In a recent opinion, the Fourth Circuit cited waiver as its basis to refuse to compel arbitration, but the result seems animated by a sense that the arbitration agreements were unenforceable.  Degidio v. Crazy Horse Saloon & Restaurant, Inc., __ F.3d __, 2018 WL 456905 (4th Cir. Jan. 18, 2018).

The case involved a putative collective and class action case by “exotic dancers” at a club in South Carolina, alleging they were wrongly classified as independent contractors and thereby denied minimum wages and other statutory protections.  The complaint was filed against the club in August of 2013.  [I can’t call it a saloon.  We aren’t in the wild west.]  At that point, it is undisputed that none of the potential plaintiffs had arbitration agreements with the club.

The club participated in discovery for a year.  In November and December 2014, the club obtained arbitration agreements with some of its dancers “as a condition of performing.”  In December of 2014, the club moved for summary judgment on the merits, arguing the dancers were properly classified as independent contractors.  Then in January of 2015, the club brought a motion to compel arbitration against plaintiffs who had signed arbitration agreements.  The district court denied the motion, raising concerns about the enforceability of the arbitration agreements.  The club brought a new summary judgment motion on the merits in October of 2015.  When that was denied, the club sought additional discovery on the merits, attempted to certify questions to the South Carolina Supreme Court, and then moved to compel arbitration against nine plaintiffs who had opted into the litigation after its last motion.  That motion was also denied.

The Fourth Circuit set the stage for its discussion by noting that litigants may waive their rights to arbitration by “substantially utilizing the litigation machinery.”  Without citing any further case law about waiver, the opinion proceeded to review the significant extent of the club’s use of “litigation machinery” (summarized above).  The court was particularly upset at the apparent gamesmanship:

The only possible purpose of the arbitration agreements, then, was to give [the club] an option to revisit the case in the event that the district court issued an unfavorable opinion [on summary judgment].  In other words, Crazy Horse did not seek to use arbitration as an efficient alternative to litigation; it instead used arbitration as an insurance policy in an attempt to give itself a second opportunity to evade liability.

In response to the club’s argument that it could not have moved to compel arbitration until the entertainers who had actually signed the agreements opted into the case, the court suggested that it should have informed the district court of its intentions so that the court did not waste judicial resources.  In addition, the court did not want to “give defendants a perverse incentive to wait as long as possible to compel arbitration.”

At the close of this waiver discussion, the court veers into what seems to be the heart of the matter: its conclusion that the arbitration agreements were “misleading” and “sham agreements.”  The arbitration agreements told the dancers that they only reason they could keep tips and set their own schedules was because they were independent contractors, and that would change if they joined the Degidio lawsuit.  The court noted that information was false.  Furthermore, the court was upset that the agreements were presented to plaintiffs “in a furtive manner,” evading the district court’s ability to supervise contact between the potential plaintiffs and counsel.  “The setting here was ripe for duress.”  However, the court does not undertake any analysis of unconscionability or other bases to find the agreements unenforceable under South Carolina law.  It just affirms the decision to deny the motion to compel arbitration.

I find this a puzzling case.  Normally, parties are allowed to agree to arbitrate a dispute that has already begun.  And litigation conduct before that agreement can’t count as a waiver.  Furthermore, parties don’t usually tell the judge about motions that they don’t yet have a basis to bring.  So, unless FLSA cases are really so different, this seems like a case that should have been analyzed on the validity of the arbitration agreements.  It is decidedly underhanded to convince people to sign arbitration agreements by misrepresenting the law.  Maybe South Carolina unconscionability doctrines are very difficult?

In my last post, I shared some of the highlights from the first half of the new CFPB Arbitration Study.  This post covers the second half of the report, with juicy information gleaned from CFPB’s analysis of almost 2,000 actual consumer arbitrations and its comparison of those results to actual consumer court actions.

Arbitration Outcomes

The AAA gave the CFPB access to information about 1850 total disputes filed with it in 2010, 2011, and 2012 relating to credit cards, checking accounts, payday loans, (GPR) prepaid cards, student loans, and auto loans.  The average claim made by a consumer was $27,000, and the average claim made by the financial institution was $16,011 (debt collection).  The bulk of the claims related to credit cards, with auto loans and students loans following a distant second and third.  Arbitration was usually completed within 5-8 months. Of the disputes resolved by arbitrators, 74% were resolved by an arbitrator who also was appointed on at least one other consumer arbitration in the sample set.

32% of the consumer arbitrations filed in 2010 and 2011 were resolved on the merits.  (The rest either settled or ended in another fashion.)  Of the 158 cases in which the consumer had an affirmative claim, arbitrators provided consumers with relief in 20% of them, with an average award around $5,400.  “When consumers were provided relief on their claims, consumers won an average of 57 cents for every dollar they claimed.”  In contrast, of the 244 affirmative claims by companies that resulted in an award, arbitrators provided the companies relief in 93% of those disputes, with an average award of $12,500 (“companies won 98 cents for every dollar claimed” in the cases where companied were provided relief).  (That could be read as indicating bias.  But, it could also mean that an unpaid debt is inherently easier to prove than a FDCPA (or other consumer) claim.)

If you’ve ever wondered how often the AAA appoints a new arbitrator after receiving a “factual objection” to the arbitrator’s service, the CFPB found that happened in response to 68% of objections in these consumer arbitrations.

With respect to attorneys’ fees, consumers who were represented and took their claims all the way to an award received fees in 14% of those cases, with an average fee award of $8,148.  Companies also received attorneys’ fees in 14% of disputes resolved by the arbitrators, with an average award of $3,387.

Litigation Outcomes

Individual Federal Court Claims 2010-2012

If there were about 2,000 individual consumer arbitrations filed in these six areas in three years, how many individual federal actions were filed?  3,462 — and 2,621 of those related to credit cards.  A whopping 87% of the individual actions asserted FDCPA claims.  And 93% of the individual plaintiffs requested a jury.  The individual federal cases were concluded in an average of 171 days.

Of those individual claims that were resolved within the study period, 48% resolved by settlement, 3.7% were dismissed on a dispositive motion, 6.8% resulted in a judgment in favor of the consumer (another 41% of cases may have settled, but the docket did not clearly indicate).  Most of the cases that the consumer won were by default (78 of 82).  The average amount awarded the consumer was $13,131.  (The CFPB could not calculate the ratio of damages to claim, because unlike arbitration demands, complaints generally have generic statements about their damages like “more than 75,000.”)

Class Actions in State and Federal Court 2010-2012

In addition to the individual cases, CFPB found 470 putative class actions filed in federal court (and another 92 filed in state courts with searchable electronic records — OR, UT, OK, and NY, plus individual counties in IL, TX, FL, and CA).  Juries were requested in 80% of the class actions.  Almost half of those cases related to credit cards.  And the majority of the claims were federal or state statutory claims (FDCPA, TCPA, TILA, Deceptive Trade Practice, etc.)  The median time to close a federal class action was around 215 days (though MDL classes took around 600 days).  Class actions in state court took longer than federal court — about 400 days on average.

Most class cases settled — either by non-class settlement (CFPB estimates 60%) or a class settlement approved by the court (12%).  Another 10% of cases ended when the defendant won a dispositive motion.  Consumers obtained a judgment in their favor in only 1.8% of class cases, usually through default judgment.  No class action in the sample went to trial.

In 94 of those putative class actions, companies moved to compel arbitration, and courts granted the motion half of the time. In the 46 classes that were compelled to arbitration, CFPB was able to identify only 12 that subsequently demanded arbitration, two of which filed as putative classes in arbitration.  Similarly, for the six individual cases that were compelled to arbitration, CFPB found only one that subsequently went to arbitration.

Small Claims Court

In an effort to see if consumers are taking advantage of their arbitration carve-outs allowing claims to proceed in small claims court, CFPB searched for filings in jurisdictions where those records are accessible.  It found that credit card issuers are filing many debt collection matters in small claims court, but very few consumers are filing affirmative claims.  For example, there were 7,905 credit card debt collection cases in Harris County, Texas alone, but 870 small claims court cases filed by consumers across 31 jurisdictions combined.

Class Action Settlements 2008-2012

 To determine the benefit of class litigation, CFPB analyzed consumer financial class action settlements that took place from 2008-2012.  The 419 settlements in that time period involved more than 350 million class members (not necessarily 350M unique people) and resulted in $2.7 billion in total relief.  For the 105 settlements where a determination was possible, the average claims rate was 21% (i.e. the plaintiffs recovered 21% of the dollars they sought).  On average, it took the classes 690 days to get to a settlement.

Which Comes First — Private or Public Action?

The report presents findings about whether public enforcement of consumer protection statutes usually comes before or after similar class actions filed by private citizens.  It found that where there are overlapping actions, “public enforcement activity was preceded by private activity 71% of the time.  In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.”  So, don’t knock the creativity of the plaintiffs’ bar.

Does Arbitration Lead To Cheaper Products?

The final section of the report analyzes whether arbitration agreements in financial products leads to lower prices for consumers.  After acknowledging that it is difficult to test that assertion on a broad level, the report looked at one example to test the cause and effect.  In that example, a number of credit cards agreed to remove their arbitration clauses for three and a half years as a result of a settlement.  The CFPB found no statistically significant evidence that those companies raised their prices more or differently from comparable companies with no change in ADR.

What Have We Learned?

My brain is a little fried from all the numbers and graphs and words, but here are some initial reactions from the information in the report:

  • Individual consumer actions settle more often in court than in arbitration.  Put differently, more cases get heard on the merits in arbitration.  (32% of cases are resolved on merits in arbitration, compared to about 10% in court.);
  • Arbitrators are repeat players, just like financial institutions, and plaintiffs’ lawyers;
  • Arbitration is not necessarily faster than litigation (comparing individual arbitrations to individual federal litigation);
  • Parties who don’t show up will lose — both in arbitration and in court (the volume of defaults surprised me);
  • Courts grant more damages to consumers than arbitrators do;
  • A large percent of plaintiffs will not bother prosecuting their claims if they have to go to arbitration (instead of remaining in court); and
  • Eliminating class actions can be a huge financial benefit to the financial institutions.  Whether you think that is also a benefit to the economy overall or not likely depends on your politics.

Watch this space for news on what the CFPB recommends going forward.

 

In a decision this week, the Third Circuit found two related parties had waived their right to arbitrate claims.  One was no suprise — it had vigorously litigated the dispute for eleven months.  But the second may have been simply guilty by association, as it had only litigated for two months.  Supermedia v. Affordable Electric, Inc,, 2014 WL 1690749 (3d Cir. April 30, 2014).

In Supermedia, the plaintiff sued AEI for breach of contract.  The contract at issue had been signed by Mr. Morley, AEI’s alleged president.  AEI moved to dismiss the complaint, and when that failed, it answered the compaint and engaged in months of discovery, incuding discovery motions to the court.  During those eleven months, AEI never mentioned its alleged right to arbitrate the dispute.  Instead, it primarily disputed Mr. Morley’s right to bind it to a contract.  Therefore, about nine months after filing its first suit, the plaintiff also sued Mr. Morley directly.  The two cases were then consolidated.

Mr. Morley and AEI made a joint motion to compel arbitration.  The district court denied the motion, finding both defendants had waived any right to arbitrate.  On appeal, the Third Circuit affirmed.

In analyzing AEI’s waiver, the Third Circuit focused on the eleven months during which AEI never mentioned its alleged right to arbitrate and vigorously pursued the litigation.  Furthermore, AEI had taken the position that the arbitration agreement was unenforceable in previous litigation between the parties.  With respect to Mr. Morley, the court acknowledged it was “a closer call.”  Although Mr. Morley moved to compel arbitration just two months after the lawsuit began, he did three things that the court found sufficient to constitute waiver.  First, he asserted claims against third parties.  Second, in answering claims, he asserted that there was no binding agreement among the parties.  And third, he participated in the pre-trial conference and acquiesced in the consolidation of the cases.

After reading more than 40 decisions about arbitration from state high courts, issued just in the past eight months, I have two bits of wisdom to share.  First, that is not the best way to spend your summer vacation, even for a devoted arbitration nerd.  And second, there are arbitration issues percolating in state courts that counsel practicing in this area should be aware of.  In particular, state courts are: 1) working hard to avoid having the FAA preempt their developed defenses to arbitration clauses; and 2) confronting a lot of issues relating to whether there is an agreement to arbitrate at all (especially authority issues in nursing home settings).

PREEMPTION

A big category of cases relate to preemption.  Most of these cases involve state courts trying to explain how application of state law is not preempted by federal law under Concepcion.  (One case that falls under this heading, Feeney, has already been reversed.)

The Supreme Court of Washington, in particular, spilled a lot of ink explaining why Concepcion did not bar it from reaching various results.  For example, it held that an arbitration clause requiring that the demand be made within 30 days, the hearing take place in California, and the prevailing party recover attorneys fees was unconscionable.  Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013).  It found Concepcion did not preclude that result.  Washington also concluded that Concepcion did not preclude it from enforcing a state statute prohibiting insurance contracts from calling for arbitration (it held FAA preemption was essentially preempted by the McCarran-Ferguson Act).  State v. James River Ins. Co., 292 P.3d 118 (Wash. 2013).  Finally, Washington refused to vacate an arbitration award in favor of Subway franchisees based on the franchisor’s argument that its arbitration agreement called for arbitration in Connecticut, but the Washington court compelled arbitration in Washington.  Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013).  While rejecting the franchisor’s preemption arguments, the court said (pre Amex) “[w]hether Concepcion reaches beyond class arbitraiton procedures is subject to debate.”  Id.

Montana found that Concepcion did not prevent it from declaring the arbitration agreement in a payday loan unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 (Mont. 2013).  The Supreme Court of Montana applied a Montana rule invalidating adhesion contracts if they are not within the weaker party’s “reasonable expectations” or are otherwise oppressive.  In applying the rule, it focused on the facts that the arbitration clause was not conspicuous, the plaintiff did not understand it, the plaintiff was less sophisticated than the lender, and the clause was vague.  Two justices dissented, noting that Montana has only applied the rule to evaluate arbitration clauses and therefore it is preempted under the Concepcion reasoning.  Those two justices got the last laugh — the Ninth Circuit in July found that Montana’s rule is preempted under Concepcion.

In another case involving a payday lender, the Supreme Court of Florida concluded the lower court’s ruling was preempted.  McKenzie Check Advance of Florida, LLC v. Betts, 112 So. 3d 1176  (Fla. 2013).  In that case, the trial court found the arbitration clause was void as against public policy because it would prevent consumers from vindicating their state statutory rights.  The high court, however, found that Concepcion prevented Florida from adopting its own state-law version of the Green Tree rule at issue in Amex (which only applies to federal statutes, and has now been decimated in any case). 

Finally, addressing both nursing home arbitration and preemption, New Mexico held that the party alleging an arbitration agreement is unconscionable bears the burden of proving that unconscionablility, even when the other party is a nursing home accused of negligent care.  Strausberg v. Laurel Healthcare Providers, LLC, __ P.3d __, 2013 WL 3226753 (N.M. 2013).  The court noted that to adopt the opposite rule would be preempted by the FAA.

AUTHORITY

Really, the heading for this could be “Nursing Home Arbitration Litigation,” because in 2013 there have already been five separate opinions from state high courts relating to when wrongful death or negligence claims against nursing homes have to be arbitrated.  In general, the issue is: did the relative who signed documents for the nursing home resident have the resident’s authority to sign on his or her behalf?  Without proof of authority, state courts have concluded that there is no valid arbitration agreement in the nursing home admission documents.  E.g., SSC Montgomery Cedar Crest Ooperating Co. v. Bolding, __ So. 3d__, 2013 WL 1173975 (Ala. 2013); Courtyard Gardens Health & Rehab., LLC v. Quarles, __ S.W.3d __, 2013 WL 2361051 (Ark. 2013); GGNSC Batesville, LLC v. Johnson,  109 So. 3d 562 (Miss. 2013); State v. King, 740 S.E.2d 66 (W. Va. 2013).  However, if the resident dies, his or her estate and heirs are bound by an arbitration agreement the resident actually signed.  Laizure v. Avante at Leesburg, Inc., 109 So. 3d 752 (Fla. 2013).

NON-SIGNATORIES

Another issue that comes up regularly in both state and federal courts is when arbitration can be enforced by or against non-signatories.  On that topic, the Supreme Court of New Jersey found that the lower courts had erred by allowing a non-signatory to compel arbitration.  Hirsch v. Amper Fin. Servs., LLC, __ A.3d __, 2013 WL 4005282 (N.J. 2013).  The court disliked the way the lower courts had applied the equitable estoppel doctrine.  “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.”  Id. at *1.   Even when the parties and claims are intertwined, New Jersey will not compel arbitration without proof of detrimental reliance.

DID THE PARTIES INTEND ARBITRATION TO BE PART OF THE AGREEMENT?

The Supreme Court of Iowa recently concluded that an agreement to arbitrate existed, even though all negotiations of the contract were oral and did not mention arbitration.  Bartlett Grain Co. v. Sheeder, 829 N.W.2d 18 (Iowa 2013).  Over the course of several phone calls, Sheeder agreed to sell corn to Bartlett at particular prices on certain dates.  Bartlett then sent Sheeder confirmation forms to sign, which provided for arbitration under the National Grain Feed Association arbitration rules.  The court relied largely on the UCC to reject Sheeder’s argument that he was not bound by the arbitration term in the confirmations.

THE ARBITRATION CLAUSE IS UNENFORCEABLE

An interesting New Mexico case found an arbitration agreement was illusory.  Much like a 2012 Fifth Circuit case applying Texas law, the New Mexico Supreme Court found the employer’s promise to arbitrate was illusory because the employer could amend or terminate its Dispute Resolution Program at any time, even after the employee’s claim accrued.  Flemma v. Halliburton Energy Servs., Inc., 303 P.3d 814 (N.M. 2013).

In addition, the Gandee decision from Washington and Kelker decision from Montana (discussed in the preemption section above) both found arbitration agreements unconscionable in consumer settings.

APPEALS

One area where state courts seem to be completely in line with the federal courts is in enforcing the limited bases for appealing arbitration awards.  So far this year, for example, Mississippi declared that “manifest disregard of the law” is not a valid basis for vacating arbitration awards under Mississippi’s arbitration act.  Robinson v. Henne, 115 So. 3d. 797 (Miss. 2013); but see C-Sculptures, LLC v. Brown, __ S.E.2d __, 2013 WL 1898379 (S.C. 2013) (applying the state uniform arbitration act, not the FAA, and vacating an award based on the arbitrator’s “manifest disregard” of state law).

New Mexico held that an employee who did not raise any objection about the scope of his arbitration proceedings with the arbitrator had waived any right to later argue that he reserved some claims for litigation.  Horne v. Los Alamos Nat’l Security, LLC, 296 P.3d 478 (N.M. 2013).  That decision is in accord with the recent decisions of the Minnesota Court of Appeals finding that parties must raise objections with arbitrators or else they are waived.

**Why this doozy of a blog post?  Because ArbitrationNation just celebrated its second birthday!  Nothing else quite says “thanks for sticking with me” like 1250 dense words… **

Let’s say you are considering updating your form contract, or you are in the midst of negotiating a new contract with someone.  Should you include mandatory arbitration for resolving any disputes?  Assuming you have the choice, my view is you should only include arbitration if at least one of these five factors are present:

1.  Having a knowledgeable industry professional decide the dispute is very important (an architect, engineer, doctor, reinsurance expert, etc), instead of a judge or jury without that expertise, because disputes are likely to be very technical.

2.  Keeping the proceedings confidential (and not publicly available in court filings) is very important to you.  (Although, if either party moves to vacate, much of your arbitration proceeding could become part of a court record.)

3.  You do not want class actions.  (They can be precluded in an arbitration agreement; it is less clear whether they can be precluded without an arbitration agreement.)

4.  You want to arbitrate because other parties on the same project or deal have arbitration provisions.  (For example, if the owner and general contractor on a construction project are bound to arbitrate, the owner and architect may also want to agree to arbitrate in case the architect is implicated in claims between the owner and general.)

5.  There is a chance that you may have to enforce a judgment in a foreign court.  The New York Arbitration Convention allows the winning party in an arbitration to enforce its judgment abroad much more easily than if the judgment had come from a U.S. court, which is important if the loser’s assets are located abroad.  [*Note that the original version of this post only included the first four reasons.  But I received useful feedback via Twitter and email about this additional benefit of arbitration over litigation and added it to the list.  Thanks for the input!]

It is a relatively short list.  But, in my view, these are the only four bases on which arbitration has a significant advantage over litigation.  You will note that speed of resolution is not on the list (unless parties opt for expedited proceedings, arbitrations generally take about as long as court proceedings — the median case valued between 1 and $10 million dollars administered by the AAA took 414 days to get to an award).  You will also note that cost is not on the list (in my experience on complicated commercial matters, there is no cost saving to arbitration and I found a recent study supporting my anecdotal evidence).  Speed and cost used to be the primary reasons people chose arbitration.

There are other potential reasons to choose arbitration that I am also discounting.  For example, the risk of an illogical jury verdict is not significantly greater in my mind than the risk of an illogical arbitration award.  I also do not see any advantage to the greater informality and looser rules in arbitration, or find it less adversarial.  And, although you can make someone conduct the arbitration hearing in the basement of your building, you could just as easily have a forum selection clause choosing your home town courthouse in most circumstances, so I do not count that as a big advantage for arbitration.

It’s the start of a new year and a great time to step back and revisit our reasons for inserting arbitration in our contracts.  I’d love to hear whether you agree or disagree with my list!  Let me know @KramerLiz.

In answer to the proverbial question “how much litigation waives the right to arbitrate?,” the Third Circuit has responded that ten months does the trick, if the party seeking arbitration has engaged in significant motion practice, regardless of whether any discovery was exchanged. In re Pharmacy Benefit Managers Antitrust Litig., __ F.3d __, 2012 WL 5519658 (3d Cir. Nov. 15, 2012).  This marks a change in the Third Circuit’s case law on waiver, which had previously placed a strong emphasis on the exchange of discovery as the point of no return.

In re Pharmacy involves a class of retail pharmacies that brought suit in federal court alleging the pharmacy benefits manager violated antitrust laws.  The defendant/benefits manager responded by first bringing a motion to dismiss, arguing the plaintiffs had no antitrust injury.  After that motion was denied, defendant filed its answer without asserting any right to arbitrate.  After the defendant obtained new counsel, and the case had been underway for ten months, the defendant filed a motion to compel arbitration.  The district court granted the motion to compel and stayed the case, finding that defendant had not waived arbitration.  The plaintiffs refused to bring their claims in arbitration and instead dismissed their claims in order to appeal the order compelling arbitration.

The Third Circuit first addressed its jurisdiction over the appeal.  The defendant argued the plaintiffs should not be rewarded for dismissing their claims in order to find an “end run” around the rule that a successful motion to compel arbitration is not normally appealable unless the judge simultaneously dismisses the case.  However, the Third Circuit found it irrelevant how the claims were dismissed–jurisdiction over the appeal was proper because the plaintiffs’ claims were dismissed (as opposed to just stayed).

Then the Third Circuit reversed the district court, finding that the defendant had waived its right to arbitrate.  The court analyzed all six relevant factors from its Hoxworth decision on waiver, but focused heavily on these two acts by the defendant: waiting ten months to bring its motion to compel arbitration without any explanation other than its change of counsel; and making a significant motion to dismiss on the merits.  However, another factor, the extent of discovery, cut against waiver because the parties had not engaged in any discovery.  Indeed, the Third Circuit acknowledged that its “cases finding waiver have uniformly featured significant discovery activity in the district court.”  Even so, the Third Circuit relied on cases from other circuits and the general rule that a defendant cannot “act inconsistently with the right to arbitrate” in finding that the benefits manager had waived its right to arbitrate.  

Because the Third Circuit reversed on the question of waiver, it did not address whether the arbitration clause was unenforceable due to its limitation on the remedies available under antitrust laws.

Despite the Supreme Court’s best efforts, some myths of arbitration law just will not die.  In yesterday’s per curiam decision of the Supreme Court, the Justices tried to put a stake through the heart of a common myth: that a party may successfully avoid a motion to compel arbitration by arguing that not all claims and/or not all parties fall within the scope of the arbitration agreement.  KPMG LLP v. Cocchi, __ U.S. __, 2011 WL 5299457 (Nov. 7, 2011).  Surely you have seen this in your cases, the non-moving party usually invokes the phrase “piecemeal litigation,” i.e. “if I am forced to arbitrate, it will result in expensive and duplicative piecemeal litigation.”  SCOTUS is tired of this argument.

 In Cocchi, 19 investors in what turned out to be a Ponzi scheme brought four claims against the auditor, KPMG, in state court in Florida.  (Florida is the same state whose refusal to compel arbitration got smacked down in 2006’s Buckeye Check Cashing v. Cardegna decision.)  KPMG moved to compel arbitration based on provisions of its contract with its client, the alleged Ponzi schemer.  The contract stated that “[a]ny dispute or claim arising out of or relating to … the services provided [by KPMG] … (including any dispute or claim involving any person or entity for whose benefit the services in question are or were provided) shall be resolved” either by mediation or arbitration.

The Florida trial court and appellate court denied KPMG’s motion to compel arbitration.  Because KPMG was relying on its contract with the Ponzi schemer, and had not contracted with the investors, the Florida courts noted that the arbitration provisions could only be enforced if the claims were “derivative.”  After analyzing two of the four claims and finding that they were direct, the Florida courts denied the motion to compel arbitration. 

The Supreme Court vacated the Florida appellate decision and remanded the case for consideration of all four claims.  If any of those claims are derivative, the Court directed, the investors must be compelled to arbitrate the derivative claim(s) against KPMG.  It took the occasion to remind us all that: “when a complaint contains both arbitrable and nonarbitrable claims, the Act requires courts to ‘compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.'”