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ESSEX CORP. v. INDEPENDENT FIN. MKTG. GROUP

February 23, 1998

ESSEX CORPORATION, Plaintiff, against INDEPENDENT FINANCIAL MARKETING GROUP, INC., JOHN HARRELL, and LORI YOUNG, Defendants.


The opinion of the court was delivered by: BAER

 HAROLD BAER JR., District Judge:

 Defendants Independent Financial Marketing Group, Inc. ("Independent"), John Harrell and Lori Young move to compel arbitration of Plaintiff Essex Corporation's ("Essex") claims. *fn1" For the reasons stated below, the motion to compel arbitration is granted and the action stayed.

 I. Background

 The Plaintiff, Essex, is a New York Corporation that markets annuities, investment, and insurance products to banks and their customers. The Defendant, independent, is a competitor of Essex in the bank insurance and investment industry. Defendants John Harrell and Lori Young are former Essex employees who currently work for Independent. In their amended complaint dated June 2, 1997, Essex advances the following nine claims: (1) against Independent, for copyright infringement; (2) against Young, for copyright infringement; (3) against Harrell, for breaching his confidentiality agreement with Essex by disclosing confidential business information to Independent; (4) against Harrell, for breaching his restrictive covenant by assisting Independent in their efforts to attract one of Essex's clients; (5) against Harrell and Young, for violating the duty of fidelity owed to Essex; (6) against Independent, for wrongfully inducing Harrell to breach his agreement with Essex; (7) against Independent, for wrongfully inducing and conspiring with Harrell and Young to violate their fiduciary duties to Essex; (8) against Independent, for making false representations concerning its services; and (9) against Independent, for trademark violations and unfair competition. Compl. PP 42-62. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1331, 1338 and 1367, as well as 15 U.S.C. § 1121.

 John Harrell worked for Essex from 1990 until 1996 and Lori Young from 1993 to 1994. As employees of Essex, their principal responsibilities included: (1) the sale of annuities, including variable annuities, which involved investment in securities; and (2) the training of others to sell annuities, including instruction in compliance with securities law. Harrell Decl. P 4; Young Decl. P 4. These activities required that Harrell and Young be licensed and registered with a member of the National Association of Securities Dealers ("NASD"). Essex is not a NASD member. Consequently, Harrell and Young obtained their license and registration through Essex National Securities, Inc. ("ENSI"), a NASD-member and wholly-owned subsidiary of Essex. Harrell Decl. PP 4-6; Young Decl. PP 4-6. At all times, however, Harrell and Young were officially Essex employees.

 ENSI performs three functions for Essex. First, sales representatives of Essex's customer banks, who require NASD licensing, register with NASD through ENSI. Once these employees have obtained their license, they can sell NASD-registered products. Second, ENSI supervises these employees to insure compliance with NASD rules. Finally, payments received for NASD-registered products are deposited with ENSI, who send them to the investment company providing the product. The investment company then pays ENSI a percentage of each sale. Nicholas Aff. P 6. Between January 1, 1993 and January 1, 1997 Essex sold $ 11.3 billion in financial products. During this period, approximately 16% of Essex's total revenue, or $ 1.8 billion, can be attributed to ENSI. Nicholas Aff. PP 9, 11.

 As registered representatives of ENSI, Harrell and Young signed a Uniform Application for Securities Industry Registration ("Form U-4"). Harrell Decl. P 7; Young Decl. P 7. The Form U-4 states that the representative agrees to "arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws [of NASD]." Stechman Aff., Ex. 1.

 Essentially, Essex's claims are all related to one marketing strategy and two sets of documents, which they claim were wrongfully appropriated and used by Independent with the assistance of Harrell and Young. The first set of documents are called "Essex Black Pieces," which consist of charts, graphs, tables and text providing financial information and analysis concerning investment and historical trends in the securities industry. These documents are called Black Pieces because of their distinctive black background. They are used as sales tools by representatives selling Essex products. Essex owns the copyrights to these Black Pieces, but these documents are created by ENSI.

 The other set of documents relevant to this litigation are a series of informational publications called "Your Money Matters." These publications are distributed to prospective customers by Essex sales representatives. Particularly relevant here, is a document entitled "Your Money Matters - Investment Pyramid," which ranks various forms of securities according to risk and potential for financial return. As with the Black Pieces, Essex owns the copyrights to the "Your Money Matters" informational publications, but ENSI created these documents.

 Finally, Essex's system of presenting financial products to potential customers -- called "hybrid program marketing" -- is central to this action. According to Essex, most companies in the bank insurance and investment industry market their products through full-time employees, or by providing marketing support to branch bank employees who sell financial products on a part-time basis. Conversely, through hybrid program marketing, Essex utilizes both full-time employees of the bank or marketing company and part-time employees of the branch bank. Accompanying this program is a hybrid methodology, encompassing employee training and compensation, marketing and sales materials, techniques and strategies, and a system for implementing and sustaining the hybrid program. Essex contends that the hybrid program methodology is a valuable trade secret which Defendant Harrell agreed to maintain in strict confidence. *fn2" Compl. PP 15, 25.

 As stated earlier, both Harrell and Young are now employed by Independent. At Independent, Harrell and Young are involved in the marketing of variable annuities, and are therefore required to have securities licenses. Since Independent is not a member of NASD, Harrell and Young were licensed through Liberty Securities Corp. ("Liberty"), a NASD member wholly-owned by the entity that wholly-owns Independent.

 II. Discussion

 Form U-4, the agreement signed by Harrell and Young when employed by Essex, is a contract. Consequently, § 9 of the Federal Arbitration Act ("FAA") governs the interpretation of the arbitration provision contained in this agreement. See Thomas James Associates, Inc. v. Jameson, 102 F.3d 60, 65 (2d Cir. 1996). Pursuant to § 3 of the FAA, a district court must stay proceedings if satisfied that the parties have agreed in writing to arbitrate an issue in the litigation. ...


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