In Solymar Investments, Ltd. v. Banco Santander S.A., 672 F.3d 981 (11th Cir. 2012), the Eleventh Circuit addressed the “novel question” of whether a district court finding the existence of a valid contract containing an arbitration clause must then consider a further challenge to that contract's place within a broader, unexecuted agreement.  In Solymar, the plaintiff Holding Corporations invested an undisclosed sum of money with the defendant Santander.  Although the Holding Corporations had requested “low-risk” investments, the funds were placed with a Bernie Madoff-run fund.  The parties ultimately agreed to a multi-part comprehensive settlement, which included an “Exchange Agreement.”  Due to timing issues and based on Santander’s assurance that the remaining documents would be completed soon thereafter, the Holding Corporations acceded to Santander’s request to execute the Exchange Agreement.  When no agreement was reached on the remaining documents, the Holding Corporations filed suit.  Santander moved to dismiss under the arbitration clause of the signed Exchange Agreement.  The district court followed the recommendation of the magistrate judge and dismissed the action.

On appeal, the Eleventh Circuit looked first to the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq., which provides that a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The court then examined the interplay of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 87 S.Ct. 1801 (1967) and Granite Rock Co. v. International Brotherhood of Teamsters, 130 S.Ct. 2847 (2010), and held that these cases require a two-step process in considering the arbitrability of any contract containing an arbitration clause:  (1) resolution of any formation challenge to the contract containing the arbitration clause, in keeping with Granite Rock; and 2) determination of whether any subsequent challenges are to the entire agreement, or to the arbitration clause specifically, in keeping with Prima Paint.

As to the Granite Rock inquiry as to contract formation, the Eleventh Circuit found that the district court had properly declined to consider parol evidence.  The Exchange Agreement on its face was not ambiguous, did not leave open essential terms, stated that it contained the “entire agreement” between the parties, and made no reference to the alleged comprehensive agreement.  The fraudulent inducement exception to the parol evidence rule did not apply because the proferred testimony would impermissibly directly contradict an express provision of the Exchange Agreement.

Under the Prima Paint inquiry, the court can consider challenges only to the formation of the arbitration clause within the contract, not broad challenges to general contracts containing arbitration clauses, which are properly reserved for the arbitrator.  Here, the plaintiffs challenged the Exchange Agreement as a whole, so the Eleventh Circuit affirmed the dismissal of the trial court.

For the full case, click here.  

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The U.S. Supreme Court, in a Florida case, has held that where a complaint contains both arbitrable and nonarbitrable claims arising from an agreement that falls within the Federal Arbitration Act ("FAA"), the arbitrable claims must be submitted to arbitration even though the nonarbitrable claims may proceed separately in a different forum.  KPMG LLP v. Cocci, 2011 WL 5299457 (U.S. Nov. 7, 2011). 

In KPMG, the plaintiffs were nineteen individuals and entities who lost millions of dollars after investing in Bernard Madoff's "infamous Ponzi scheme." The plaintiffs sued KPMG, among others, for negligent misrepresentation, violation of the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”), professional malpractice, and aiding and abetting a breach of fiduciary duty.  KPMG LLP v. Cocchi, 51 So. 3d 1165, 1167 (Fla. 4th DCA 2010), vacated, 2011 WL 5299457.  The circuit court denied KPMG's motion to compel arbitration, and the auditor appealed.  The Fourth District affirmed, finding that the arbitration clause could be enforced only if plaintiffs' claims were derivative, and further finding that the negligent misrepresentation and violation of FDUTPA claims were direct rather than derivative under applicable Delaware law.  Id.

The case proceeded directly to the U.S. Supreme Court for immediate review.  The Supreme Court vacated the Fourth District's opinion and remanded the case for a determination as to whether the other two claims in the complaint were arbitrable, in which event such claims must be submitted to arbitration, "even where the result would be the possibly inefficient maintenance of separate proceedings in different forums."  KPMG LLP v. Cocci, 2011 WL 5299457.  For the full case, click here.
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