Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey
726 F.2d 1286 (1984)
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Rule of Law:
Under the Federal Arbitration Act (FAA), disputes arising out of employment contracts, even if the alleged breach occurs post-termination, are arbitrable if the rights and duties involved are dependent on the original contract, and a court's grant of preliminary injunctive relief prior to arbitration in such cases constitutes an abuse of discretion that frustrates the Act's purpose.
Facts:
- Ivan Hovey, Mary Wichmann, Bruce Markey, and Richard Kadry were account executives with Merrill Lynch, Pierce, Fenner & Smith, Inc.
- Hovey, Markey, and Wichmann signed employment agreements with Merrill Lynch stating that certain records remained Merrill Lynch's property post-employment, prohibiting removal or retention of copies, and restricting client solicitation for one year after termination; they, along with Merrill Lynch, were also members of the New York Stock Exchange (NYSE).
- Richard Kadry was also an employee, and Erickson was a secretary for Merrill Lynch; neither were NYSE members, and Erickson did not sign an employment agreement.
- Hovey, Wichmann, Markey, Kadry, and Erickson resigned from Merrill Lynch on or around July 1, 1983.
- All five former employees subsequently joined E.F. Hutton, a competitor firm.
- The former employees admitted to retaining limited client information entrusted to them while at Merrill Lynch and to soliciting those clients while employed by E.F. Hutton.
Procedural Posture:
- Mary Wichmann filed a lawsuit in federal district court against Merrill Lynch, seeking to restrain Merrill Lynch from suing her, to compel arbitration before the New York Stock Exchange (NYSE) of any disputes, and to stay the action pending arbitration.
- Merrill Lynch filed a counterclaim against Wichmann and a separate complaint against the other former employees (Hovey, Markey, Kadry, and Erickson) in federal district court, seeking an order enjoining them from further violations of their employment contracts.
- The employees cross-moved the federal district court to compel arbitration under the Federal Arbitration Act (9 U.S.C. §§ 1-4).
- The federal district court determined that the dispute was not arbitrable.
- The federal district court granted Merrill Lynch's request for preliminary injunctive relief against the former employees.
- The employees appealed the district court's decision to the United States Court of Appeals for the Eighth Circuit.
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Issue:
Does the Federal Arbitration Act compel arbitration of a dispute between a former employer and former employees concerning post-termination solicitation and use of client records, where the underlying rights and duties stem from employment contracts, and if so, does the issuance of a preliminary injunction prior to arbitration constitute an abuse of discretion?
Opinions:
Majority - LAY, Chief Judge
Yes, the Federal Arbitration Act compels arbitration of the dispute concerning post-termination solicitation and use of client records, and the district court's issuance of a preliminary injunction prior to arbitration was an abuse of discretion. The court first found that valid arbitration agreements existed. Hovey, Markey, and Wichmann, as NYSE members, were bound by NYSE Rule 347, which mandates arbitration for controversies 'arising out of the employment or termination of employment.' For Kadry and Erickson, the court held that NYSE Article VIII provided an agreement to arbitrate controversies 'arising out of the business' of a member, interpreting this broadly to include employees, not just customers. The court then addressed whether the dispute's subject matter was covered by these agreements. Rejecting the district court's rigid temporal analysis, the Eighth Circuit ruled that 'arising out of' does not mean 'during' the employment relationship. Citing Nolde Bros., Inc. v. Bakery & Confectionary Workers Union, the court reasoned that arbitration clauses survive contract termination for disputes over obligations arguably created by the expired agreement. Here, Merrill Lynch's cause of action depended on the employment contract, and the parties' rights and duties were determined by it, distinguishing it from a purely post-termination tort claim like in Coudert v. Paine Webber Jackson & Curtis. Therefore, the dispute was arbitrable. The court then concluded that the district court abused its discretion in granting a preliminary injunction. Citing Moses H. Cone Memorial Hospital v. Mercury Construction Corp., the court emphasized that the Federal Arbitration Act expresses a clear congressional intent to move parties into arbitration 'as quickly and easily as possible,' and judicial inquiry for injunctive relief necessarily injects the court into the merits of issues more appropriately left to the arbitrator. The Act directs courts to stay judicial action when arbitration is mandated, and no contractual provision for injunctive relief pending arbitration was alleged.
Analysis:
This case significantly reinforces the broad scope and preemptive nature of the Federal Arbitration Act (FAA), particularly in employment-related disputes within the securities industry. It clarifies that arbitration clauses covering matters 'arising out of' employment are not strictly limited to the duration of employment but extend to post-termination conduct when the underlying rights and duties derive from the employment contract. Furthermore, the ruling establishes a strong presumption against preliminary injunctive relief in arbitrable disputes, emphasizing that judicial intervention, even to preserve the status quo, typically frustrates the FAA's policy of swift and unobstructed arbitration. This decision limits a party's ability to bypass arbitration through injunctive measures and encourages reliance on the agreed-upon arbitral forum for contract disputes.
