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Downing v. Lynch

decided: January 9, 1984.

WILLIAM CARY DOWNING, PLAINTIFF-APPELLANT,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., DEFENDANT-APPELLEE



Appeal from an order of the United States District Court for the Southern District of New York (Gerard L. Goettel, Judge) denying motions to compel arbitration, to stay this action pending arbitration and to enjoin the defendant from commencing parallel actions.

Mansfield, Kearse, and Winter, Circuit Judges. Mansfield, Circuit Judge (Concurring).

Author: Winter

WINTER, Circuit Judge:

William Cary Downing appeals from an order of the United States District Court for the Southern District of New York (Gerard L. Goettel, Judge) denying his motions to compel arbitration, to stay this action pending that arbitration and to enjoin the defendant from commencing parallel actions. We affirm and remand for further proceedings consistent with this opinion.

BACKGROUND

In February, 1982, Downing was hired by Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") as an account executive trainee and registered representative in its office in Savannah, Georgia. At the time of his employment, Downing signed a non-compete agreement. By that agreement, Downing pledged that if he left the firm, he would not for one year solicit any of Merrill Lynch's customers whom he had served or whose names had become known to him while in Merrill Lynch's employ. He also pledged that he would not remove from Merrill Lynch's premises any of its records, including records of the names and addresses of the firm's clients. The non-compete agreement provided that it should be construed and governed by New York law.

The agreement did not contain any provision for the arbitration of disputes between the parties. Nevertheless, Downing contends that an agreement to arbitrate existed by virtue of the fact that on November 16, 1981, he signed and filed a Form U-4 with the New York Stock Exchange (the "Exchange" or "NYSE"). By that form, which was also signed by an officer of Merrill Lynch, Downing agreed to "arbitrate any dispute, claim or controversy that may arise between me and my firm . . . that is required to be arbitrated under the rules, constitutions or by-laws of the organizations with which I register. . . ."

The Rules and Constitution of the New York Stock Exchange require arbitration in two circumstances. Rule 347 of the New York Stock Exchange requires that:

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. [emphasis added].

In addition, Article VIII, Section 1 of the Constitution of the New York Stock Exchange requires that:

Any controversy between parties who are members . . . [or] member firms . . . and any controversy between a non-member and a member . . . or member firm . . . arising out of the business of such member . . . shall at the instance of any such party, be submitted for arbitration, in accordance with the provisions of the Constitution and the Rules of the Board of Directors.

Downing resigned from Merrill Lynch on June 8, 1983 and immediately went to work for E.F. Hutton ("Hutton") in Savannah. He took with him copies of Merrill Lynch documents containing confidential information furnished by customers concerning securities transactions with Merrill Lynch. Downing intends to use those documents to solicit business on behalf of Hutton.

On the day he left Merrill Lynch, Downing filed a complaint in the Southern District of New York seeking a declaratory judgment that his "controversy" with Merrill Lynch was arbitrable. He also sought, inter alia, to compel Merrill Lynch to arbitrate the controversy before the Exchange, pursuant to the Federal Arbitration Act, 9 U.S.C. ยงยง 1 et seq. (1976), and to enjoin Merrill Lynch from commencing litigation in any other court.

On June 9, 1983, the day following the filing of this action, Louis Fantacone, Resident Vice-President of Merrill Lynch, wrote Downing to request that he return any customer information that he might have in his possession and to note that Downing had agreed not to solicit securities business from the customers with whom he had contact while in Merrill Lynch's employ. Downing contended before the district court that Merrill Lynch customarily seeks judicial enforcement of non-compete agreements against former account executives while opposing their demands for arbitration before the Exchange. He also stated that his Merrill Lynch Office Manager had threatened to pursue "legal proceedings" against him if he solicited Merrill Lynch ...


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