Pre-arbitration 'status quo' injunctions: do they protect the arbitration process or impair agreements to arbitrate?

• Author: Hanzman, Michael A.

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. McCollum, 666 S.W.2d 604 (Tex.App. 1984), a Texas intermediary appellate court followed then-recent decisions from the federal Courts of Appeals for the Eighth and 10th circuits, and held that [sub sections] 3 and 4 of the Federal Arbitration Act, 9 U.S.C. [sub sections] 3,4, preclude courts from issuing preliminary injunctions in disputes governed by unqualified arbitration agreements. After the Supreme Court of Texas denied its application for writ of error review, Merrill Lynch filed a petition for a writ of certiorari in the Supreme Court of the United States. Dissenting from the Court's denial of certiorari review, Justice White, joined by Justice Blackmun, observed that other courts, "apparently untroubled by [sections] 3 of the Arbitration Act," had routinely held that such injunctions were available, and stated: "The question presented by this case -- whether the Arbitration Act bars a court from issuing a preliminary injunction in a case subject to arbitration -- is one that has divided the state and federal courts." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. McCollum, 105 S. Ct. 811, 812-813 (1985).

Over a decade later this question of considerable importance still divides courts, and it will undoubtedly continue to be litigated frequently as more businesses and professions choose arbitration as their preferred method of dispute resolution.

The debate over whether courts have subject matter jurisdiction to grant injunctive relief in arbitrable disputes arises most often in cases involving personal service contracts, such as employment or partnership agreements, and other contractual settings in which the parties exchange confidential or proprietary information. To avoid lengthy, expensive, and public litigation, many businesses incorporate expansive arbitration clauses into such contracts, often failing to consider whether the arbitration forum will be equipped to dispense appropriate temporary or emergency relief should a dispute arise. When an employee or partner then breaches a covenant not to compete, improperly solicits former clients, or misappropriates proprietary information, the business that insisted upon (and in all likelihood drafted) the arbitration clause seeks injunctive relief to maintain the "status quo" and prevent the alleged ongoing breach pending arbitration. They contend that judicial intervention is necessary to enforce the agreement to engage in meaningful arbitration, and prevent the arbitration process from becoming a hollow formality. The party opposing judicial intervention typically protests that the court should not nullify the bargained-for arbitration by delving into the merits of the controversy and issuing preliminary rulings that could interfere with the arbitrators' independent determinations.

When presented with arbitration agreements that expressly authorize or contemplate pre-arbitration injunction proceedings, courts have unhesitatingly and uniformly enforced the parties' bargain by sanctioning requests for .status quo" injunctions. See, e.g., American Express Financial Advisors, Inc. v. Makarewicz, 122 F.3d 936 (11th Cir. 1997). Applying ordinary legal principles governing the formulation of contracts, and recognizing that because arbitration is a matter of contract parties "are free to structure their arbitration agreements as they see fit. . ." , id. at 940, courts faced with such arbitration agreements simply adhere to the controlling contractual provision. In many cases, however, the governing arbitration agreement is silent on the question of whether pre-arbitration injunctive proceedings are permissible. When the parties' agreement does not expressly or implicitly open the courthouse door, the question then becomes whether allowing judicial intervention runs afoul of the FAA. This is the question that has "divided the state and federal courts."McCollum, 105 S. Ct. at 812.

The purpose of this article is two-fold. Its first objective is to educate practitioners so they will be prepared to address this issue when counseling a client entering into an arbitration agreement, or a client faced with an arbitrable dispute. A thorough understanding of this issue is critic al since, as a practical matter, many cases are won or lost at the preliminary injunction stage, with the result obtained driving the terms of a settlement or the eventual outcome on the merits. The article then advocates a uniform resolution of the present decisional conflict in order to achieve consistency and stability in the enforcement of expansive arbitration clauses.

The Overriding Purpose of Arbitration Statutes

The FAA was enacted by Congress in reaction to "the old judicial hostility to arbitration. "Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 985 (2d Cir. 1942).(1) The Act was designed to "overrule the judiciary's longstanding refusal to enforce agreements to arbitrate," Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238 (1985), and to place such agreements "upon the same footing as other contracts." Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974). Many state legislatures also have enacted statutes that encourage the use of arbitration and ensure that agreements to arbitrate will be enforced according to their terms and conditions. See, eg., F.S. [sections] 682.01 et seq., known as the "Florida Arbitration Code."(2) These federal and state statutes were motivated by a desire to render arbitration agreements no less and no more enforceable than any other contract. Prima Paint Corp v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).

To implement their enforcement mandate, arbitration statutes typically provide mechanisms available to parties seeking to compel compliance with an arbitration agreement. Section 3 of the FAA directs that a court, upon being satisfied that a matter before it is referable to arbitration, "shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. . . ."(3) Similarly, [sections] 4 of the FAA instructs federal courts to order arbitration to proceed "in accordance with the terms of the agreement" upon being satisfied that "the making of the agreement for arbitration or the failure to comply therewith is not at issue."(4) Most state arbitration statutes contain similar provisions, such as F.S. [sections] 682.03 (a court shall direct the parties to proceed with arbitration in accordance with the terms of their arbitration agreement provided it is satisfied that no substantial issue exists as to the making of the agreement or arbitration provision).

Against this legislative backdrop, the judiciary's view of arbitration has "evolved from hostility to eager acceptance." Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 910 (Del. 1989). It is now well settled that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay or a like defense to arbitrability." See Moses H. Cone Memorial Hosp. v. Mercury Constr Corp., 460 US. 1, 103 S. Ct. 942, n.34 (1983). Courts also have embraced the view that absent the parties' clear intent to the contrary, broad arbitration clauses, such as those requiring the arbitration of "any and all controversies" or "any dispute" relating to or arising out of a particular agreement, will encompass all claims touching upon the subject matter of the contract, regardless "of the legal labels attached to them," including statutory and tort claims. See Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F2d 840,846 (2d Cir. 1987).(5)

Although courts clearly favor arbitration, the judiciary also has recognized that arbitration statutes were motivated "first and foremost, by a congressional desire to enforce agreements into which the parties had entered, "Dean Witter u Byrd, 105 S. Ct. at 1242, and that contracting parties are "at liberty to choose the terms under which they will arbitrate." Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 109 S. Ct. 1248 (1989). It follows that in determining whether a particular claim is arbitrable, the...