Kpmg LLP v. Cocchi
The Supreme Court set aside a Florida appeals court ruling that had let investors avoid arbitration on all their claims against an auditing firm, because the Florida court only analyzed two of the four claims before refusing arbitration entirely.
The Court reaffirmed that when a lawsuit has a mix of arbitrable and non-arbitrable claims, courts must sort through each claim individually and send the arbitrable ones to arbitration, even if that means litigating some claims separately.
“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.”
States the core rule that courts must sort arbitrable from nonarbitrable claims rather than rejecting arbitration wholesale.
How it got here: A Florida trial court denied KPMG's motion to compel arbitration, the Florida Fourth District Court of Appeal affirmed, and KPMG asked the Supreme Court to review that ruling.
The Case in Depth
What happened
A group of investors lost money in funds tied to Bernard Madoff's fraud scheme and sued the funds' managers and their outside auditor, KPMG, claiming KPMG failed to properly audit the funds' finances. The investors brought four separate legal claims against KPMG, including negligent misrepresentation, a state consumer-protection claim, professional malpractice, and aiding a breach of fiduciary duty. KPMG sought to force the claims into arbitration under its audit contract with the fund managers.
The question before the Court
If a lawsuit mixes claims that must go to arbitration with claims that don't, can a court refuse to send any of them to arbitration just because some claims can stay in court?
Why it matters
Businesses that rely on arbitration clauses gain assurance that courts cannot dodge those agreements by lumping distinct claims together. Investors and other plaintiffs facing multiple legal theories against a company will now see courts required to examine each claim separately, which can mean part of a lawsuit heads to arbitration while the rest stays in court.
What changes now
The case returns to the Florida Fourth District Court of Appeal, which must now examine the two claims it previously did not address—professional malpractice and aiding and abetting breach of fiduciary duty—to decide whether either must be arbitrated under the audit services agreement. This is not a final resolution of the underlying dispute; it only corrects the appeals court's incomplete claim-by-claim analysis.
What this does not decide
The Court did not decide whether any of the four claims against KPMG are actually arbitrable under Delaware law, which governs whether the claims are "direct" or "derivative." It left that question, and the fate of the two unaddressed claims, for the Florida appeals court to resolve on remand.
How the Court got there
The legal reasoning, step by step
- The Court reaffirmed that under the Federal Arbitration Act, when a lawsuit contains both claims that must be arbitrated and claims that don't have to be, courts must send the arbitrable claims to arbitration even if that leads to duplicate proceedings in different forums.
- From this rule, the Court explained that judges must carefully examine every individual claim in a complaint to sort out which ones are covered by an arbitration agreement, rather than issuing a single ruling covering the whole complaint.
- Applying this to the Florida appeals court's opinion, the Court found that the appeals court had only analyzed whether two of the four claims (negligent misrepresentation and the consumer-protection claim) were arbitrable, concluding those were direct claims not covered by the arbitration clause.
- The Court found nothing in the appeals court's opinion addressing whether the other two claims, professional malpractice and aiding a breach of fiduciary duty, were also direct claims outside the arbitration agreement or whether they should have been arbitrated.
- Because the appeals court refused to compel arbitration on the whole complaint without examining all four claims individually, the Court concluded that ruling failed to follow the plain language of the Arbitration Act and the Court's precedent requiring claim-by-claim review.
Doctrinal impact
Cases affected by this decision
Reaffirms Dean Witter Reynolds Inc. v. Byrd (470 U. S. 213)
Reaffirms that courts must compel arbitration of arbitrable claims even if it creates separate, duplicate proceedings.