U.S. District Judge Lewis Kaplan rejected KPMG’s argument that its sixteen former partners, who have been indicted for their roles in the firm’s peddling of questionable tax shelters, should be required to arbitrate their claims to have the firm pay their attorney’s fees.  The judge’s opinion (available below) is, as usual, lengthy — 68 pages — and heavily footnoted — 180 of them — although it’s not nearly as long as his earlier decision holding that the Department of Justice’s Thompson Memo was unconstitutional.  While the rejection of KPMG’s request is hardly surprising, given the judge’s apparent exasperation with both the federal prosecutors from the Southern District and KPMG, this decision may be subject to challenge by the firm on the arbitration issue.  While the court determined that one group of former partners was not subject to KPMG’s 2003 partnership agreement requiring arbitration of disputes involving former partners, the rest of them appear to be parties to that agreement.  For those partners, however, Judge Kaplan decided that requiring arbitration would be against public policy, which may be a tough position to sustain given the strong federal policy in favor of arbitration. 

Regardless of how the arbitration issue is ultimately resolved, the judge has set a trial date of October 17 to decide whether KPMG must pay the attorney’s fees of the defendants.  Given how the firm has fared to this point, the outcome of that proceeding is likely a foregone conclusion, which means that the costs to the firm will mount rather quickly when it must pay for the phalanx of lawyers defending the sixteen defendants.  Once KPMG lose that round, at that point it can appeal to the Second Circuit, which may well weigh in on the various matters that have arisen in the case regarding the application of the Thompson Memo. (ph)

Download kpmg_attorneys_fees_opinion_sept_6.pdf