U.S. Supreme Court Admonishes Courts to Enforce Arbitration
In a pointed per curiam opinion, the United States Supreme Court recently reiterated that both state and federal courts must apply the "emphatic federal policy in favor of arbitral dispute resolution." State courts "have a prominent role to play as the enforcers of agreements to arbitrate."
In KPMG LLP v. Cocchi, the Court held that when a party moves to compel arbitration, "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." In this respect, the FAA "leaves no place for the exercise of discretion.. ."
The plaintiffs in Cocchi were individuals and entities who purchased limited partnership interests in certain limited partnerships known as the Rye Funds. The Rye Funds were invested with Bernard Madoff and suffered significant losses as a result. The plaintiff investors sued several entities, including the auditing firm, KPMG. They alleged four claims against KPMG: (1) negligent misrepresentation; (2) violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA); (3) professional malpractice; and (4) aiding and abetting a breach of fiduciary duty.
KPMG moved to compel arbitration based upon the audit services agreement between KPMG and the fund manager defendants. The trial court denied the motion, and the Court of Appeal affirmed. The Court of Appeal found, among other things, that two of the claims were direct rather than derivative, so that they could not be arbitrated under applicable state law. The Court of Appeal failed to address the arbitrability of the other two claims asserted against KPMG. Because of this failure, the Supreme Court vacated the Court of Appeal's judgment and remanded the case for a determination of whether either of the remaining two claims required arbitration.
The KPMG decision sends a clear message to state and federal courts that they must enforce valid agreements to arbitrate, and that the Supreme Court will continue to ensure that enforcement.
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