Originally from Dispute Resolution Journal

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EMPLOYMENT

Injunction in Aid of Arbitration

The 2nd Circuit held that a New York statute permitting the court to decide an application for a preliminary injunction in aid of arbitration, “but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief,” permits the judge to consider traditional equitable standards for the issuance of an injunction.

This case grew out of a “non-compete” clause in an employment agreement, which prohibited Robert Messih from working for any competitor of SG Cowen Securities during the term. The contract required arbitration in California, granted Cowen the right to injunctive relief against a breach, and selected New York law to govern its interpretation and application.

Messih resigned as managing director of Cowen’s San Francisco office eight months into the term and went to work for a competitor in California. Cowen sued in a New York court seeking a temporary injunction in aid of arbitration under § 7502(c) of the New York Civil Practice Law and Rules (CPLR), and served Messih and his employer with notice of intent to arbitrate.

The court issued an ex parte temporary restraining order (TRO) enjoining Messih from working for a Cowen competitor, but upon removal to federal court, the district court dissolved the TRO and denied the motion for a preliminary injunction. The district court concluded that an injunction under § 7502 required analysis under traditional equitable criteria, including a likelihood of success on the merits, danger of irreparable harm and a balancing of equities. It found that Cowen could not demonstrate a likelihood of success on the merits because the non-compete clause was unenforceable under both California law (which had greater contact with the dispute) and New York law. It also found no showing of irreparable harm.

The 2nd Circuit held that the district court did not abuse its discretion in denying the preliminary injunction based on equitable criteria. Although there were contrary cases, the court found that New York law was “at best ambivalent” on the issue of whether the “but only” language provided the sole standard for determining whether an injunction may issue. The court went on to find that the “but only” language rendered the stated ground indispensable but not exclusive.

Cowen argued that CPLR § 7501 precluded the court from passing on the merits. This provision, which confers jurisdiction on the courts to enforce arbitration agreements and enter judgment on the award, states that “in determining any matter arising under this article, the court shall not consider whether the claim with respect to which arbitration is sought…is tenable, or otherwise pass upon the merits of the dispute.”

The 2nd Circuit was not persuaded by Cowen’s argument. It reasoned that even if § 7501 arguably precluded consideration of the merits, the provision did not preclude balancing the equities. Moreover, § 7501 predated § 7502(c) and its purpose was to ameliorate judicial hostility to arbitration by courts that excessively scrutinized the merits in denying motion to arbitrate. The court also noted that construing § 7502(c) to compel the granting of injunctive relief in aid of arbitration, when the applicant had no chance of success and the enjoined party would suffer substantial and irreparable harm, would raise due process concerns.

The court provided a bit of guidance when it said that in determining whether to issue an injunction in aid of arbitration, the likelihood of success in the arbitration “will naturally have greatly reduced influence” because it cannot be determined with the same degree of confidence as in the litigation setting.

SG Cowen Securities Corp. v. Messih, QDS: 01762913 (2d Cir. Aug. 30, 2000).