Merrill Lynch Inv. Managers v. Optibase, Ltd.
| Decision Date | 18 July 2003 |
| Docket Number | Docket No. 02-9195. |
| Citation | 337 F.3d 125 |
| Parties | MERRILL LYNCH INVESTMENT MANAGERS, Plaintiff-Appellee, v. OPTIBASE, LTD., Defendant-Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
Stephen P. Younger (Monica Youn, Deborah Steinberger, of counsel), Patterson, Belknap, Webb & Tyler LLP, New York, NY, for Defendant-Appellant.
Judith Welcom (Daniel A. McLaughlin, of counsel), Sidley Austin Brown & Wood LLP, New York, NY, for Plaintiff-Appellee.
Before: KEARSE, JACOBS, and CABRANES, Circuit Judges.
Defendant-Appellant Optibase, Ltd. ("Optibase") suffered losses on an investment fund recommended by broker-dealer Merrill Lynch, Pierce, Fenner & Smith, Inc. ("MLPF&S"), with which Optibase had an agreement to arbitrate. Optibase commenced an arbitration asserting claims against three parties, including Plaintiff-Appellee Merrill Lynch Investment Managers ("MLIM") — a sister company to MLPF&S — which served as investment adviser for the fund, and with which Optibase had no agreement to arbitrate. MLIM sought in the district court a preliminary injunction restraining Optibase from proceeding with arbitration against MLIM in the New York Stock Exchange ("NYSE"). Optibase appeals from the grant of the preliminary injunction entered September 10, 2002 by the United States District Court for the Southern District of New York (Swain, J.).
Optibase contends that MLIM is bound to arbitrate with it on the grounds that (1) the arbitration agreement between Optibase and MLPF & S references affiliates of MLPF & S, of which MLIM is one, (2) MLPF & S was acting as agent of MLIM, and (3) in any event the injunction is barred by laches. We affirm.
The facts relevant to this appeal are undisputed.
Optibase, an Israeli corporation with offices in California and Massachusetts, offers broadband digital video streaming solutions. In 1999, Optibase's chief executive and chief financial officers met with a MLPF&S broker in New York City to discuss potential investment opportunities. MLPF&S is registered with the Securities and Exchange Commission ("SEC") as a broker-dealer, and is a member of the NYSE. MLPF&S is a wholly owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."), a publicly held corporation. The MLPF&S broker advised Optibase to invest $4 million in the Merrill Lynch Senior Floating Rate Portfolio (the "Merrill Lynch Fund" or "Fund"), and Optibase did.
The investment adviser for the Fund is MLIM, a limited partnership. MLIM is neither a registered broker-dealer nor a member of the NYSE. It is one of the world's largest asset management organizations and manages approximately $500 billion in funds, including registered and unregistered investment companies, hedge funds, pension funds, 401(k) plans, unit investment trusts, personal trusts, and individual client accounts. The general partner of MLIM is Princeton Services, Inc., a wholly owned subsidiary of ML&Co. ML&C. is also MLIM's limited partner. Under the federal securities laws, ML&Co. and MLPF&S are deemed to be affiliates of MLIM.
In early August 2000, Optibase signed a Working Capital Management Account Agreement (the "Agreement") in connection with its account at MLPF&S. The arbitration clause that is a subject of this appeal provides in part:
The Customer agrees that all controversies that may arise between the Customer and MLPF&S ... shall be determined by arbitration.
J.A. at 362. Following the signature line, the Agreement adds:
MLPF&S and its affiliates shall be entitled to fully rely upon the above certifications, representations and warranties.
Id. at 127 (the "affiliate provision"). The next paragraph states:
In accordance with [the arbitration clause] of the WCMA Agreement, [Optibase] is agreeing in advance to arbitrate any controversies which may arise with MLPF&S.
On February 5, 2002, Optibase filed arbitration claims with the NYSE against MLIM and ML&Co. On March 11, 2002, Optibase filed an Amended Statement of Claim, adding MLPF&S as a party. The Amended Statement of Claim alleges, inter alia, that the Merrill Lynch Fund was an unsuitable investment; that the MLPF&S broker made several unauthorized purchases of the Fund for Optibase's account; that the total invested was approximately $14.8 million; that individuals managing the Merrill Lynch Fund for MLIM resigned at the end of October 2000 because the Fund was performing poorly; and that by reason of the conduct of MLIM, MLPF&S, and ML&Co., Optibase lost more than $2 million.
MLIM protested its inclusion in the arbitration, first to Optibase and then to the NYSE, on the ground that there was no basis for compelling it to arbitrate. By letter dated May 21, 2002, the NYSE denied MLIM's request that the NYSE decline the use of its facilities for the arbitration of Optibase's claims against MLIM, and instructed MLIM to answer the Amended Statement of Claim within 20 days, "[i]n the absence of a court ordered stay." J.A. at 29. On June 7, 2002, MLIM commenced this action, seeking inter alia to enjoin Optibase from pursuing its claims against MLIM in the NYSE arbitration. (ML&Co. and MLPF&S are not parties to this action.)
At a July 24, 2002 hearing in the district court, Optibase contended that MLIM was amenable to arbitration on the basis of the arbitration clause contained in the Agreement between MLPF&S and Optibase, or because MLPF&S acted as MLIM's agent. The court disagreed and orally granted MLIM's motion for a preliminary injunction, which was later memorialized and finally entered on September 10, 2002.
The court first concluded that the terms of the Agreement — in particular, the arbitration clause and the affiliate provision — did not bind MLIM: "[A] provision permitting an affiliate of MLPF&S to rely on certifications and representations by MLPF&S's counterparty to the Agreement does not constitute a commitment of affiliates of MLPF&S to arbitrate pursuant to that Agreement." Supplemental App. at 109-10. Next, the court rejected Optibase's agency argument: "[N]otwithstanding Optibase's representations that Merrill Lynch and its affiliates marketed themselves as coordinated entities, Optibase has proffered no evidence tending to show that MLPF & S was acting on behalf of MLIM when it entered into the ... [A]greement with Optibase." Id. at 111. Also, the court rejected Optibase's laches argument. Id. at 108-09.
We review a district court's grant of a preliminary injunction for abuse of discretion. Bronx Household of Faith v. Bd. of Educ., 331 F.3d 342, 348 (2d Cir.2003). "A district court `abuses' or `exceeds' the discretion accorded to it when (1) its decision rests on an error of law ... or a clearly erroneous factual finding, or (2) its decision — though not necessarily the product of a legal error or a clearly erroneous factual finding — cannot be located within the range of permissible decisions." Zervos v. Verizon N.Y., Inc., 252 F.3d 163, 169 (2d Cir.2001) (footnote omitted).
As the party seeking a preliminary injunction, MLIM's burden before the district court was to establish: "(1) that it will be irreparably harmed if an injunction is not granted, and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation, and a balance of the hardships tipping decidedly in its favor." Bronx Household of Faith, 331 F.3d at 348-49.
In finding that MLIM would suffer irreparable harm absent a preliminary injunction, the district court properly relied on Maryland Casualty Co. v. Realty Advisory Board on Labor Relations, 107 F.3d 979 (2d Cir.1997), which affirmed a preliminary injunction granted in favor of a party resisting arbitration on the ground that the dispute was outside the arbitration agreement. We observed that otherwise the movant "would be irreparably harmed by being forced to expend time and resources arbitrating an issue that is not arbitrable, and for which any award would not be enforceable." Id. at 985.
Optibase contends that its dispute against MLIM is arbitrable because (1) MLIM is bound by the arbitration clause contained in the Agreement between Optibase and MLPF&S, and (2) an agency relationship between MLIM and MLPF&S exists that permits MLIM, as a non-signatory, to be bound by MLPF&S's agreement to arbitrate with Optibase.
It cannot be argued that MLIM is bound by the express terms of the arbitration clause contained in the Agreement between Optibase and MLPF&S:
The Customer agrees that all controversies that may arise between the Customer and MLPF&S, including, but not limited to, those involving any transaction or the construction, performance or breach of this or any other agreement between the customer and MLPF&S, whether entered into prior to, on or subsequent to the date hereof, shall be determined by arbitration.
J.A. at 362 (emphasis added). Optibase relies on the combined force of this clause coupled with the affiliate provision . The district court was unpersuaded: "[A] provision permitting an affiliate of MLPF&S to rely on certifications and representations by MLPF&S's counterparty to the Agreement does not constitute a commitment of affiliates of MLPF&S to arbitrate pursuant to that Agreement." Supplemental App. at 109-10. We agree.
Absent an express agreement to arbitrate, this Court has recognized only "limited theories upon which [it] is willing to enforce an arbitration agreement against a nonsignatory." Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 780 (2d Cir.1995). There are five such theories: "1) incorporation by reference; 2) assumption; 3)...
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