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

• Decision Date: 21 March 1985
• Docket Number: No. 84-1795,84-1795
• Parties: MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellee, v. Kenneth Dale BRADLEY, Samuel L. Collins, Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1048

756 F.2d 1048

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellee, v. Kenneth Dale BRADLEY, Samuel L. Collins, Appellants.

No. 84-1795.

United States Court of Appeals, Fourth Circuit.

Argued Dec. 4, 1984.

Decided March 21, 1985.

Charles R. Waters, II, Norfolk, Va. (W. David Timberlake, Terence Murphy, Kaufman & Canoles, Norfolk, Va., on brief), and Joel E. Davidson, New York City, for appellants.

Guy R. Friddell, III, Norfolk, Va. (Walter D. Kelley, Jr., Marie L. Achtemeir, Willcox, Savage, Dickson, Hollis & Eley, P.C., Norfolk, Va., on brief), for appellee.

Before PHILLIPS and CHAPMAN, Circuit Judges, and MICHAEL, United States District Judge for the Western District of Virginia, sitting by designation.

CHAPMAN, Circuit Judge:

This expedited appeal involves a dispute between Merrill Lynch, Pierce, Fenner and Smith, Inc. (Merrill Lynch) and one of its former account executives, Kenneth D. Bradley. Merrill Lynch brought this action against Bradley seeking damages as well as injunctive relief to prevent him from using Merrill Lynch's records and soliciting Merrill Lynch's clients. On July 26, 1984, the district court held a hearing on Merrill Lynch's motion for a temporary restraining order and Bradley's motion to stay the trial and compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. Secs. 1-14 (1982). At the conclusion of the hearing, the district court granted Merrill Lynch a preliminary injunction, denied Bradley's motion to stay the injunction, and ordered expedited arbitration of the parties' dispute. Bradley appeals from the district court's order granting Merrill Lynch a preliminary injunction pending arbitration. 28 U.S.C. Sec. 1292(a)(1). We affirm.

I

On December 16, 1981, Merrill Lynch hired Bradley to serve as an account executive at its office in Newport News, Virginia. At that time Merrill Lynch and Bradley entered into an Account Executive Agreement which provides, inter alia, the following:

1. All records of Merrill Lynch, including the names and addresses of its clients, are and shall remain the property of Merrill Lynch at all times during my employment with Merrill Lynch and after termination for any reason of my employment with Merrill Lynch, and that none of such records or any part of them is to be removed from the premises of Merrill Lynch either in original form or in duplicated or copied form, and that the names, addresses, and other facts in such records are not to be transmitted verbally except in the ordinary course of conducting business for Merrill Lynch.

2. In the event of termination of my services with Merrill Lynch for any reason, I will not solicit any of the clients of Merrill Lynch whom I served or whose names became known to me while in the employ of Merrill Lynch in any community or city served by the office of Merrill Lynch, or any subsidiary thereof, at which I was employed at any time for a period of one year from the date of termination of my employment. In the event that any of the provisions contained in this paragraph and/or paragraph (1) above are violated I understand that I will be liable to Merrill Lynch for any damage caused thereby.

The Account Executive Agreement also provides that "any controversy between myself [Bradley] and Merrill Lynch arising out of my employment, or the termination of my employment with Merrill Lynch for any reason whatsoever shall be settled by arbitration...." In addition, Bradley was required to sign New York Stock Exchange Form U-4 when he registered with the Exchange and began his employment at Merrill Lynch. Like his employment agreement, this form requires that any controversy between Bradley and any member organization of the New York Stock Exchange shall be settled by arbitration. Finally, both Rule 347 of the Rules of the New York Stock Exchange and Article VIII, Section One of the Exchange Constitution provide that all controversies between members of the Exchange arising out of the business of the members shall be settled by arbitration in accordance with the Rules of the New York Stock Exchange.

At approximately 4:00 p.m. on Friday, July 20, 1984, Bradley tendered his resignation to Merrill Lynch and announced that he had accepted a position with Prudential-Bache Securities, Inc. at its office in Virginia Beach, Virginia. Merrill Lynch alleges that as early as the day following his resignation Bradley telephoned most or all of his Merrill Lynch customers and urged them to transfer their accounts from Merrill Lynch to Prudential-Bache. Merrill Lynch learned of Bradley's actions and filed suit on Monday, July 23, 1984, alleging breach of contract, breach of fiduciary duty, and violation of Va.Code Sec. 18.2-499.

Merrill Lynch also brought suit against Samuel L. Collins, vice president and general manager of Prudential-Bache's office in Virginia Beach, for tortious interference with contract and conspiracy to injure another in its trade or business. Merrill Lynch claims that the instant case represents the third time within ten months that a Merrill Lynch account executive in the Hampton Roads, Virginia area had been lured away by Prudential-Bache and had begun immediately to breach his contractual and fiduciary obligations by soliciting Merrill Lynch's customers. ¹

The district court's preliminary injunction prohibits Bradley from soliciting any customers whom he had serviced or learned about while employed by Merrill Lynch. The injunction further prohibits Bradley from participating in the servicing of these customers by Prudential-Bache, including any referrals to other personnel of Prudential-Bache. At the request of Bradley's counsel, however, the district court's order was modified to delete the requirement that the New York Stock Exchange conduct arbitration in an expedited fashion.

II

Merrill Lynch and Bradley both agree that the dispute between them is subject to mandatory arbitration and that Bradley is not in default in proceeding with arbitration. Thus, the principal issue on appeal is whether Sec. 3 of the Federal Arbitration Act, 9 U.S.C. Sec. 3 (1982), absolutely precludes a district court from granting one party a preliminary injunction to preserve the status quo pending the arbitration of the parties' dispute.

Bradley argues that the district court abused its discretion in granting Merrill Lynch a preliminary injunction because Sec. 3 precludes a court from considering the merits of a controversy when the dispute is subject to mandatory arbitration. Bradley cites two recent decisions to support his argument. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286 (8th Cir.1984); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Scott, No. 83-1480 (10th Cir. May 12, 1983). ²

In Hovey the Eighth Circuit held that Sec. 3 precludes a court from granting Merrill Lynch a preliminary injunction against its former account executives pending arbitration. The court stated that "where the Arbitration Act is applicable and no qualifying contractual language has been alleged, the district court errs in granting injunctive relief." 726 F.2d at 1292. In Scott the Tenth Circuit vacated, by order and without formal written opinion, a preliminary injunction which the district court had granted pending arbitration. Nevertheless for the reasons that follow, we decline to follow Hovey and Scott and instead hold that, under certain circumstances, a district court has the discretion to grant one party a preliminary injunction to preserve the status quo pending the arbitration of the parties' dispute.

The starting point for our inquiry, of course, is the language of Sec. 3:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. Sec. 3 (emphasis added). Section 3 does not contain a clear command abrogating the equitable power of district courts to enter preliminary injunctions to preserve the status quo pending arbitration. Instead, Sec. 3 states only that the court shall stay the "trial of the action"; it does not mention preliminary injunctions or other pre-trial proceedings. Certainly Congress knows how to draft a statute which addresses all actions within the judicial power. ³ Furthermore, nothing in the statute's legislative history suggests that the word "trial" should be given a meaning other than its common and ordinary usage: the ultimate resolution of the dispute on the merits. See Senate Rep. No. 536, 68th Cong., 1st Sess. (1924); H.R.Rep. No. 96, 68th Cong., 1st Sess. (1924).

We do not believe that Congress would have enacted a statute intended to have the sweeping effect of stripping the federal judiciary of its equitable powers in all arbitrable commercial disputes without undertaking a comprehensive discussion and evaluation of the statute's effect. Accordingly, we conclude that the language of Sec. 3 does not preclude a district court from granting one party a preliminary injunction to preserve the status quo pending arbitration. ⁴

Our interpretation of Sec. 3 is not inconsistent with this Court's decision in In re Mercury Construction Corp., 656 F.2d 933 (4th Cir.1981) (en banc), aff'd sub nom. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Bradley relies upon an isolated phrase in In re Mercury Construction Corp. to support his argument that Sec. 3 requires the stay of "all proceedings" pending arbitration. See 656 F.2d at 939 ("Section 3 requires a stay of all...