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MERRILL LYNCH, PIERCE, FENNER & SMITH INC. v. DOE

November 3, 1994

MERRILL LYNCH, PIERCE, FENNER & SMITH INC., Plaintiff,
v.
JOHN M. DOE (JOHN BANKS), Defendant.



The opinion of the court was delivered by: JOHN G. KOELTL

 John G. Koeltl, District Judge

 On the present application, plaintiff Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") seeks temporary declaratory relief declaring that it has the right, which cannot be enjoined by a state court, to proceed in federal court to seek injunctive relief in aid of an arbitration with a former Merrill Lynch financial consultant, defendant John Banks. For the reasons stated below, the Court, having heard oral argument from both sides and having received extensive evidentiary submissions, will grant the temporary declaratory relief sought. In the circumstances of this case, that relief is necessary to prevent irreparable injury and Merrill Lynch has demonstrated the clear likelihood of success on the merits in view of strong precedents from the United States Supreme Court which have held that a state court is without power to enjoin a person from proceeding with an in personam suit in federal court. See Donovan v. City of Dallas, 377 U.S. 408, 12 L. Ed. 2d 409, 84 S. Ct. 1579 (1964); General Atomic Co. v. Felter, 434 U.S. 12, 54 L. Ed. 2d 199, 98 S. Ct. 76 (1977) ("General Atomic I"); General Atomic Co. v. Felter, 436 U.S. 493, 56 L. Ed. 2d 480, 98 S. Ct. 1939 (1978) ("General Atomic II"); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 21 n.24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). The balance of the equities also tips decidedly in Merrill Lynch's favor on this application.

 This action involves a dispute between Merrill Lynch and a former broker in its Forth Worth, Texas office, John Banks. At the bottom of the controversy, of which only a small piece is at issue in this action, is Merrill Lynch's allegation that Banks, in violation of his employment agreement, is soliciting the clients he serviced at Merrill Lynch and is in possession of confidential Merrill Lynch information. Banks denies that he possesses confidential information and denies that it is wrongful for him to solicit the clients he personally served.

 Banks alleges that the merits of this controversy should never come before a court, because the entire dispute should be in arbitration before the National Association of Securities Dealers, Inc. (the "NASD"). Banks alleges that he has already instituted an NASD arbitration proceeding and that Merrill Lynch is seeking to avoid arbitration by prosecuting this action. Merrill Lynch asserts that it is perfectly prepared to go to arbitration, but that it should be entitled to seek preliminary relief in aid of arbitration, in the form of a status quo injunction, to protect its customers and business information from misappropriation. See, e.g., Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 910 F.2d 1049 (2d Cir. 1990) (holding that the Federal Arbitration Act does not preclude a federal district court from issuing preliminary injunctive relief pending arbitration). Merrill Lynch also alleges that it should have the right to pursue such relief in a federal court, or at least to present its case for such relief to a federal court, provided that the court has jurisdiction under the laws of the United States.

 Merrill Lynch finds itself forced to attempt to vindicate this basic right to sue in a federal court in this action, because Banks has sought to close the door of the federal court house by prosecuting a state court action to enjoin Merrill Lynch from suing him in federal court, despite the plain teaching of Donovan and its successors. Banks filed his suit in New York State Supreme Court prior to his resignation, jumping the gun, because he apparently believed that he had an opportunity to obtain ex parte relief in that forum and that he was unlikely to be faced with a preliminary injunction against himself pending arbitration. The parties were very candid at oral argument in acknowledging the forum shopping in which they were engaging.

 Indeed, we are informed by the parties that the maneuvering in the present cases are just a small part of a much larger pattern of forum shopping between the attorneys for the plaintiff -- who have represented numerous former brokerage employees -- and Merrill Lynch. Each accuses the other of seeking ex parte orders in various courts and not adequately advising the courts of the issues and principles involved. For example, Merrill Lynch charges that the attorneys for the plaintiff have obtained in excess of twenty temporary restraining orders in New York State Court aimed at establishing that forum's exclusive jurisdiction over arbitration proceedings, many of which were obtained ex parte and included injunctions against Merrill Lynch proceeding in federal court, despite the United States Supreme Court precedents giving it that right. The plaintiff in turn alleges, and Merrill Lynch denies, that Merrill Lynch attempts to obtain ex parte temporary restraining orders from federal courts around the country preventing its former brokers from soliciting clients and using client information.

 On October 27, 1994, Banks instituted his action in the Supreme Court of the State of New York and included an application by order to show cause for an order in aid of arbitration and a temporary restraining order to compel Merrill Lynch to arbitrate and to enjoin it from instituting other proceedings. In re the Application of John M. Doe v. Merrill Lynch, Pierce, Fenner & Smith, No. 130317/94, N.Y. Sup. Ct. (October 27, 1994). On October 28, after one hour's notice to Merrill Lynch and without the presence of Merrill Lynch's counsel, Justice Lobis of the New York State Supreme Court granted the temporary restraining order which enjoined Merrill Lynch from commencing or prosecuting an action or proceeding on this matter in any court or any arbitration forum other than the NASD. Soon after Justice Lobis issued her order, counsel for Merrill Lynch arrived at her chambers and advised her that this action had been filed in federal court earlier in the day, prior to the time that Merrill Lynch received notice to appear before her. Having been unaware of the pendency of this action when granting the temporary restraining order, Justice Lobis revised her order to permit Merrill Lynch to go forward before this Court. With respect to the commencement or prosecution of other proceedings, she continued the order pending the hearing on the application for an order in aid of arbitration, which is now scheduled for Friday, November 4, 1994.

 In this present action before the Court, apparently filed in anticipation of the defendant's strategy to prevent Merrill Lynch from obtaining injunctive relief by commencing suit in an unfriendly forum, Merrill Lynch seeks only preliminary declaratory relief and a declaratory judgment declaring that it has the right, which cannot be abridged by a state court, to seek status quo injunctive relief in connection with Banks' pending arbitration. The status quo relief would seek to protect Merrill Lynch pending a decision by the arbitration panel from the alleged misappropriation of its customer information.

 On the evening of October 28, 1994, the day on which this action was filed, this Court heard lengthy arguments on behalf of both parties and has since received and reviewed extensive submissions.

 II. JURISDICTION

 Jurisdiction for this declaratory judgment action is based on 28 U.S.C. § 1331, which provides that, "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331 (1994). This case arises under the Supremacy Clause of the United States Constitution and the laws of the United States that define the jurisdiction of United States district courts. See Donovan v. City of Dallas, 377 U.S. 408, 413, 12 L. Ed. 2d 409, 84 S. Ct. 1579 (1964) (reversing a grant of a state court injunction enjoining prosecution of a federal action and explaining, "Petitioners being properly in the federal court had a right granted by Congress to have the court decide the issues they presented, and to appeal to the Court of Appeals from the District Court's dismissal"). See generally Illinois v. General Elec. Co., 683 F.2d 206, 211 (7th Cir. 1982) (Posner, J.) (upholding federal question jurisdiction in a declaratory judgment action arising under the Supremacy Clause and the Commerce Clause), cert. denied, 461 U.S. 913, 77 L. Ed. 2d 282, 103 S. Ct. 1891 (1983). *fn1"

 III. AVAILABILITY OF TEMPORARY DECLARATORY RELIEF

 Merrill Lynch has sought temporary declaratory relief rather than a temporary restraining order or a preliminary injunction against Banks or the State Court because it alleges that it seeks the least intrusive way of vindicating its right to proceed in federal court. Given the ability of the Court to issue a final declaratory judgment, 28 U.S.C. § 2201, which is equitable in nature, this Court also has the power to issue such provisional equitable relief when it is necessary based on the urgency of the situation, the irreparable harm that would otherwise occur, and the remaining factors which courts consider when granting provisional injunctive relief. Some courts have indeed acknowledged that temporary or preliminary declaratory relief is available to litigants as a provisional remedy. See generally, Original Great Am. Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 276 (7th Cir. 1992) (Posner, J.) (citing cases in which some courts have found such relief available while others disagree and finding that preliminary declaratory relief is not appealable); Delaughter v. Borden Co., 431 F.2d 1354, 1358 (5th Cir. 1970).

  Moreover, in the circumstances of this case, preliminary relief should be available under the All Writs Act, 28 U.S.C. § 1651, as relief which is necessary in aid of this Court's jurisdiction. See, e.g., United States v. New York Telephone Co., 434 U.S. 159, 173-74, 54 L. Ed. 2d 376, 98 S. Ct. 364 (1977) (holding that, under the All Writs Act, "'unless appropriately confined by Congress, a federal court may avail itself of all auxiliary writs as aids in the performance of its duties, when the use of such historic aids is calculated to achieve the ends of justice entrusted to it.' . . . The power conferred by the Act extends, under appropriate circumstances, to persons who, though not parties to the original action or engaged in wrongdoing, are in a position to frustrate the implementation of a court order or the proper administration of justice. . .") (citations omitted). Given the pendency of the state court action, the temporary restraining order ...


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