Koob v. IDS Financial Services, Inc.

• Decision Date: 13 July 1995
• Citation: 629 N.Y.S.2d 426,213 A.D.2d 26
• Parties: Michael KOOB, Petitioner-Respondent, v. IDS FINANCIAL SERVICES, INC. and IDS Life Insurance Company, Respondents-Appellants.
• Court: New York Supreme Court — Appellate Division

Page 426

629 N.Y.S.2d 426

213 A.D.2d 26

Michael KOOB, Petitioner-Respondent, v. IDS FINANCIAL SERVICES, INC. and IDS Life Insurance Company Respondents-Appellants.

Supreme Court, Appellate Division First Department.

July 13, 1995.

Bruce H. Gieseman, of counsel (Grippo & Elden and Robinson, St. John & Wayne, attorneys) for respondents-appellants.

Anthony Paduano, of counsel (Jordan D. Becker on the brief, Smith Campbell & Paduano, attorneys) for petitioner-respondent.

Before ROSENBERGER, J.P., and WALLACH, RUBIN and MAZZARELLI, JJ.

RUBIN, Justice.

This appeal involves an employment contract, made and performed in Minnesota, between parties that are domiciled in that state. The contract contains a clause restricting petitioner's endeavors upon separation from his employment, which was activated when petitioner departed to work for Prudential Securities, Inc., likewise in Minnesota. Because respondents are members of the National Association of Securities Dealers (NASD), petitioner submitted a statement of claim to that organization, in New York, demanding arbitration pursuant to the NASD Code of Arbitration Procedure. Petitioner has been granted a stay by the Supreme Court of the State of New York, which remains in effect, enjoining respondents from bringing any proceeding in the courts of any state to enforce the restrictive covenant contained in the employment agreement.

This case raises significant questions regarding the extent to which the courts of New York should attempt to supervise arbitration proceedings, conducted between parties domiciled in another jurisdiction and concerning events that occurred entirely outside this State. It is submitted to the Court for review of an order dated January 9, 1995, as amended by an order dated January 23, 1995, respectively imposing and continuing what is denominated a "TRO", preliminarily enjoining respondents from commencing any action against petitioner. Submitted as a supplemental record on appeal is an order dated April 3, 1995, "enjoining IDS from commencing or prosecuting any related actions or proceedings against Petitioner in any state court or arbitration forum other than the NASD". Although a provision directing arbitration is stricken from the subsequent order, the practical effect is indistinguishable from an order that permanently stays an action and directs the parties to arbitrate their dispute (see, CPLR 7503[a], except that it is imposed as a provisional remedy pursuant to CPLR 7502(c) (added by L.1985, ch. 253, § 1, eff. Jan. 1, 1986).

The issue defined by the briefs is whether the parties to the proceeding have a sufficient connection with this State to warrant the exercise of personal jurisdiction by its courts. This appeal also raises questions concerning whether there is any procedural basis for petitioner's application to compel arbitration and, if not, whether the court possessed the equitable discretion to grant a provisional remedy.

Petitioner Michael Koob, a resident of Minnesota, worked as a financial planner for respondents at their offices in Roseville, Minnesota from October 16, 1991 until November 23, 1994. He received compensation for his sale of IDS products from respondent IDS Life Insurance Co., a Minnesota corporation engaged in the business of issuing life and disability insurance policies and annuity contracts, and from respondent IDS Financial Services Inc., a corporation registered in Delaware, engaged in the securities and investment business as a broker-dealer and investment advisory firm (collectively "IDS").

Petitioner's employment with respondents was governed by a detailed agreement. Section IV(1)(g) provides that, for one year after its termination, he will not solicit, except with the permission of IDS, within his assigned territory, "a Client you contacted, dealt with or learned about while you represented IDS Life or an Affiliate or because of that representation." Section IV(3) provides: "(a) You agree that: (1) The violation of the provisions in this section will result in damage to IDS Life that cannot be determined exactly and for which IDS has no adequate remedy at law; and that (2) IDS Life has the specific right to enforce these provisions; and that (3) IDS Life is entitled to an injunction to keep you from violating the provisions or to enforce them." Significantly, it further provides: "(b) If a dispute involving this Agreement is submitted for arbitration under the Code of Arbitration Procedure of the National Association of Securities Dealers or otherwise, you agree that IDS Life is entitled to an injunction from a court of competent jurisdiction to keep you from violating these restrictions while the arbitration is pending" (emphasis added).

November 23, 1994 must have been a busy day in the life of petitioner Koob. On that date, he terminated his relationship with respondents and began work for Prudential Securities, Inc. as a broker at its Bloomington, Minnesota office. On the same date, he submitted a statement of claim to the NASD. And, on that date, he submitted an order to show cause to enjoin respondents from instituting "any action or proceeding in any state court or arbitration forum other than the NASD against Petitioner or concerning Petitioner arising out of his association or termination of association with IDS and his subsequent hiring by Prudential Securities Incorporated".

In support of his demand for relief before the NASD, Koob states, "IDS, upon information and belief, is about to commence an action in the state or federal courts asserting claims against Koob arising out of the termination of his association with IDS and his subsequent employment with Prudential. Koob seeks a declaration by the Panel that he is not liable to IDS in law or in equity in any respect as a result of the termination of his association with IDS, or regarding his subsequent employment with Prudential." The verified petition sheds some light on the motivation underlying petitioner's application. In a statement which, on its face, is of doubtful veracity, he recites: "Petitioner has decided today [sic] to terminate his association with IDS and has become employed by Prudential, a competitor of IDS. Petitioner has been engaged in the solicitation of orders for securities transactions. IDS has a policy and practice of requiring some registered representatives affiliated with it to sign documents purporting to contain post-affiliation restrictive covenants." He further states, "Based upon IDS's prior practice, if not restrained, IDS likely will seek an order preventing Petitioner from continuing to work with his clients and preventing Petitioner from transacting business with any of Petitioner's clients who choose to transfer their accounts to Prudential."

It is appropriate to note that what Koob seeks from the NASD is nothing more than an advisory opinion. The sole basis for seeking arbitration is not anything that IDS, in the personae of respondents, has done to petitioner, but something which petitioner "on information and belief" thinks might be done. What petitioner seeks from the arbitration panel is a ruling as to whether respondents would be entitled to proceed in court or whether they would be limited to the arbitral forum should they elect to take some action to enforce the restrictive covenant.

While the nature of the claim sought to be arbitrated and its lack of merit are not normally any concern of the court (CPLR 7501), the situation is altogether different when the petition is one for injunctive relief in the absence of any basis to compel arbitration (CPLR 7503[a]. In these circumstances, the court is obliged to take cognizance of the end to which its equitable powers are being applied. Had the court, in this instance, undertaken such an inquiry, there is little doubt it would have been constrained to conclude that the end does not justify the means.

In deciding an application to compel arbitration pursuant to CPLR 7503[a], the court is required to "first make a determination whether the parties have entered into a valid arbitration agreement (O'Brien v. Bache Halsey Stuart Shields, 80 A.D.2d 846 [444 N.Y.S.2d 469] and, if so, whether the issue sought to be submitted to arbitration falls within the scope of that agreement (Matter of County of Rockland [& Primiano Constr. Co.], 51 N.Y.2d 1, 7 [431 N.Y.S.2d 478, 409 N.E.2d 951]" (Schenkers Intl. Forwarders v. Meyer, 164 A.D.2d 541, 543, 564 N.Y.S.2d 323, lv. denied 78 N.Y.2d 852, 573 N.Y.S.2d 465, 577 N.E.2d 1057). Though immaterial in this case, the court is empowered to determine if the dispute sought to be submitted to arbitration is timely (CPLR 7503[b]; 7502[b]; Matter of County of Rockland & Primiano Constr. Co., 51 N.Y.2d 1, 431 N.Y.S.2d 478, 409 N.E.2d 951). Finally and highly pertinent under the circumstances of this case, the court must determine if the subject of the petition sets forth an appropriate ground for judicial intervention under the provisions of CPLR article 75 (Avon Prods. v. Solow, 150 A.D.2d 236, 238, 541 N.Y.S.2d 406).

As a threshold procedural matter, CPLR 7503(a), invoked as a basis for the petition, states, "A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration." While the timeliness of an application to compel arbitration usually surfaces in the context of how late it can be filed (e.g., Corbo v. Les Chateau Assoc., 127 A.D.2d 657, 511 N.Y.S.2d 883 [application made more than four years after underlying fraud should have been discovered], it requires no discussion that a party who has filed a contemporaneous statement of claim cannot possibly be aggrieved by the failure of the named respondents to proceed to arbitration. This is especially so where the governing rules provide for subsequent service upon the named respondents by the Director of Arbitration (NASD Code of Arbitration Procedure, p 3725, § 25[a]. Also apparent from the structure...