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

• Decision Date: 09 February 1984
• Docket Number: No. B14-83-731CV,B14-83-731CV
• Citation: 666 S.W.2d 604
• Parties: MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellant, v. Ernest M. McCOLLUM, and Smith Barney, Harris, Upham & Co., Inc., Appellees. (14th Dist.)
• Court: Texas Court of Appeals

Page 604

666 S.W.2d 604

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellant, v. Ernest M. McCOLLUM, and Smith Barney, Harris, Upham & Co Inc., Appellees.

No. B14-83-731CV.

Court of Appeals of Texas Houston (14th Dist.).

Feb. 9, 1984.

Rehearing Denied March 8, 1984.

Kelly J. Coghlan, Vinson & Elkins, Houston, for appellant.

Mark C. Watler, Woodard, Hall & Primm, Houston, for appellees.

Before ROBERTSON, SEARS and ELLIS, JJ.

OPINION

ROBERTSON, Justice.

This is appeal from the trial court's: (1) denial of appellant's application for temporary injunction, (2) granting an order compelling arbitration and (3) staying the case pending completion of arbitration. Appellant raises five points of error complaining of the trial court's denying the temporary injunction "as a matter of law, without allowing an evidentiary hearing," considering "unreported and not to be reported case authority," and granting the order to stay the case and compel arbitration since a state court is "not granted the authority under the Federal Arbitration Act to compel arbitration." We affirm.

Appellee, Ernest McCollum ("McCollum"), on or about February 20, 1979, began his employment with appellant Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"). Both parties signed an Account Executive Training Agreement and Account Executive Agreement, having identical clauses regarding post-employment solicitation of Merrill Lynch clients and post-employment use of books and records of Merrill Lynch. On or about August 9, 1983, McCollum voluntarily terminated his employment with Merrill Lynch and on or about the same day commenced working for appellee Smith Barney, Harris, Upham & Co., Inc., ("Smith Barney"). Merrill Lynch, in its First Amended Original Petition and Application for Temporary Restraining Order, Temporary Injunction and Permanent Injunction, brought four "counts:" "Illegal Disclosure and Use of Trade Secrets," "Tortious Interference with Contractual and Business Relations," "Contractual Violations of McCollum," and "Unjust Enrichment." In the body of its petition, Merrill Lynch alleged that McCollum has "contacted Merrill Lynch clients to solicit business and/or the transfer of their accounts from Merrill Lynch to Smith Barney, ... removed and taken records of Merrill Lynch ... in original or in duplicated form and has made use of such records, ... tortiously interfered with the contractual relations between Merrill Lynch and its customers, ... and encouraged and enticed Merrill Lynch brokers and other personnel to breach their employment contracts with Merrill Lynch." Merrill Lynch alleged that Smith Barney had reason to know of the employment agreements and their terms and that Smith Barney encouraged McCollum in his actions.

Four of appellant's points of error concern the trial court's denial of temporary injunctive relief. Merrill Lynch sought a temporary injunction enjoining appellees from further use of confidential information and further solicitation of Merrill Lynch clients. The trial judge, in denying the application, at least in part, relied on the court's finding that all matters pled by appellant were subject to arbitration. In its first point appellant contends that the trial court erred in finding all matters pled subject to arbitration. We disagree.

First, the trial court had to decide whether an agreement to arbitrate existed, and if so, whether the matters pled by Merrill Lynch came within that agreement. Paragraph 1 & 2 of the Account Executive Agreement proscribe many of the acts which McCollum is accused of committing.

All records of Merrill Lynch including the names and addresses of the 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 nor any part of them is to be removed from the premises of Merrill Lynch either in original form or in duplicated or copied form ....

In the event of termination of my service with Merrill Lynch for any reason, I will not solicit any of the clients of Merrill Lynch for any reason, I will not solicit any of the clients of Merrill Lynch whom I served or whose names become known to me while in the employ of Merrill Lynch, or any subsidiary thereof at which I was employed at any time for a period of one year from the date or termination of my employment ....

Paragraph 5 of the same document provides:

I agree that any controversy between myself 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 at the request of either party in accordance with the constitution and Rules of the New York Exchange, then in effect.

Merrill Lynch argues that not all of the matters pled are arbitrable since some took place after McCollum terminated his employment with Merrill Lynch and are founded in tort; consequently, they do not come within the parties arbitration agreement which covers controversies "arising out of my employment or the termination of my employment." It cites Coudert v. Paine Webber Jackson & Curtis, 705 F.2d 78 (2d Cir.1983) for this proposition. In Coudert, a registered representative sued her former employer brokerage firm claiming defamation, invasion of privacy and intentional infliction of emotional distress. In reversing the trial court, the appellate court held "rather, the dispute itself does not pertain to employment or termination of employment; the tortious acts are all claimed to have occurred after such termination." Id. at 82. Merrill Lynch would have us hold that the timing of the alleged controversial acts are determinative of whether the controversy "arises out of employment or termination of employment." We refuse to so hold. We believe Coudert should be limited to its facts in that the post-employment controversy concerned tortious conduct alone, not violations of the parties employment agreement such as the case before us. We find support for our position in Downing v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 725 F.2d 192 (8th Cir.1984). "In the present case, the temporal aspect is an inevitable consequence of the contract clause in issue." Id., at 195. We believe the proper approach to be an inquiry as to whether the subject matter of the complaints arose out of the parties employment agreement or termination of employment. The mere timing of the controversial acts should not be controlling. In the case at bar Merrill Lynch argues that the express terms of the employment agreement were violated, but since these alleged violations took place after the employee-employer relationship terminated, the controversy does not arise out of employment or termination of employment. We cannot accept this argument.

Merrill Lynch and Smith Barney are members of the New York Stock Exchange and McCollum is a registered representative of the exchange. There is substantial authority for the proposition that, irrespective of the parties employment agreement as drafted by Merrill Lynch, the constitution and rules of the New York Stock Exchange constitute a part of that employment agreement given the parties relationship to the exchange. The scope of the arbitration provisions in these rules and the constitution is even broader than the provisions in the Account Executive Training Agreement and Account Executive Agreement entered into by the parties.

Section 2 of the Arbitration Act, 9 U.S.C. Section 2 (1970), makes enforceable all arbitration agreements concerning transactions relating to commerce .... Article VIII, Section 1 of the New York Stock Exchange Constitution provides:

Any controversy between parties who are members, allied members, member firms or member corporations shall, at the instance of any such party, and any controversy between a non-member firm or member corporation arising out of the business of such member, allied member, member firm or member corporation, ... shall, at the instance of such nonmember, be submitted for arbitration, in accordance with the provisions of the Constitution and the rules of the Board of Governors.

Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1211 (2d Cir.1972), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972).

The constitution and rules of a stock exchange constitute a contract between all members of the exchange with each other and with the exchange itself ....

Since the rules of the Exchange 'constitute a contract between the members, the arbitration provisions which they embody have contractual validity.' * * * The Exchange provisions requiring arbitration constitute an agreement to arbitrate which is binding upon both [parties].

Brown v. Gilligan, Will & Co., 287 F.Supp. 766, 769-770 (S.D.N.Y.1968).

The counts and allegations pled by Merrill Lynch are set out in the second paragraph of this opinion. At oral argument, Merrill Lynch argued emphatically that three of the counts were non-arbitrable because they did not "arise out of employment or termination of employment." In "count three" Merrill Lynch alleged a cause of action against Smith Barney for "unjust enrichment." No authority was cited recognizing unjust enrichment as a cause of action and our research has yielded none. Quantum meruit is recognized as a cause of action designed to prevent unjust enrichment. Even if "unjust enrichment" were a cause of action we believe it would come within the scope of the constitution and rules of the New York Stock Exchange. Merrill Lynch has not seriously contended that the constitution and rules of the New York Stock Exchange are not applicable to the controversy before us. The trial judge found all the matters pled subject to arbitration. He did not articulate whether he believed them arbitrable pursuant to the parties agreement or the constitution and rules of the New York Stock Exchange. Thus given the...