Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 08 August 1990
• Docket Number: D,No. 894,894
• Parties: Fed. Sec. L. Rep. P 95,417 Stephen BLUMENTHAL and Les Fein, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant-Appellee. ocket 89-9010.
• Court: U.S. Court of Appeals — Second Circuit

Page 1049

910 F.2d 1049

Fed. Sec. L. Rep. P 95,417

Stephen BLUMENTHAL and Les Fein, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant-Appellee.

No. 894, Docket 89-9010.

United States Court of Appeals Second Circuit.

Argued Feb. 28, 1990.

Decided Aug. 8, 1990.

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.

BACKGROUND

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

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.

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.

DISCUSSION

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.

I.

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 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.

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

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 agreed-upon role of the arbitrators as adjudicators of the dispute. Moreover, plaintiffs argue that the parties here had agreed to submit claims for preliminary injunctive relief to the arbitrators. Finally, they argue that the ability of NYSE arbitration panels to promptly assemble and rule, and to grant preliminary injunctive relief not substantially different from that of a district court, warrants the fashioning of a "rule of necessity" so that at least in NYSE cases a district court should not have preliminary injunction jurisdiction.

The short answer to these arguments is that they come too late in the day in light of controlling precedent to the contrary. In Roso-Lino Beverage Distributors, Inc. v. Coca-Cola Bottling Co., 749 F.2d 124, 125 (2d Cir.1984) (per curiam), we gave explicit and broad recognition to a district court's power to grant preliminary injunctive relief pending arbitration:

We reverse the denial of the preliminary injunction because it appears, from the record before us, that the district court believed its decision to refer the dispute to arbitration stripped the court of power to grant injunctive relief. The fact that a dispute is to be arbitrated, however, does not absolve the court of its obligation to consider the merits of a requested preliminary injunction....

749 F.2d at 125. See also Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, 1067 (2d Cir.1972) ("in a proper case such as we have here, the only way to preserve the status quo during the pendency of the arbitration proceeding is by the granting of injunctive relief"). Roso-Lino 's broad language removes any doubt that district court injunctions pending arbitration are available only when the contract expressly so provides. See Erving, 468 F.2d at 1066 n. 1; see also Guiness-Harp Corp. v. Jos. Schlitz Brewing Co., 613 F.2d 468, 472-73 (2d Cir.1980) (contract requires maintenance of status quo until arbitration); Connecticut Resources Recovery Auth. v. Occidental Petroleum Corp., 705 F.2d 31, 33-35 (2d Cir.1983) (same).

Courts of appeals elsewhere addressing the issue have endorsed a district court's power to issue an injunction pending arbitration. See Teradyne, Inc. v. Mostek Corp., 797 F.2d 43, 47-51 (1st Cir.1986); Plaintiffs now ask us to reconsider our holding in Roso-Lino in light of the language of Section 4 of the FAA, and recent Supreme Court decisions, including several decided after Roso-Lino, evincing a policy preference in favor of arbitration. Plaintiffs also point to the Eighth Circuit's minority view in Hovey, based on arguments similar to those offered by plaintiffs here, that a district court errs in granting injunctive relief in an arbitrable controversy. But a decision of one circuit contrary to ours is not by itself compelling and, as discussed below, we are not persuaded by the arguments underlying it.

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bradley, 756 F.2d 1048, 1051-54 (4th Cir.1985); Sauer-Getriebe KG v. White Hydraulics, Inc., 715 F.2d 348, 350-52 (7th Cir.1983), cert. denied, 464 U.S. 1070, 104 S.Ct. 976, 79 L.Ed.2d 214 (1984); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dutton, 844 F.2d 726, 727-28 (10th Cir.1988). But see Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286, 1291-92 (8th Cir.1984); Merrill Lynch, Pierce, Fenner & Smith, Inc....