910 F.2d 1049 (2nd Cir. 1990), 894, Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

Docket Nº:894, Docket 89-9010.
Citation:910 F.2d 1049
Party Name:Stephen BLUMENTHAL and Les Fein, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant-Appellee.
Case Date:August 08, 1990
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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910 F.2d 1049 (2nd Cir. 1990)

Stephen BLUMENTHAL and Les Fein, Plaintiffs-Appellants,



No. 894, Docket 89-9010.

United States Court of Appeals, Second Circuit

August 8, 1990

Argued Feb. 28, 1990.

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Thomas J. Kavaler, New York City (Thomas M. Campbell, Phillip C. Essig, Robert J. Rubinson, Cahill Gordon & Reindel, New York City, of counsel), for plaintiffs-appellants.

Thomas T. Loder, Paoli, Pa. (Gregory S. Rubin, Marsha L. Levick, Rubin & Associates, Paoli, Pa., of counsel), for defendant-appellee.

Before OAKES, Chief Judge, WALKER, Circuit Judge, and BILLINGS, District Judge. [*]

WALKER, Circuit Judge:

Plaintiffs Stephen Blumenthal and Les Fein appeal from a judgment of the United States District Court for the Southern District of New York (John F. Keenan, Judge) denying their motion to recover damages for a wrongful injunction and to forfeit the bond posted by defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch). We hold that the district court had jurisdiction to enjoin plaintiffs pending arbitration, but that when the arbitrators dissolved the injunction, it was rendered "wrongful" thereby permitting plaintiffs to recover on the bond. Therefore, we reverse and remand to allow plaintiffs to prove any damages, up to the amount of the bond, that resulted from the injunction.


On Friday, February 17, 1989, plaintiffs Blumenthal and Fein, both New York Stock

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Exchange ("NYSE") registered representatives, resigned from Merrill Lynch and joined Prudential-Bache Securities, Inc. Plaintiffs took with them customer lists and other records used to service clients.

The Constitution and Rules of the NYSE mandate arbitration of disputes arising out of the employment or termination of employment of a registered representative with a member firm. See NYSE Rule 347; NYSE Constitution, Art. XI, Sec. 1. Additionally, Fein's employment agreement with Merrill Lynch provided for arbitration of the same type of controversy.

Plaintiffs, on the day they resigned, filed for arbitration with the NYSE and informed Merrill Lynch that they were ready to arbitrate the issue of their continued dealings with their clients on the next available business day--Tuesday, February 21. When Merrill Lynch resisted the Tuesday arbitration, plaintiffs commenced an action in the district court under the Federal Arbitration Act ("FAA"), 9 U.S.C. Secs. 1-15 (1988), seeking to compel arbitration. 1

Plaintiffs moved the district court for a declaration of arbitrability of their dispute, including any claim for preliminary injunctive relief, and for an order compelling arbitration before the NYSE on an expedited basis. Merrill Lynch cross-moved for a preliminary injunction prohibiting plaintiffs from soliciting or accepting orders from their pre-existing clients.

On February 23, 1989, the district court ruled the dispute arbitrable and ordered expedited arbitration before the NYSE. But the district court preliminarily enjoined plaintiffs from using Merrill Lynch customer records or soliciting or accepting business from any Merrill Lynch client. The court conditioned the preliminary injunction upon Merrill Lynch's posting a $100,000 bond pursuant to Fed.R.Civ.P. 65(c).

On March 16, 1989, after a two-day arbitration, the NYSE panel, "in full and final settlement" of the matter, terminated the preliminary injunctions in effect against the plaintiffs but awarded Merrill Lynch monetary damages of $80,000 against plaintiff Fein alone. Thereafter, plaintiffs moved in the district court for recovery against the bond for "wrongful injunction," claiming the loss of "substantial commissions and long-time clients" allegedly sustained during the three weeks the injunction was in effect. The district court denied the motion in an order dated September 25, 1989. This appeal followed.


Under Fed.R.Civ.P. 65(c), a party subjected to a preliminary injunction in district court who is later found to have been "wrongfully enjoined" may recover against the security bond damages suffered as a result of the injunction. See, e.g., Edgar v. MITE Corp., 457 U.S. 624, 649, 102 S.Ct. 2629, 2644, 73 L.Ed.2d 269 (1982) (Stevens, J., concurring); Philips Business Systems, Inc. v. Executive Communications Systems, Inc., 744 F.2d 287, 290 (2d Cir.1984); Medafrica Line, S.P.A. v. American West African Freight Conference, 654 F.Supp. 155, 156 (S.D.N.Y.1987). Plaintiffs assert that the preliminary injunction later vacated by the arbitrators was "wrongful" because (1) the district court was without jurisdiction to enter an injunction pending arbitration and (2) the arbitrators' ultimate disposition rendered the injunction substantively wrongful. We disagree with the first contention but agree with the second.


Challenging previous decisions of this court and the weight of federal appellate authority, Blumenthal and Fein assert that the FAA bars a federal district court from issuing a preliminary injunction pending arbitration. They ground their argument

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in the language of the statute and the federal policy favoring arbitration.

Plaintiffs' statutory argument is based on Section 4 of the FAA. That section provides, in pertinent part, that a party seeking to compel arbitration pursuant to a written agreement "may petition any United States district court which, save for such agreement, would have jurisdiction " over the subject matter of the case for an order directing that the arbitration proceed according to the agreement (emphasis added). 2 Plaintiffs contend that the words "save for such agreement" operate to divest the district court of jurisdiction over a dispute covered by an arbitration agreement except to order arbitration or to exercise other powers explicitly provided for in the FAA.

Further, citing the "strong federal policy" favoring arbitration, see Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 233, 107 S.Ct. 2332, 2341, 96 L.Ed.2d 185 (1987); Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11, 94 S.Ct. 2449, 2452-53, 41 L.Ed.2d 270 (1974), and mandating the speedy removal of arbitrable disputes from the courts, see Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985); Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 940, 74 L.Ed.2d 765 (1983); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967), plaintiffs argue that a district court's injunction pending arbitration abrogates the...

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