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

• Decision Date: 25 January 1984
• Docket Number: No. 83-2231,83-2231
• Citation: 726 F.2d 1286
• Parties: MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellee, v. Ivan HOVEY, Richard Kadry, Bruce Markey and Lynn Erickson, Appellants. Mary WICHMANN, Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1286

726 F.2d 1286

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellee, v. Ivan HOVEY, Richard Kadry, Bruce Markey and Lynn Erickson,

Appellants.

Mary WICHMANN, Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellee.

No. 83-2231.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 15, 1983.

Decided Jan. 25, 1984.

Stephen W. Plambeck, Nilles, Hansen, Selbo, Magill & Davies, Ltd., Fargo, N.D., Jerry Raskas, Raskas, Ruthmeyer, Pomerantz & Wayne, St. Louis, Mo., Thomas F. Curnin, Thomas J. Kavaler, Joel E. Davidson, Kathy M. Silberthau, Cahill, Gordon & Reindel, P.C., New York City, for appellants.

John J. Cole, Edwin L. Noel, Catherine D. Perry, St. Louis, Mo., for appellee; Armstrong, Teasdale, Kramer & Vaughan, St. Louis, Mo., Gjevre, McLarnan, Hannaher, Vaa, Skatvold & McLarnan, Moorhead, Minn., of counsel.

Before LAY, Chief Judge, FAGG, Circuit Judge, and NICHOL, Senior District Judge. ^*

LAY, Chief Judge.

Merrill Lynch, Pierce, Fenner & Smith, Inc. sought injunctive relief against five former employees to prevent their use of Merrill Lynch's records and their solicitation of Merrill Lynch clients. The employees counterclaimed seeking to compel arbitration under the Federal Arbitration Act, 9 U.S.C. Secs. 1-4 (1982). The district court granted injunctive relief ¹ and refused to submit the dispute to arbitration. The employees have appealed.

As former account executives with Merrill Lynch, Ivan Hovey, Mary Wichmann, Bruce Markey, and Richard Kadry each signed employment agreements. ² The agreement provides, inter alia, that certain records "shall remain the property of Merrill Lynch at all times during my employment with Merrill Lynch and after termination of my employment ... with Merrill Lynch" and prohibits former account executives from removing or retaining copies thereof; and it purports to prohibit these employees from "soliciting" clients of Merrill Lynch for one year after the termination of employment. The employees subsequently resigned from Merrill Lynch and joined E.F. Hutton, a competitor. ³ The employees admit that they have retained some limited information entrusted to them by clients whom they had serviced while at Merrill Lynch. Moreover, the employees admit that they have solicited these customers while at E.F. Hutton. (Appellant's Brief at 4). On appeal, we are not addressing whether this constitutes a breach of the employment agreement nor do we address the validity of the clauses that purport to prohibit this conduct. The issue presented on appeal is whether the dispute is subject to arbitration or whether Merrill Lynch may properly proceed in the federal district court.

I. Arbitrability

We initially address three issues: (1) whether there exists a valid agreement to arbitrate; (2) whether the subject matter of this dispute is covered by the agreement; and if so, (3) whether there has been a breach of the agreement. ⁴ See Johnson Controls, Inc. v. City of Cedar Rapids, Iowa, 713 F.2d 370, 373 (8th Cir.1983); National Railroad Passenger Corp. v. Missouri Pacific Railroad, 501 F.2d 423, 427 (8th Cir.1974).

Merrill Lynch and Hovey, Markey, and Wichmann are members of the NYSE. As members of the NYSE, they have agreed to comply with the NYSE rules, including the dispute resolution procedures detailed in Rule 347. ⁵ The employees seek arbitration under the Federal Arbitration Act, 9 U.S.C. Secs. 3, 4 based on NYSE Rule 347. Rule 347 provides:

Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative by and with such member or member organization shall be settled by arbitration, at the instance of any such party, in accordance with the arbitration procedure described elsewhere in these rules.

It is readily apparent that this rule is binding on its signatories and is part of the employment agreement between the employees and Merrill Lynch. See Muh v. Newburger, Loeb & Co., 540 F.2d 970, 972-73 (9th Cir.1976); Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1211 (2d Cir.), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972). Moreover, we find that Rule 347 constitutes a valid written agreement to arbitrate which is governed by the Federal Arbitration Act. ⁶ 9 U.S.C. Secs. 1-4; see Coenen, 453 F.2d at 1211; Stokes v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 523 F.2d 433 (6th Cir.1975).

On the other hand, Kadry and Erickson are not members of the NYSE, nor do their employment contracts contain an arbitration agreement. Kadry and Erickson rely primarily on Article VIII of the NYSE Constitution to support their claim for arbitration. Article VIII allows nonmembers to compel arbitration of any controversy "arising out of the business" of a member. ⁷ Merrill Lynch contends that the employees' reliance on Article VIII is misplaced. Merrill Lynch urges that Article VIII's reference to "business" reflects that the provision's intention is to allow customers, not employees, to compel arbitration. We find, however, that the provision is not so limited. The article of the Constitution reflects the self-regulation of the securities industry, as well as the effort to provide an integrated method of resolving disputes involving the affairs of the NYSE. We find that Article VIII constitutes an agreement to arbitrate, upon which Kadry and Erickson may rely.

In accordance with the Federal Arbitration Act we also find that all of the employees have timely and properly requested arbitration. The remaining issue is whether the arbitration agreement reaches the subject matter of the dispute here.

The various arbitration agreements between the parties employ substantially the same terminology. They state that "[a]ny controversy ... arising out of the employment or termination of employment ... shall be settled by arbitration." NYSE, Rule 347 (emphasis added).

The district court found that the solicitation and record duplication took place after the employment relationship between the parties had been terminated. Employing essentially a temporal analysis, the court concluded that the violations, therefore, could not have "aris[en] out of the employment or termination of employment." On appeal, Merrill Lynch reasserts the contention that only those disputes which occurred during the employment relationship are arbitrable. On the other hand, the employees contend that, although the dispute occurred after their termination, it is still within the scope of the arbitration agreement. Upon analysis of the applicability of the Federal Arbitration Act and the Rules and Constitution of the NYSE, along with a plain reading of the arbitration agreement, we find that the dispute is arbitrable.

Under the Federal Arbitration Act, 9 U.S.C. Secs. 1-4 (1982), where the parties have agreed to seek dispute resolution by arbitration, the courts are asked to stay their hand. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., --- U.S. ----, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). The scope of the arbitration agreement will be interpreted liberally and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone, 103 S.Ct. at 941 & n. 27; Johnson Controls, 713 F.2d at 373. "[T]he court's function in an action to compel arbitration may not extend beyond ascertaining whether the party seeking arbitration has made a claim which on its face is governed by the contract." National R.R. Passenger Corp., 501 F.2d at 427 (emphasis original). The presumption of arbitrability, however, is tempered by the caveat that parties cannot be forced to arbitrate controversies that they have not agreed to submit to arbitration. United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, 4 L.Ed.2d 1409 (1960).

To support its argument that the present dispute is not arbitrable, Merrill Lynch relies primarily on Coudert v. Paine Webber Jackson & Curtis, 705 F.2d 78 (2d Cir.1983) and the district court opinion in Downing v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 83 Civ. 4312 (S.D.N.Y. Aug. 18, 1983), in which the appeal was pending. In Coudert, a divided panel of the Second Circuit held that a dispute involving a defamation claim of a former account executive was not arbitrable where the alleged defamation took place after the account executive had resigned. In Downing, a district court extended this holding to a dispute involving a violation of the solicitation clause after the employee had resigned and joined a competing firm. On appeal, however, the Second Circuit reversed the district court's extension finding that "a dispute over such a contract term would clearly be arbitrable notwithstanding the time at which the dispute arose." Downing v. Merrill Lynch, Pierce, Fenner & Smith, No. 83-7710 slip op. at 5 (2d Cir. Jan. 9, 1984) (remanded to determine whether there was an agreement to arbitrate).

The sole issue in Coudert was the arbitrability under the Rules of the NYSE of a grievance arising out of an employer's allegedly tortious conduct. The majority in Coudert distinguished "grievance[s] arising after the termination of the agreement to arbitrate" from grievances that are based on conditions that arise during the term of the agreement to arbitrate. 705 F.2d at 81. The former are not arbitrable; the latter, however, are arbitrable regardless of whether the agreement to arbitrate has since ceased. In Coudert, the majority found that the basis of the grievance was the employer's conduct after the termination of the employment relationship and therefore also after the termination of the agreement to arbitrate. Id. at 82. Accordingly, the dispute was not found to be subject to the arbitration agreement. Id. Our case is distinguishable from Coudert and we decline to extend a rigid temporal approach to the determination of arbitrability in the...