Opinion
Civil Action No. 02-471, Section: E/3
March 8, 2002
ORDER and JUDGMENT
This matter came before the Court on plaintiff's motion for a preliminary injunction to disqualify counsel. Record Doc. # 4. Plaintiff UBS PaineWebber, Inc., ("Painewebber") filed a "Verified Complaint for Injunction in Aid of Arbitration" in district court (Record Doc. # 1) seeking an injunction restraining and enjoining defendant L. Jerome Stanley ("Stanley") from continuing his representation of defendant Joey S. Stone ("Stone") in an arbitration that is presently pending before NASD Dispute Resolution, Inc. ("NASD-DR"). The matter was submitted to the Court on the briefs on March 6, 2002.
ANALYSIS
"The Federal Arbitration Act, 9 U.S.C. § 1-14 governs arbitration agreements made in contracts involving commerce." Bhatia v. Johnston, 818 F.2d 418, 420 (5th Cir. 1987). If there is a valid arbitration agreement, and if the specific dispute falls within the substance and scope of that agreement, a district court cannot interfere with an arbitration proceeding. Smith, Barney, Harris Upham Co., Inc. v. Robinson, 12 F.3d 515, 520 (5th Cir. 1994) (citations omitted); Folse v. Richard Wolf Medical Instruments Corp., 56 F.3d 603, 605 (5th Cir. 1995).
In RGI, Inc., v. Tucker Associates, Inc., 858 F.2d 227 (5th Cir. 1988), the Fifth Circuit identified the issue as:
"a familiar problem that remains unsettled: `Whether the [Federal] Arbitration Act bars the issuance of a preliminary injunction pending arbitration.' Merrill Lynch, Pierce, Fenner Smith, Inc., v. McCullom, 469 U.S. 1127, 105 S.Ct. 811, 83 L.Ed.2d 804, 806 (1985) (White, J. dissenting from denial of cert.) (question has divided state and federal courts). The crux of the problem is whether the commands of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. require that a federal court immediately divest itself of any power to act to maintain the status quo once it decides a case before it is arbitrable."Id. at 228-29.
The parties do not dispute that a valid arbitration agreement exists, nor does either claim that the specific dispute under arbitration is beyond the substance and scope of that agreement. PaineWebber claims that Stanley should be disqualified as Stone's counsel in the pending arbitration proceeding because Stanley may be a material witness in that arbitration. Alternatively, Painewebber seeks an order from this Court precluding Stanley from testifying at the arbitration hearing should he continue as Stone's counsel. PaineWebber argues that this matter is governed by Louisiana Rules for Professional Conduct Rule 3.7. Under Rule 3.7, a lawyer "shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness. . . ." PaineWebber correctly cites several Louisiana cases holding that the Rules of Professional Conduct have the force and effect of substantive law, and are mandatory. However, none of the cases cited involves a matter pending in an arbitration proceeding. PaineWebber argues that Stanley's "prospective violation of RPC 3.7" is sufficient to warrant the injunctive relief sought from this Court.
Stanley argues that when the parties submitted their claims to arbitration at the NASD, they agreed that the arbitration would be governed by the rules in the NASD Code. The Court agrees. The relevant sections of the NASD Code of Arbitration are as follows:
10106. Legal proceedings No party shall, during the arbitration of any matter, prosecute or commence any suit, action, or proceeding against any other party touching upon any of the matters referred to arbitration pursuant to this Code.
10214. Awards The arbitrator(s) shall be empowered to award any relief that would be available in court under the law. The arbitrator(s) shall issue an award setting forth a summary of the issues, including the type(s) of dispute(s), the damages or other relief requested and awarded, a statement of any other issues resolved, and a statement regarding the disposition of any statutory claim(s).
10323. Evidence The arbitrator(s) shall determine the materiality and relevance of any evidence proffered and shall not be bound by rules governing the admissibility of evidence.
Painewebber argues vigorously that this matter does not touch upon the matter referred to arbitration but is merely ancillary thereto because it seeks to prevent an "improper and illegal act" — Stanley's "prospective violation of RPC 3.7" — from occurring in the arbitration. See PaineWebber's Reply Memorandum, p. 3. PaineWebber argues that Robinson supports its position that because its requested injunctive relief does not affect the merits of the controversy, the district court would not be "interfering" with the arbitration by granting the injunction. See id, at pp. 3-4. PaineWebber also cites NASD Rule 10335 providing that "[i] industry or clearing disputes required to be submitted to arbitration . . ., parties to the arbitration may seek injunctive relief either within the arbitration process or from a court of competent jurisdiction", and a number of cases from other circuits holding that a district court has the power to enter injunctive relief in aid of pending arbitration proceedings. PaineWebber's arguments are not persuasive.
Robinson signed an employment agreement with Smith Barney in which he agreed not to solicit other smith Barney employees for one year after the termination of his employment. Upon leaving Smith Barney and going to work for Morgan Keegan, he immediately (and admittedly) violated the terms of his non-solicitation agreement. Smith Barney initiated a NYSE arbitration against Robinson and his new employer seeking damages for breach of the nonsolicitation agreement and a permanent injunction preventing both from soliciting Smith Barney employees, and on the same day, filed suit against Robinson only in federal district court requesting a preliminary injunction against his continuing violation of the non-solicitation agreement. Robinson counterclaimed in district court for a permanent injunction prohibiting the arbitration proceeding. it is interesting that the issue of the propriety of a preliminary injunction by the district court in a case involving a pending arbitration proceeding never came up. The Fifth circuit identified the issue as the enforce ability of the non-solicitation agreement. Id. at 516. It affirmed the district court's preliminary injunction prohibiting Robinson from violating the agreement based on a finding on the merits that the agreement was enforceable under Louisiana law, id., and affirmed the district court's dismissal of Robinson's counterclaim for an injunction against the arbitration proceeding holding that "[a] district court cannot interfere with an arbitration proceeding . . . if a valid arbitration agreement exists and the specific dispute falls within the substance and scope of that agreement." Id. at 520.
Merrill Lynch, Pierce, Fenner Smith, Inc., v. Thornley, 147 F.2d 229 (2nd Cir. 1998); Performance Unlimited, Inc., v. Questar Publishing, 52 F.3d 1373, 1382 (6th Cir. 1995); Peabody Coalsales Co. v. Tampa Electric Co., 36 F.3d 47-48 (8th Cir. 1994). This Court notes that the Peabody Coalsales case is from the Eighth Circuit, whose rule is that injunctive relief is not available outside of the arbitration proceeding unless the parties' disputed contract provides for such relief. In that case, the Eighth circuit relied on language in the contract that required the continued performance of the contract during arbitration in reversing the district court's denial of injunctive relief.
In RGI, Inc., the Fifth Circuit discussed the split in the circuit courts as to whether injunctive relief from a district court is available in cases involving pending arbitration. Without specifically resolving the differences between the conflicting views, the Court affirmed the district court's grant of a preliminary injunction in a matter under arbitration "where the parties had contemplated its use before hand" in the disputed contract or agreement that is the subject of the arbitration. Id. at 229-30. In every case cited herein as approving injunctive relief in the district court, the requested relief was to enjoin one (or both) of the parties to a disputed contract from a continuing breach of the terms and conditions of the contract during the pendency of the arbitration proceeding. The underlying consideration of the courts is to "preserve the status quo pending arbitration and, ipso facto, the meaningfulness of the arbitration process." Teradyne v. Mostek Corp., 797 F.2d 43, 51 (1th Cir. 1986) (emphasis in original), quoted by RGI, Inc. 858 F.2d at 230. The requested injunction in this case has nothing to do with preserving the status quo between the parties pending arbitration.
The essence of PaineWebber's complaint is its concern about the nature and substance of the evidence to be heard and considered by the arbitrator. PaineWebber's motion asks the district court to inject itself directly into the arbitration proceeding by prospectively restricting the evidence to be proffered at that proceeding. The issue PaineWebber asks this Court to decide clearly "touches upon" the matter referred to arbitration without implicating the merits of the dispute being arbitrated. Under the rules of the arbitration to which PaineWebber agreed, it is prohibited from bringing this action in federal court. Moreover, those rules empower the arbitrator to award any relief to PaineWebber that would be available in court under the law, and to "determine the materiality and relevance of any evidence proffered". It is not the province of this Court to interfere with that process.
This Court's authority is limited to vacating, modifying, or correcting an arbitration award after it has been rendered. 9 U.S.C. § 10;Robinson, 12 F.3d at 520-21; Folse, 56 F.3d at 605. PaineWebber's remedy, if it believes the arbitrator engaged in misconduct or exceeded his or her power during the arbitration process, is to challenge the award pursuant to section 10 of the Arbitration Act after it has been rendered.
Upon consideration of the complaint, the record, all memoranda of counsel, the applicable law, and for the reasons assigned, plaintiff's motion for a preliminary injunction to disqualify counsel is DENIED.
Accordingly;
IT IS ORDERED, ADJUDGED AND DECREED that judgment be and is hereby entered in favor of defendants JOEY S. STONE and L. JEROME STANLEY DISMISSING plaintiff UBS PAINEWEBBER INC.'s complaint.