Palm Beach County is famous for many things. Burt Reynolds, Tiger Woods, Michael Jordan, Spring Training for the World Series-winning St. Louis Cardinals are among them. Sometimes Palm Beach County gets in the news because the United States Supreme Court finds something worthy emanating from our court system.
In this case, the Supreme Court took issue with a ruling from the Fourth District Court of Appeals, which agreed with a ruling by Hon. David French, denying a motion to compel arbitration by KPMG, a national accounting firm. This dispute is more fallout from Bernard Madoff and his admitted fraud.
It appears that the plaintiffs lost money investing through one or more of the feeder funds, Termont Partners and others. They claim, according to the court, that they relied on audits performed by KPMG. They further claimed that the audits were not done properly. And, of course, they claim that they lost money.
When they sued, KPMG moved to compel arbitration because there was an arbitration clause in the audit engagement agreement. According to the court, there were professional malpractice claims along with some Florida state law claims. The court differentiated the claims, under a Delaware choice-of-law provision, as direct or derivative. The trial court and the Fourth DCA both held that arbitration was unavailable because the direct claims did not have to be arbitrated.
The US Supreme Court disagreed. The Court held that, even though it may appear judicially inefficient, the arbitrable claims, referred to as “derivative”, must be arbitrated. The Court also held that the “direct” claims need to be examined to see if they are arbitrable as well. This could very well leave the litigation split between two arenas, likely increasing costs and complexity.
Not sure how I feel about this decision. The US Supreme Court continues its support of arbitration “above all.” But in a situation where the cases will be split, it seems that the costs of litigation will increase dramatically and no real benefit will be served by forcing the parties to arbitration.