to the extent that their claims “were derivative in that they arose from the services KPMG performed . . . pursuant to the audit services agreement.” Slip op. 2-3. It further held that, under applicable state law, only two of the respondents’ four claims against KPMG were derivative rather than direct. The Court of Appeal did not explicitly address the arbitrability of the remaining claims.

In a unanimous decision, issued on the basis of the petition-stage briefing alone, the Supreme Court granted KPMG’s petition for certiorari and vacated the judgment of the Court of Appeal. The Court rejected “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.” Slip op. 4. Quoting its decision in Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985), the Court explained that the Federal Arbitration Act (“Act”) “leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” Id. (quoting 470 U.S. at 218). Thus, “when a complaint contains both arbitrable and nonarbitrable claims, the Act requires courts to ‘compel arbitration of pendent arbitrable claims . . ., even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.’” Id. (quoting Dean Witter, 470 U.S. at 218). Accordingly, the Court instructed, “courts must examine a complaint with care to assess whether any individual claim must be arbitrated.” Id. The Court held that, by neglecting to address the arbitrability of the plaintiffs’ two other claims, the lower court had “failed to give effect to the plain meaning of the Act” and its requirement that arbitrable disputes be sent to arbitration. Id. The Court thus remanded the case with instructions to “examine the remaining two claims to determine whether either requires arbitration.” Id. at 5.

The Court’s summary action in KPMG reflects its continuing willingness to ensure that the lower courts adhere to the dictates of the Federal Arbitration Act.

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