Opinion
06 Civ. 1510 (WHP).
August 11, 2006
MEMORANDUM AND ORDER
Plaintiffs Eaton Vance Management, Eaton Vance Investment Counsel (collectively, "Eaton Vance") and Nancy Tooke ("Tooke") bring this action pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201-02, against ForstmannLeff Associates LLC ("Defendant" or "ForstmannLeff"). Plaintiffs seek a declaration that a restrictive covenant entered into between Tooke and ForstmannLeff is unenforceable, and request an injunction prohibiting ForstmannLeff from enforcing the covenant. Defendant moves to dismiss or, in the alternative, to stay this action pending arbitration. Plaintiffs move for summary judgment on all of their claims. For the reasons set forth below, Defendant's motion to dismiss is granted, and Plaintiffs' motion for summary judgment is denied.
BACKGROUND
Eaton Vance, ForstmannLeff and Schroders Investment Management North America, Inc. ("Schroders") are investment management firms. (Amended Complaint, dated Apr. 28, 2006 ("Compl.") ¶¶ 13, 17-18.) Tooke is an investment portfolio manager who was employed by Schroders from 1994 to 2004. (Compl. ¶¶ 14, 17-19.) In May 2004, Tooke left Schroders to work for ForstmannLeff following ForstmannLeff's acquisition of her asset management contracts from Schroders. (Compl. ¶¶ 18-19.)
ForstmannLeff and Tooke entered into a written employment agreement with a term of two years (the "Employment Agreement"). (Compl. Ex. 1, § 5(a).) Section 7 of the Employment Agreement prohibits Tooke from "solicit[ing], attempt[ing] to solicit or accept[ing] customers which were customers of [ForstmannLeff]" for one year following Tooke's departure from ForstmannLeff (the "Restrictive Covenant"). (Compl. Ex. 1, § 7.) Further, Section 8 of the Employment Agreement provides that:
if [Tooke] breaches, or threatens to commit a breach of, any of the covenants contained in Sections 6 or 7, [ForstmannLeff] shall have, in addition to, and not in lieu of, any other rights and remedies available to [ForstmannLeff] under law or in equity, the right to have such covenant specifically enforced by any court of competent jurisdiction . . .
(Compl. Ex. 1, § 8.) Finally, Section 14 of the Employment Agreement states that "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach hereof, other than claims for specific performance or injunctive relief pursuant to Section 8 hereof, shall be settled by arbitration . . ." (the "Arbitration Clause"). (Compl. Ex. 1, § 14.)
Nearly all of Tooke's clients followed her from Schroders to ForstmannLeff. (Compl. ¶ 19.) On January 13, 2006, Tooke resigned from ForstmannLeff to work for Eaton Vance. (Compl. ¶¶ 32-34.) A number of Tooke's clients have since withdrawn their assets from ForstmannLeff (Plaintiffs' Statement of Undisputed Material Facts, dated Apr. 14, 2006 ¶ 22), and ForstmannLeff has informed at least some of these clients that the Restrictive Covenant prohibits Tooke from soliciting or accepting their business (Compl. ¶ 4). In a letter to ForstmannLeff dated February 1, 2006, Eaton Vance asserted that the Restrictive Covenant is unenforceable with respect to certain of Tooke's former clients. (Compl. ¶ 54.) The letter informed ForstmannLeff that Eaton Vance had accepted an account from one of these clients and that it intended to accept other, similar accounts. (Compl. ¶ 54.)
On February 7, 2006, ForstmannLeff filed an arbitration demand with the American Arbitration Association, alleging that Tooke is in violation of the Restrictive Covenant. (Compl. ¶ 55.) ForstmannLeff seeks damages, specific performance of the Restrictive Covenant and injunctive relief requiring that Tooke "sever her relationship with any client whose business she has improperly solicited or accepted" since joining Eaton Vance. (Plaintiffs' Memorandum of Law in Support of Its Motion for Summary Judgment, dated Apr. 14, 2006, Ex. 11.) Certain of Tooke's former clients have declined to move their assets to Eaton Vance as a result of the arbitration demand. (Compl. ¶¶ 56-58.)
Eaton Vance filed this action on February 24, 2006. On April 14, 2006, the Complaint was amended to name Tooke as a plaintiff. Defendant moves to dismiss the Amended Complaint on the grounds that: (1) Eaton Vance lacks standing; (2) the action should be dismissed or, in the alternative, stayed pursuant to Federal Arbitration Act ("FAA") § 3; and (3) the action should be dismissed or, in the alternative, stayed pursuant to this Court's inherent power to control its docket.
DISCUSSION
I. Legal Standard
On a motion to dismiss pursuant to rule 12(b)(6), a court must accept the material facts alleged in the complaint as true and construe all reasonable inferences in Plaintiffs' favor.Hartford Court Co. v. Pellegrino, 380 F.3d 83, 89-90 (2d Cir. 2004). A court should not dismiss a complaint for failure to state a claim "unless it appears beyond doubt that the plaintiff[s] can prove no set of facts in support of [their] claim which would entitle [them] to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); accord Jacobs v. Ramirez, 400 F.3d 105, 106 (2d Cir. 2005). Dismissal is proper when the plaintiffs fail to plead the basic elements of a cause of action. See In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 69 (2d Cir. 2001). The issue on a motion to dismiss is not "whether plaintiff[s] will prevail, but simply whether [they are] entitled to offer evidence to support [their] claims." Taylor v. Vt. Dep't of Educ., 313 F.3d 768, 788 (2d Cir. 2002).
The Declaratory Judgment Act provides that "[i]n a case of actual controversy within its jurisdiction," a district court "may declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201(a). In passing the Act, "Congress sought to place a remedial arrow in the district court's quiver; it created an opportunity, rather than a duty, to grant a new form of relief to qualifying litigants." Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995). While district courts typically have a "virtually unflagging obligation" to exercise their jurisdiction, Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976), they "possess discretion in determining whether and when to entertain an action under the Declaratory Judgment Act, even when the suit otherwise satisfies subject matter jurisdictional prerequisites." Wilton, 515 U.S. at 282.
In order to decide whether to entertain an action for a declaratory judgment, this Court must consider whether the judgment will (1) serve a useful purpose in clarifying or settling the legal issues involved; and (2) finalize the controversy and offer relief from uncertainty. Duane Reade, Inc. v. St. Paul Fire Marine Ins. Co., 411 F.3d 384, 389 (2d Cir. 2005); Texport Oil Co. v. M/V. Amolyntos, 11 F.3d 361, 366 (2d Cir. 1993). The Court may also consider: "(1) whether the proposed remedy is being used merely for `procedural fencing' or a `race to res judicata'; (2) whether the use of a declaratory judgment would increase friction between sovereign legal systems or improperly encroach on the domain of a state or foreign court; and (3) whether there is a better or more effective remedy." Dow Jones Co. v. Harrods Ltd., 346 F.3d 357, 359-60 (2d Cir. 2003).
II. Tooke
ForstmannLeff seeks to dismiss or, in the alternative, stay this action with respect to Tooke pursuant to Section 3 of the FAA, 9 U.S.C. § 3, and this Court's inherent power to control its docket, see WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 76 (2d Cir. 1997). For the reasons stated below, this Court grants ForstmannLeff's motion to dismiss the claims asserted by Tooke.
A. Jurisdiction to Decide Arbitrability
As an initial matter, ForstmannLeff argues that this Court should not reach the question of whether Tooke's claims are within the scope of the Arbitration Clause. ForstmannLeff contends that this issue of arbitrability is a question for the arbitrator in the first instance.
"Although the [Supreme] Court has also long recognized and enforced a `liberal federal policy favoring arbitration agreements,' it has made clear that there is an exception to this policy: The question whether the parties have submitted a particular dispute to arbitration, i.e., the `question of arbitrability,' is `an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.'"Howsam, 537 U.S. at 83 (quoting AT T Techs., 475 U.S. at 649; Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); and citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)) (emphasis in original). Such "clear and unmistakable evidence" may be found in the arbitration clause "even absent an express contractual commitment" of questions of arbitrability to an arbitral forum.Shaw Group Inc. v. Triplefine Int'l Corp., 322 F.3d 115, 121 (2d Cir. 2003). A broadly drafted arbitration clause may evidence the parties' intention to arbitrate issues of arbitrability. See Shaw Group, 322 F.3d at 121; Paine Webber, Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996) ("The words `any and all [disputes]' are elastic enough to encompass disputes over whether a claim . . . is within the scope of arbitration."); Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 46 (1997). Courts have also found clear and unmistakable evidence when the parties agree to be bound by the rules of an arbitral tribunal that require arbitrability to be decided by the arbitrator. See, e.g., Contec Corp. v. Remote Solution Co., 398 F.3d 205, 211 (2d Cir. 2005). Thus, "parties may overcome the First Options presumption [against arbitrability] by entering into a separate agreement that (1) employs . . . `any and all' language . . ., or (2) expressly incorporates the provisions of [a tribunal that requires questions of arbitrability to be decided in arbitration]." John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 55 (2d Cir. 2001).
It is undisputed that the American Arbitration Association's National Rules for the Resolution of Employment Disputes govern the arbitration at issue in this action, and that these rules are silent as to whether the arbitrator or the court determines questions of arbitrability. (Plaintiffs' Memorandum of Law in Opposition to Defendant's Motion to Dismiss, dated Apr. 28, 2006 ("Pl. Opp. Mem.") Exs. 2-3.) Thus, Defendant relies on the language of the Arbitration Clause, which provides that "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach hereof, other than claims for specific performance or injunctive relief pursuant to Section 8 hereof, shall be settled by arbitration . . ." (Compl. Ex. 1, § 14.) As discussed in greater detail below, Section 8 of the Employment Agreement gives ForstmannLeff the right to initiate proceedings for specific performance or injunctive relief in court, rather than arbitration. Where, as here, "a single agreement contains both a broadly worded arbitration clause and a specific clause assigning a certain decision to [another authority] . . . the presence of both . . . clauses creates an ambiguity" as to whether the parties assigned questions of arbitrability to the arbitrator.Katz v. Feinberg, 290 F.3d 95, 97 (2d Cir. 2002). Because the Arbitration Clause contains no "clear and unmistakable" delegation of the arbitrability question, this Court must determine whether Tooke's claims are arbitrable. Katz, 290 F.3d at 97.
B. Scope of the Arbitration Clause
"There is a strong federal policy favoring arbitration as an alternative means of dispute resolution." Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 76 (2d Cir. 1998). As a result, arbitration clauses must be read as broadly as possible, and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp., 460 U.S. at 24-25.
Section 3 of the FAA 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 . . .9 U.S.C. § 3; accord Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985). In reviewing the arbitrability of Tooke's claims, the court must determine (1) whether the parties agreed to arbitrate; and (2) whether the scope of the agreement encompasses the claims asserted. ACE Capital Re Overseas Ltd. v. Cent. United Life Ins. Co., 307 F.3d 24, 28 (2d Cir. 2002); Campaniello Imports, Ltd. v. Saporiti Italia S.P.A., 117 F.3d 665 (2d Cir. 1997). If all of her claims are subject to arbitration, and no useful purpose will be served by granting a stay, the case may be dismissed. In re Am. Express Merchants Litig., No. 03 Civ. 9592 (GBD), 2006 WL 662341, at *10 (S.D.N.Y. Mar. 16, 2006); Cicchetti v. Davis Selected Advisors, No. 02 Civ. 10150 (RMB), 2003 WL 22723015, at *3 (S.D.N.Y. Nov. 17, 2003); Lewis Tree Serv., Inc. v. Lucent Techs. Inc., 239 F. Supp. 2d 332, 340 (S.D.N.Y. 2002). Here, the parties do not dispute the validity of their agreement to arbitrate, but instead spar over whether the scope of the clause encompasses the claims asserted in the Amended Complaint.
Tooke does not identify any federal statute that would render her claims non-arbitrable.
The Arbitration Clause provides that "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach hereof, other than claims for specific performance or injunctive relief pursuant to Section 8 hereof, shall be settled by arbitration . . ." (Compl. Ex. 1, § 14.) Because Tooke seeks a declaratory judgment and injunctive relief pertaining to the enforceability of the Restrictive Covenant, her claims clearly "arise out of" and "relate to" the Employment Agreement. Therefore, her claims are non-arbitrable only if they qualify as "claims for specific performance or injunctive relief pursuant to Section 8 . . ."
Section 8 provides that if Tooke breaches or threatens to breach the Restrictive Covenant in Section 7, "[ForstmannLeff] shall have, in addition to, and not in lieu of, any other rights and remedies available to [ForstmannLeff] under law or in equity, the right to have such covenant specifically enforced by any court of competent jurisdiction." (Compl. Ex. 1, § 8 (emphasis added).) This language does not remove actions for specific performance or injunctive relief from the Arbitration Clause. Instead, it provides ForstmannLeff the right to initiate such a proceeding in a court "in addition to, and not in lieu of" its right to arbitrate issues of specific performance and injunctive relief pursuant to the Arbitration Clause. In other words, ForstmannLeff may assert these claims in either an arbitration or a court of competent jurisdiction. When ForstmannLeff chose to initiate proceedings in arbitration, it did so within its rights under the Arbitration Clause.
Moreover, only ForstmannLeff is granted rights under Section 8. That section provides: "[ForstmannLeff] shall have . . . the right to have such covenant specifically enforced by any court of competent jurisdiction." (Emphasis added.) Section 8 grants Tooke no rights of any kind. Thus, Tooke's options are limited to those set forth in the Arbitration Clause, which requires arbitration for "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach hereof." The claims asserted by Tooke in the Amended Complaint are therefore subject to binding arbitration. Indeed, the issue of the Restrictive Covenant's enforceability is presently before the arbitrator in the proceedings brought by ForstmannLeff.
This Court retains the jurisdiction to order dismissal rather than a stay in the context of FAA § 3. Lewis Tree Serv., Inc., 239 F. Supp. 2d at 340. Particularly in the context of a declaratory judgment request, district courts "possess discretion in determining whether and when to entertain an action . . . even when the suit otherwise satisfies subject matter jurisdictional prerequisites." Wilton, 515 U.S. at 282. "Since this Court finds that all of [Tooke's] claims against [ForstmannLeff] are subject to arbitration, it . . . orders that [her claims] be dismissed." In re Am. Express Merchants Litig., 2006 WL 662341, at *10.
This holding does not apply to Eaton Vance because Eaton Vance is not a party to the Employment Agreement and, therefore, is not bound by the Arbitration Clause. See WorldCrisa, 129 F.3d at 75-76.
III. Eaton Vance
ForstmannLeff contends that as a non-party to the Employment Agreement, Eaton Vance lacks standing to prosecute this action. This Court agrees.
A. Standing
Under New York law, unless a party has contractual privity or is a third-party beneficiary of a contract, it lacks standing to enforce the terms of the agreement. Highlands Ins. Co. v. PRG Brokerage, Inc., No. 01 Civ. 2272 (GBD), 2004 WL 35439, at *14 (S.D.N.Y. Jan. 6, 2004); Wells Fargo Bank Northwest, N.A. v. Energy Ammonia Transp. Corp., No. 01 Civ. 5861 (JSR), 2002 WL 1343757, at *1 (S.D.N.Y. June 18, 2002);Eaves Brooks Costume Co. v. Y.B.H. Realty Corp., 76 N.Y.2d 220, 226 (1990). Eaton Vance was neither a party to nor a third-party beneficiary of the Employment Agreement. Therefore, it lacks standing to sue under the Agreement.
It is undisputed that New York law governs Plaintiff's claims. "[W]here the parties have agreed to the application of the forum law, their consent concludes the choice of law inquiry.Texaco A/S v. Commercial Ins. Co., 160 F.3d 124, 128 (2d Cir. 1998) (quoting Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997)).
"Since it is the underlying cause of action . . . that is actually litigated in a declaratory judgment action, a party bringing a declaratory judgment action must have been a proper party had the defendant brought suit on the underlying cause of action. Collin County v. Homeowners Assoc. for Values Essential to Neighborhoods, 915 F.2d 167, 171 (5th Cir. 1990); see also Mylan Pharms., Inc. v. Thompson, 268 F.3d 1323, 1330 (Fed. Cir. 2001). Parties who lack standing to enforce an agreement also lack standing to seek a declaration of rights under the contract. See Travelers Prop. Cas. Corp. v. Winterthur Intl, No. 02 Civ. 2406 (SAS), 2002 WL 1391920, at *5 (S.D.N.Y. Jun. 25, 2002) (a party that is not privy to an insurance contract but would benefit from the insurance policy may not bring a declaratory judgment action to determine whether the insurer owes coverage under the policy); Hartford Fire Ins. Co. v. Mitlof, 123 F. Supp. 2d 762, 769-71 (S.D.N.Y. 2000) (same); Verosol B.V. v. Hunter Douglas, Inc., 806 F. Supp. 582, 588 (E.D. Va. 1992) (holding that party not in contractual privity has an "interest in this controversy [which is] far too remote to make it a proper party to this declaratory judgment action"). Indeed, "[c]ourts routinely hold that a plaintiff that has hired (or wishes to hire) the employees of a competitor does not have standing to sue that company to seek nullification of a non-compete agreement between the competitor and its employees." Bowhead Info. Tech. Servs., LLC v. Catapult Tech., Ltd., 377 F. Supp. 2d 166, 172 (D.D.C. 2005) (granting ex-employer's motion to dismiss new employer's declaratory judgment action); see also Defiance Hosp., Inc. v. Fauster-Cameron, Inc., 344 F. Supp. 2d 1097, 1118 (N.D. Ohio 2004) (same); Premier Pyrotechnics, Inc. v. Zambelli Fireworks Mfg. Co., No. 05-3112-CV-SFJG, 2005 WL 1307682, at *2 (W.D. Mo. May 31, 2005) (same).
Eaton Vance contends that its standing arises not from the Employment Agreement itself, but from ForstmannLeff's initiation of the arbitration against Tooke. The arbitration is purportedly the source of the harm to Eaton Vance because some of Tooke's former clients will not transfer their assets to Eaton Vance while the arbitration is pending. (Pl. Opp. Mem. at 7-8.) This argument is unavailing. The Amended Complaint seeks an interpretation of the Employment Agreement and injunctive relief based on that interpretation. Plaintiffs do not seek relief based on the existence of an arbitration. Where, as here, "the relief requested is the interpretation of a contract to which plaintiff is not a party . . . Plaintiff does not having standing to pursue [a] declaratory judgment action." Premier Pyrotechnics, 2005 WL 1307682, at *2 (rejecting plaintiff's contention that "the gravamen of [the] complaint is that the defendant has threatened legal action against the plaintiff for impermissibly interfering with defendant's allegedly protected interests"); see also Bowhead Info., 377 F. Supp. 2d at 172-73; Defiance Hosp., 344 F. Supp. 2d at 1118.
The law does not permit Eaton Vance to use the Declaratory Judgment Act to avoid the well-settled requirements of contractual privity. Eaton Vance therefore lacks standing to pursue this action.
CONCLUSION
For the foregoing reasons, Defendant's motion to dismiss is granted, and Plaintiffs' motion for summary judgment is denied.SO ORDERED.