Court Opinion

ID: 4023592
Source: CourtListenerOpinion
Date Created: 2016-08-11 20:01:10.250418+00
Date Added: 2024-06-11T07:45:03.595248
License: Public Domain

NOT FOR PUBLICATION

                    UNITED STATES COURT OF APPEALS
                                                                           FILED
                            FOR THE NINTH CIRCUIT
                                                                           AUG 11 2016
                                                                        MOLLY C. DWYER, CLERK
                                                                         U.S. COURT OF APPEALS
MORGAN STANLEY & CO. LLC;                        No.   15-17092
MORGAN STANLEY SMITH BARNEY,
LLC,                                             D.C. No. 1:15-cv-01291-LJO-JLT

              Plaintiffs-Appellees,              MEMORANDUM*

 v.

DAVID COUCH,

              Defendant-Appellant.

                   Appeal from the United States District Court
                      for the Eastern District of California
                Lawrence J. O’Neill, Chief District Judge, Presiding

                        Argued and Submitted June 17, 2016
                             San Francisco, California

Before:       SCHROEDER, TASHIMA, and OWENS, Circuit Judges.

      In 2007, Plaintiffs Morgan Stanley & Co. LLC and Morgan Stanley Smith

Barney, LLC (together, “Morgan Stanley”) hired Defendant David Couch as a

financial advisor. Upon his hiring, Couch signed an employment contract that

          *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
included an agreement to arbitrate “any controversy or claim” arising out of his

employment, “excluding statutory employment claims.”

      In 2013, Morgan Stanley fired Couch. Couch sued Morgan Stanley,

pleading violations of the California Labor Code and economic interference under

California common law. The parties proceeded to litigate Couch’s claims on the

merits for over a year. In 2015, after discovery had closed and mere days before

summary judgment motions were due, Couch filed a separate set of claims with the

Financial Industry Regulatory Authority (“FINRA”), a self-regulatory organization

that often serves as an arbitration forum for financial sector disputes. In response,

Morgan Stanley filed this action for declaratory relief, arguing that by including

the economic interference claims in his complaint, and then litigating those claims

for more than a year, Couch had waived his arbitration rights under the

employment contract. Morgan Stanley moved to enjoin preliminarily any further

FINRA proceedings, pending resolution of its declaratory judgment action. The

district court granted the motion.

      Couch appeals. He argues that (1) the district court lacked jurisdiction to

entertain Morgan Stanley’s suit; (2) the arbitrator, not the court, should decide

whether Couch waived his right to arbitrate; and (3) the district court abused its

discretion in granting the preliminary injunction.

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      We have jurisdiction under 28 U.S.C. § 1292(a)(1), and we affirm the

district court’s preliminary injunction order.

      1.     Couch challenges the district court’s jurisdiction to entertain Morgan

Stanley’s declaratory judgment action. The Declaratory Judgment Act, 28 U.S.C.

§ 2201(a), does not itself confer jurisdiction over a claim; rather, the Act “merely

provides an additional remedy in cases where jurisdiction is otherwise

established.” Staacke v. U.S. Sec’y of Labor, 841 F.2d 278, 280 (9th Cir. 1988).

Here, it is undisputed that the parties are diverse from one another and the amount

in controversy in the underlying dispute exceeds $75,000, exclusive of interest and

costs. Thus, the district court had federal subject matter jurisdiction to adjudicate

Morgan Stanley’s claims. 28 U.S.C. § 1332(a); see also Budget Rent-A-Car, Inc.

v. Higashiguchi, 109 F.3d 1471, 1474 (9th Cir. 1997) (holding that a claim

satisfying diversity requirements satisfies jurisdictional requirements for

declaratory judgment).1

      2.     Couch next contends that the FINRA arbitrator, rather than the district

court, should have decided whether Couch waived his right to arbitrate. It is

      1
              Couch contends that because the arbitration agreement was “self-
executing,” there was no Article III case or controversy for the district court to
adjudicate. This argument fails. The parties dispute the enforceability of the
arbitration clause, and thus the action meets jurisdictional requirements. See
Goldman Sachs v. City of Reno, 747 F.3d 733, 737-38 (9th Cir. 2014).
                                           3
presumptively for the district court to decide whether a party waived its arbitration

rights by litigating otherwise-arbitrable claims. See Cox v. Ocean View Hotel

Corp., 533 F.3d 1114, 1121 (9th Cir. 2008). The presumption that a court should

decide issues of waiver by litigation conduct may be rebutted by a showing of

“clear and unmistakable evidence” that the parties intended to submit the issue to

arbitration. Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1127 (9th Cir. 2013).

      The arbitration clause at issue in this case states that “any dispute as to the

arbitrability of a particular issue or claim pursuant to this arbitration provision is to

be resolved in arbitration.” This language, requiring that the arbitrability of

individual issues or claims be resolved by the arbitrator, does not encompass

disputes over whether the clause remains valid in light of the parties’ litigation

conduct. Cf. Momot v. Mastro, 652 F.3d 982, 988 (9th Cir. 2011) (holding

language “delegating to the arbitrators the authority to determine ‘the validity or

application of any of the provisions of’ the arbitration clause” was clear and

unmistakable evidence that parties intended arbitrators to decide arbitrability

(emphasis added)). The arbitration clause is not clear and unmistakable evidence

that the parties intended for an arbitrator to decide claims of waiver by litigation.

      Because the arbitration agreement explicitly incorporated the FINRA rules,

those rules may also rebut the presumption that the court should decide issues of

                                            4
waiver by litigation. See Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069,

1071 (9th Cir. 2013). Couch cites two rules describing (1) how to transfer

arbitrable claims to a court of competent jurisdiction, and (2) the procedures for

obtaining a “temporary injunctive order” once the parties have submitted an issue

to arbitration. FINRA Rules 13803–04. These rules describe steps the parties may

take once arbitration proceedings have begun. They are silent as to whether the

district court or the arbitrator should decide gateway questions of arbitrability. In

the absence of any evidence demonstrating the parties’ intent to the contrary, the

district court correctly determined that it had the authority to decide whether Couch

waived his rights to arbitration through his litigation conduct.

       3.     Finally, Couch contends that the district court erred in granting

Morgan Stanley’s motion for preliminary injunction. To obtain a preliminary

injunction, a plaintiff must demonstrate that: (1) it “is likely to succeed on the

merits”; (2) it “is likely to suffer irreparable harm in the absence of preliminary

relief”; (3) “the balance of equities tips in [its] favor”; and (4) “an injunction is in

the public interest.” Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008).

We review the district court’s grant of a preliminary injunction for abuse of

discretion. Boardman v. Pac. Seafood Grp., 822 F.3d 1011, 1017 (9th Cir. 2016).

                                            5
      On the merits, Morgan Stanley alleges that Couch waived his right to

arbitration by litigating his non-statutory claims in district court. An agreement to

arbitrate is deemed waived upon a showing of “(1) knowledge of an existing right

to compel arbitration; (2) acts inconsistent with that existing right; and

(3) prejudice to the party opposing arbitration resulting from such inconsistent

acts.” Gutierrez v. Wells Fargo Bank, NA, 704 F.3d 712, 720-21 (9th Cir. 2012)

(citation omitted). Couch does not dispute that he was aware of his right to

arbitrate non-statutory employment claims under his employment contract.

      The district court reasoned that Couch’s inclusion of two economic

interference claims2 in his original complaint – and subsequent litigation of those

claims to the eve of summary judgment – was inconsistent with his arbitration

right. This was not an abuse of discretion. See Van Ness Townhouses v. Mar

Indus. Corp., 862 F.2d 754, 759 (9th Cir. 1988).

      Finally, the district court determined that prejudice resulted from Couch’s

13-month delay in asserting his rights; the costs incurred in defending the

arbitrable claims on the merits in the district court; and the access to discovery

      2
              California classifies economic interference claims as tort law claims.
See, e.g., Korea Supply Co. v. Lockheed Martin Corp., 63 P.3d 937, 950 (Cal.
2003). Thus, the claims were non-statutory and fell within the scope of the
arbitration provision.
                                           6
devices, like depositions and interrogatories, that litigation afforded him, and

which would not have been available in arbitration. This is sufficient to

demonstrate prejudice under our caselaw. See Martin v. Yasuda, 2016 WL
3924381, at *6 (9th Cir. July 21, 2016) (holding that spending 17 months litigating

the case in district court was “conduct inconsistent with [defendants’] right to

arbitrate” and satisfied the element of prejudice); Van Ness, 862 F.2d at 759

(finding prejudice where party litigated matter through pleadings, motions, and

pre-trial conference order, despite a viable right to arbitration, and the opposing

party relied on this activity to its detriment). Thus, the district court did not abuse

its discretion in concluding that the first Winter factor was met.

      The district court also did not abuse its discretion in concluding that Morgan

Stanley would suffer irreparable harm if forced to arbitrate Couch’s non-statutory

claims. As explained above, Morgan Stanley has shown a likelihood of success on

the merits of its claim that Couch waived his contractual right to arbitration,

leaving Morgan Stanley with no duty to arbitrate Couch’s non-statutory claims.

“One of the threads running through federal arbitration jurisprudence is the notion

that ‘arbitration is a matter of contract and a party cannot be required to submit to

arbitration any dispute which he has not agreed so to submit.’” Textile Unlimited,

Inc. v. A.BMH & Co., 240 F.3d 781, 786 (9th Cir. 2001) (holding that the district

                                            7
court did not clearly err in finding party would suffer irreparable harm in absence

of stay of arbitration) (citation omitted). The district court was thus within its

discretion to conclude that forcing Morgan Stanley to arbitrate Couch’s claims, in

the likely absence of any contractual duty to do so, would cause it irreparable

harm. Cf. LAWI/CSA Consolidators, Inc. v. Wholesale & Retail Food Distribution,

Teamsters Local 63, 849 F.2d 1236, 1241 n.3 (9th Cir. 1988) (“[Party] was entitled

to injunctive relief once it established that it was no longer under a contractual duty

to arbitrate.”).

       Finally, the district court did not abuse its discretion in concluding that the

balance of the equities and the public interest favor granting a preliminary

injunction to Morgan Stanley. If arbitration proceedings were not enjoined,

Couch’s extended delay in asserting his arbitration right would force Morgan

Stanley to re-litigate claims it likely has no duty to arbitrate at all. See Cooper v.

Rimmer, 379 F.3d 1029, 1032 (9th Cir. 2004) (per curiam) (noting that undue delay

is a proper consideration for the balance of the equities). By contrast, we see no

reason why preliminarily enjoining arbitration proceedings would impair Couch’s

claims.

       As for the fourth Winter factor, even given the public policy generally

favoring arbitration, enforcing the agreement at this late stage in the litigation

                                            8
would frustrate the public interest. “The overarching purpose of the Federal

Arbitration Act . . . is to ensure the enforcement of arbitration agreements

according to their terms so as to facilitate streamlined proceedings.” Gutierrez,
704 F.3d at 721 (citation omitted). Here, forcing the parties to arbitrate Couch’s

non-statutory claims, when it is doubtful that Morgan Stanley has any obligation to

do so, would only serve to complicate and extend the proceedings. This does not

serve any public interest. Thus, we conclude that the district court did not abuse its

discretion when it preliminarily enjoined FINRA arbitration proceedings.

      The order of the district court is

      AFFIRMED.

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