Opinion ID: 221659
Heading Depth: 2
Heading Rank: 2

Heading: Power to Grant Preliminary Injunction

Text: The Employee Defendants argue that the district court lacked power to issue a preliminary injunction because the Receiver's claims against them are subject to arbitration. The Receiver argues that case law, the FINRA rules, and common sense allows the district court to issue a preliminary injunction pending its resolution of a motion to compel arbitration. The district court found that it had power to grant preliminary injunctive relief before deciding whether to compel arbitration. We agree with the district court. While the Employee Defendants acknowledge that the grant of a preliminary injunction lies within a district court's discretion, they posit that a motion to compel arbitration strips the district court of its power to grant an injunction. The Employee Defendants contend that (1) SGC is and was subject to arbitration for this dispute at all relevant times because it is a member of FINRA and it is bound under the broad arbitration clause of each Promissory Note, which requires that any controversy arising out of or related to the Note be submitted to arbitration pursuant to FINRA rules; (2) the dispute in this action is arbitrable because the Receiver became subject to the FINRA rules and the arbitration clauses when he stepped into the shoes of the received entity he represents; and (3) the FINRA rules do not contemplate pre-arbitration injunctive relief nor allow court-ordered injunctions lasting longer than 15 days. The Employee Defendants argue that because the dispute is arbitrable and subject to the FINRA rules, the district court did not have the discretion to issue injunctive relief; it only had the power to decide the motion to compel arbitration. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) (By its terms, the Act leaves no room for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.). The Employee Defendants also argue that cases from both sides of a circuit split support their contention that the district court does not have power to enter an injunction. The circuit split concerns the power of a district court to issue an injunction while arbitration is pending. The Fifth Circuit acknowledged the circuit split in RGI, Inc. v. Tucker & Associates, Inc., 858 F.2d 227, 229 (5th Cir.1988), but did not enter the fray. [6] The Employee Defendants contend that once again we may avoid the fray and still decide the issue in their favor because both the Eighth Circuit, on one side of the split, and the Seventh Circuit, on the other side of the split, would not permit an injunction here. The Eighth Circuit held that where the [Federal Arbitration Act (FAA) ] is applicable to the dispute between the parties and no qualifying language has been alleged, the district court errs in granting injunctive relief because the judicial inquiry required to determine the propriety of injunctive relief necessarily would inject the court into the merits of issues more appropriately left to the arbitrator. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286, 1292 (8th Cir.1984). The Seventh Circuit held that the district court may only issue injunctive relief that is effective only until the arbitration panel is able to address whether the equitable relief should remain in effect. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Salvano, 999 F.2d 211, 215-16 (7th Cir. 1993). The Receiver responds that the district court's broad power to preserve the status quo is well-established and supported by case law, FINRA rules, and common sense. The Receiver notes that even after a district court decides that a case is subject to arbitration, most federal authority permits the district court to issue a preliminary injunction to maintain the status quo pending arbitration. Further, the Receiver points out that under FINRA Rule 13804, (1) parties can seek court-ordered temporary injunctive relief even where the case is subject to mandatory arbitration, and (2) if a court issues a temporary injunction in a dispute subject to arbitration, an arbitration panel will hold a hearing within 15 days to determine whether to continue the injunctive relief. The Receiver argues that if FINRA rules allow court-ordered injunctive relief when a party loses on the motion to compel arbitration, then he is entitled to such relief while the motion is still pending. Finally, the Receiver notes that a rule that would prohibit the district court from preserving the status quo when a motion to compel arbitration is filed would enable any party to strip the trial court of its authority to enjoin the party's conduct simply by filing a motion to compel arbitration.
In its order, the district court relied on its equitable powers to preserve the status quo, and expressly reserved the question of whether the Receiver's claims were subject to arbitration. In so doing, the district court noted that the cases in the circuit split did not specifically address the issue in this case: whether a court may preserve the status quo pending its resolution of a motion to compel arbitration, not pending the actual arbitration itself. We agree with the district court that it court can grant preliminary relief before deciding whether to compel arbitration. The language of the FAA does not touch on the ancillary power of the federal court to act before it decides whether the dispute is arbitrable. The federal law of arbitration is governed by the FAA. 9 U.S.C. §§ 1-16. As the Employee Defendants note, the Supreme Court has consistently expressed a strong preference for arbitration. See Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (In enacting § 2 of the [FAA], Congress declared a national policy favoring arbitration. ...). However, these sections do not provide guidance on the issue of whether a court may issue a preliminary injunction before deciding whether the dispute is arbitrable. Section 3 provides: If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, 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, providing the applicant for the stay is not in default in proceeding with such arbitration. 9 U.S.C. § 3 (emphasis added). Similarly, § 4 provides: A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court ... for an order directing that such arbitration proceed in the manner provided for in such agreement.... The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. 9 U.S.C. § 4 (emphasis added). Section 3 only speaks to what the court should do once it is satisfied that the issue is referable to arbitration. Similarly, § 4 mandates that the court must direct the parties to proceed to arbitration only after it is satisfied that there is no issue as to whether a party failed to comply with the arbitration agreement. Both of these sections speak only to situations after the court has decided arbitration must ensue. Here, the district court has yet to make up its mind as to arbitrability. The district court relied on its equitable powers to preserve the status quo, but expressly reserved the issue of whether the Receiver's claims were subject to arbitration for resolution at a later date. Nothing in the FAA controls a district court's approach to its docket. While the Supreme Court has stated that Congress'[s] clear intent, in the [FAA], [was] to move the parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible[,] there is nothing to control the district court's expeditious determination of arbitrability. Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (emphasis added). The cases cited by the Employee Defendants also do not bar the exercise of the district court's equitable powers here. The RGI Court found that [t]he crux of the problem [in the circuit split] is whether the commands of the [FAA] require that a federal court immediately divest itself of any power to act to maintain the status quo once it decides that the case before it is arbitrable.  RGI, 858 F.2d at 228-29 (emphasis added). Here, however, the district court has not yet decided whether the case is arbitrable and thus the circuit-split cases are not applicable. The Receiver's request for a preliminary injunction was entered before the motion to compel arbitration. We agree with the district court that if we were to reverse and hold that the district court must stop everything and consider the motion to compel arbitration, such a holding would create a harsh procedural rule: in order to avoid irreparable injury, motions to compel arbitration where a request for injunctive relief is involved must be resolved before any temporary restraining order expires. Such a rule would be both burdensome for district courts and impracticable, given the time it takes motions to compel arbitration to become ripe for ruling, even if no discovery is required. Janvey v. Alguire, No. 3:09-CV-724-N, at 6 n. 5 (N.D. Tex June 6, 2010) (order granting preliminary injunction). Though the circuit-split cases do not apply here, the reasoning of those circuits holding that a court may issue an injunction pending arbitration applies here. [7] As explained by the First Circuit, the congressional desire to enforce arbitration agreements would frequently be frustrated if the courts were precluded from issuing preliminary injunctive relief 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 (1st Cir.1986). Here, the district court merely sought to preserve the status quo before deciding the motion to compel arbitration, and by doing so they sought to preserve the meaningfulness of any arbitration that might take place. Even if applicable to the facts here, the Seventh Circuit case cited by the Employee Defendants would not bar the preliminary injunction issued by the district court. In Salvano, the Seventh Circuit held that the district court may issue injunctive relief only until the arbitration panel is able to address whether the equitable relief should remain in effect. 999 F.2d at 215-16. In the instant case, the district court expressly stated that if it decides to compel arbitration, the defendants may ask the district court to reconsider the preliminary injunction in light of Fifth Circuit precedent and the terms of the contracts. The matter of arbitrability has not yet been decided, and the district court did not overreach when it decided the preliminary injunction motion.