Teradyne, Inc. v. Mostek Corp., 86-1225

• Citation: 797 F.2d 43
• Decision Date: 01 August 1986
• Docket Number: No. 86-1225,86-1225
• Parties: TERADYNE, INC., Plaintiff, Appellee, v. MOSTEK CORP., Defendant, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 43

797 F.2d 43

TERADYNE, INC., Plaintiff, Appellee, v. MOSTEK CORP., Defendant, Appellant.

No. 86-1225.

United States Court of Appeals, First Circuit.

Argued May 8, 1986.

Decided Aug. 1, 1986.

Carol Goodman, with whom Mark F. Walter and LeBoeuf, Lamb, Leiby & MacRae, New York City, were on brief, for defendant, appellant.

Bernard J. Bonn, III, with whom Ronald T. Gerwatowski and Testa, Hurwitz & Thibeault, Boston, Mass., were on brief, for plaintiff, appellee.

Before COFFIN, BOWNES and TORRUELLA, Circuit Judges.

BOWNES, Circuit Judge.

Defendant-appellant, Mostek Corporation (Mostek), now known as CTU of Delaware, Inc., appeals from a district court interlocutory order issued in favor of plaintiff-appellee, Teradyne, Inc. (Teradyne), in an ongoing breach of contract action by Teradyne against Mostek. The order enjoins Mostek from disposing of or encumbering $4,000,000 of its assets and directs it to set that amount aside in an interest bearing account to satisfy any judgment or arbitration award obtained by Teradyne. Teradyne is claiming approximately $3,500,000 for cancellation charges, alleged failure to pay unearned price discounts on goods delivered, for goods and services invoiced, and for incidental and consequential damages. Alternatively, it seeks damages computed under the Uniform Commercial Code (U.C.C.) for lost profits, incidental and consequential damages. Teradyne has posted a $25,000 bond as directed by the district court's order.

Mostek's appeal raises three issues: (1) whether the district court's order should be treated as a nonappealable attachment order or as a preliminary injunction appealable under 28 U.S.C. Sec. 1292(a)(1); ¹ (2) whether the district court lacked power because of the Federal Arbitration Act, 9 U.S.C. Secs. 1-14, to issue the order; and (3) whether the court abused its discretion in issuing the order.

Mostek manufactured, designed and marketed semiconductor components for use in computers, telecommunications equipment and other end products. Teradyne manufactures laser systems (sometimes called memory repair systems) and memory testers, both of which were key to Mostek's manufacturing operations.

The present dispute erupted when, on May 24, 1985, Mostek cancelled orders for memory testers and laser systems it had given Teradyne and then cancelled a second set of orders on July 25, 1985. When Teradyne proceeded to demand cancellation charges assessed at 70% of the original purchase price, Mostek refused to pay. On September 26, 1985, Teradyne, relying on an arbitration clause in the contract, filed a demand for arbitration against Mostek with the American Arbitration Association. Mostek opposed that demand.

Changes in Mostek's corporate status complicated matters when United Technologies Corporation, which had acquired Mostek in 1980, announced, on October 17, 1985, that Mostek would cease operations. On October 30, United and Mostek entered into a Memorandum of Understanding with Thomson Semiconductors, Inc., under which Thomson agreed to buy substantially all of Mostek's assets for approximately $71 million in cash, subject to certain offsets and debits. The sale was executed in November and Teradyne was contemporaneously notified that it had occurred. The proceeds of the sale were deposited in a separate bank account in Mostek's name and dedicated to the payment of the claims of Mostek's creditors. Prompted by this change in Mostek's status, Teradyne commenced this action on January 17, 1986, seeking, inter alia, an injunction requiring Mostek to set aside sufficient funds to satisfy a Teradyne judgment pending the outcome of arbitration.

I. THE APPEALABILITY OF THE DISTRICT COURT'S ORDER

Trustees of Hospital Mortgage Group v. Compania Aseguradora, 672 F.2d 250 (1st Cir.1982), is the only case in this circuit bearing on the question of whether an interlocutory order which is similar in effect to an attachment should be treated as a nonappealable attachment or a preliminary injunction appealable under 28 U.S.C. Sec. 1292(a)(1). ² That case involved an action by the plaintiff trustees to foreclose on a mortgage on certain plots of land. The district court issued an order requiring the defendant to either post a bond of $67,167.09 with the court securing its mortgage liability or satisfy its property tax liability on the mortgaged realty and repay the plaintiffs for taxes advanced on the defendant's behalf. The defendant appealed, contending that the order was an abuse of the district court's discretion. We held that the order was not appealable; that it was not an injunction under 28 U.S.C. Sec. 1292(a)(1) because it did not constrain the defendant in any way beyond restricting its use of the bond money during the pendency of the litigation. 672 F.2d at 251. We noted that allowing such "minimally coercive orders" to be appealed as injunctions under Sec. 1292(a) would make any order relating to a bond immediately appealable, and held the appellant's situation "indistinguishable from that of the subject of an attachment order." Id.

We find that the order in the present case is distinguishable from the order in Compania Aseguradora for three reasons. First, the order here is more than "minimally coercive." The tying up of four million dollars pending the outcome of arbitration proceedings is a significant constraint, the fact that it can be put in an interest bearing account notwithstanding. Second, although we recognize that the label used by the parties in the district court cannot control appealability, see 16 Wright, Miller, Cooper & Gressman, Federal Practice and Procedure Sec. 3922 at 32 (1977), we think it significant that the district court and the parties treated the order as a preliminary injunction. Teradyne specifically asked for injunctive relief and the order followed two temporary restraining orders in Teradyne's favor. Moreover, the court described the order as a preliminary injunction in its memorandum and granted the order on the basis of its findings that Teradyne had met the prerequisites for injunctive relief. Third, and we think this is the most compelling reason, this case, unlike Compania Aseguradora, does not merely involve posting a bond or surrendering property for attachment. Here, as with a traditional injunction, Mostek has been ordered to refrain from certain conduct and to affirmatively take certain action. We think it advisable, however, to look beyond our own circuit for guidance.

The Second Circuit has discussed this issue definitively in at least two cases. In Inter-Regional Financial Group, Inc. v. Hashemi, 562 F.2d 152 (2d Cir.), cert. denied, 434 U.S. 1046, 98 S.Ct. 892, 54 L.Ed.2d 798 (1978), it held that an order directing defendant to deliver certain stock certificates to the custody of the the clerk as security for any judgment was appealable pursuant to 28 U.S.C. Sec. 1292(a)(1). The court treated the order as an injunction because the defendant was required to bring the certificates to the clerk from outside the venue state of New York, as "a necessary step preceding the actual attachment." Id. at 154. The case of In re Feit & Drexler, Inc., 760 F.2d 406 (2d Cir.1985), concerned an order prohibiting an individual and those holding property for her or acting in concert with her from transferring or disposing of any of the individual's property except on order of the court and ordering her, her agents and employees and those holding property for her or acting in concert with her to deliver her property to her attorney who was to hold the property in safekeeping pending further order of the district court. The court saw no basis for distinguishing this order from the order held appealable in Hashemi. Id. at 412.

The Seventh Circuit reached a different conclusion in Rosenfeldt v. Comprehensive Accounting Service Corporation, 514 F.2d 607 (7th Cir.1975). In an opinion authored by Judge (now Justice) Stevens, it held that an order directing plaintiffs to deliver to defendants all accounts/clients, accounts receivable, books, records, files and work papers and restraining plaintiffs from certain specific activities was not appealable. The court held that the motion "was, in effect, a petition for a writ of attachment or replevin pursuant to Federal Rule of Civil Procedure 64" and stressed that it was so treated by the parties and the district court. Id. at 609. Rosenfeldt has been criticized for not recognizing that the order had all of the ingredients of an injunction. See 16 Wright, Miller, Cooper & Gressman, Federal Practice and Procedure Sec. 3922 at 44. A close reading of Judge Steven's opinion, however, suggests that he was influenced by the particular circumstances of the case and the consequences of allowing an appeal. He pointed out that holding the order appealable would result in disparate treatment of secured parties contrary to the pertinent provisions of the Uniform Commercial Code. 514 F.2d at 610.

The question of whether an interlocutory order which has the attributes of both an attachment and an injunction should be treated for appeal purposes as an attachment or an injunction depends upon the terms of the order. Factors to be considered are: the present and future consequences of the constraint involved; whether the order directs or restrains conduct of one of the parties; how the order was treated below by the district court and the parties. Considering all of these factors, we hold that the district court's order should be treated as a preliminary injunction appealable under Sec. 1292(a)(1).

II. THE EFFECT OF THE FEDERAL ARBITRATION ACT, 9 U.S.C. Secs. 1-14, ON THE DISTRICT COURT'S POWER TO GRANT PRELIMINARY INJUNCTIVE RELIEF

Mostek contends that the policy of the Arbitration Act precludes the grant of preliminary injunctive relief in an arbitrable dispute. The district court has not yet determined whether or not this dispute is arbitrable. If Mostek's argument is correct, then it clearly...