Opinion
No. CV 01-00659 CBM (RCx)
February, 2, 2001
ORDER Granting Plaintiff's Request for Preliminary Injunction, Findings of Fact and Conclusions of Law [Order to Show Cause issued January 24, 2001]
Plaintiff Merrill Lynch, Pierce, Fenner Smith Incorporated ("Merrill Lynch") applies for a preliminary injunction precluding Defendants Sanah Chung and John Barnes ("Defendants") from soliciting and accepting business from the Merrill Lynch clients whose accounts they serviced, or whose names they learned, while in the employ of Merrill Lynch and from using, disclosing, or transmitting information contained in Merrill Lynch's records. Merrill Lynch filed an ex-parte motion for temporary injunctive relief on January 22, 2001. On January 24, 2001, the Court entered temporary injunctive relief in favor of Merrill Lynch, and ordered that deposition discovery proceed in this case on an expedited basis. The Court has heard argument from counsel for the respective parties, and reviewed the parties submissions in support of and in opposition to order to show cause why preliminary injunctive relief should not issue. For the reason that follow the Court grants Merrill Lynch's motion for a preliminary injunction.
FINDINGS OF FACT
1. Merrill Lynch is a corporation organized and existing under Delaware law, with its principal place of business in New York, New York. Merrill Lynch is engaged in the business of providing financial services, including, among other things, facilitating the purchase and sale of securities and various investment products on various securities and commodities exchanges nationwide.
2. Defendants are residents of California and are former financial consultants in Merrill Lynch's Los Angeles, California office. While employed by Merrill Lynch, Defendants serviced hundreds of Merrill Lynch accounts, representing nearly $175 million in assets under Merrill Lynch management, which generated in excess of $4 million in revenues for Merrill Lynch in 2000 alone.
3. Defendant Chung commenced his employment with Merrill Lynch on or about December 1, 1994. Defendant Barnes commenced his employment with Merrill Lynch on or about July 25, 1994.
4. At the time Defendants commenced their employment with Merrill Lynch, and as a condition of their employment, Defendants executed an agreement entitled the Financial Consultant Employment Agreement and Restrictive Covenants (hereafter the "Agreement"), which prohibits them from soliciting any account they served or whose name became known to them during their employment at Merrill Lynch for one (1) year following the termination of their employment. The Defendants' Agreements also prohibits them from using or disclosing to third parties Merrill Lynch's confidential customer list and customer information for the customers they served or whose names became known to them at Merrill Lynch, at any time during their employment or thereafter. See Defendants' Agreements ¶¶ 1-2.
In their Financial Consultant Employment Agreement and Restrictive Covenants with Merrill Lynch, Defendants expressly consented to the issuance of a temporary restraining order or preliminary injunction by this Court in the event they breached the terms of their contract. (See Agreements at ¶ 4-5). It should also be noted that Defendants also both agreed to comply with various other Merrill Lynch policies and guidelines, including Merrill Lynch's Compliance Outline for Financial Consultants, Merrill Lynch's Guidelines for Business Conduct, and Conflict of Interest agreement, all of which further confirm the confidentiality of Merrill Lynch customer information and prohibit its disclosure.
5. During the course of their employment, Merrill Lynch provided Defendants with numerous benefits and opportunities including, but not limited to, introductory and advanced securities training, compensation, employment related benefits, access to Merrill Lynch's confidential and proprietary client information and records, and operational and sales support.
6. Defendants resigned from Merrill Lynch's Los Angeles, California office, without prior notice, on Friday January 12, 2001 and immediately joined a competitor of Merrill Lynch, Salomon Smith Barney, Inc. ("Smith Barney"), located in Los Angeles, California.
7. Merrill Lynch alleged that Defendants copied and removed information pertaining to the customers they serviced at Merrill Lynch. Merrill Lynch alleged that Defendants utilized customer information to prepare a mass mailing to the customers to announce their affiliation with Smith Barney and then sent out this mass mailing to the Merrill Lynch customers whose accounts they serviced. Merrill Lynch also alleged that Defendants removed and disclosed Merrill Lynch customer information including customer names, addresses, telephone numbers, account numbers, asset values, account titles, and more.
8. Merrill Lynch alleged that Defendants personally telephoned Merrill Lynch customers to engage them in conversations concerning the products and services offered by their new employer and to otherwise solicit Merrill Lynch customers to transfer their accounts to them at Smith Barney. Merrill Lynch argued that Defendants' use of the telephone inherently crosses over from mere announcement to direct or indirect solicitation; and Merrill Lynch noted that the context of a phone call cannot be verified as a written statement can and, this therefore, opens up the door for potential abuse. Merrill Lynch also argued that a telephone call inherently allows Defendants to apply more pressure on the client to transfer his/her accounts compared to the receipt of a tombstone-type announcement.
9. While the Defendants opposed Merrill Lynch's motion for a preliminary injunction, they did not deny that they signed their respective Agreements with Merrill Lynch, or that they removed Merrill Lynch customer information and personally telephoned Merrill Lynch clients.
10. Defendants argued that their conduct was proper because their communication with Merrill Lynch clients complied with California law that allows a former employee to notify customers when he switches employment as long as the notice does not constitute a solicitation. Defendants claims that their telephone conversations adhered to this aspect of California law and that any discussion that may have followed regarding their new firm was initiated by clients.
CONCLUSIONS OF LAW Jurisdiction
11. The parties agree that the merits of this dispute will be resolved in arbitration before the National Association of Securities Dealers ("NASD"). The Court finds, however, that it has jurisdiction to enter a preliminary injunction in order to preserve the status quo pending a final determination of the merits of this dispute by the NASD arbitration panel. See, e.g., Distrib, Co. v. Huber, 863 F.2d 639 (9th Cir. 1988). Accord American Express Fin. Advisors, Inc. v. Makarewicz, 122 F.3d 936, 940 (11th Cir. 1997); American Express Fin. Advisors, Inc. v. Thorley, 147 F.3d 229, 231-32 (2nd Cir. 1998); Merrill Lynch, Pierce, Fenner Smith Inc. v. Dutton, 844 F.2d 726 (10th Cir. 1988); Merrill Lynch, Pierce, Fenner Smith Inc. v. Bradley, 756 F.2d 1048 (4th Cir. 1985).
12. In addition, the NASD Code of Arbitration Procedure (the "Code") also specifically provides that "parties to the arbitration may seek injunctive relief either within the arbitration process or from a court of competent jurisdiction." NASD Code Rule 10335.
13. Furthermore, Merrill Lynch and Defendants specifically agreed in their Agreements that Merrill Lynch would be entitled to seek temporary and preliminary injunctive relief pending an arbitration hearing on the merits before a full panel of arbitrators. (See Agreement at ¶¶ 4-5); see also Thorley, 147 F.3d at 231-32 (reversing district court for refusing to consider plaintiff's motion for temporary injunctive relief and stating "the contracts at issue explicitly state that the plaintiff is entitled to seek a temporary injunction in a court of competent jurisdiction while waiting for arbitration to occur"); American Express Fin. Advisors, Inc. v. Makarewicz, 122 F.3d 936, 940 (11th Cir. 1997) (holding that a similar provision calling for injunctive relief in court pending NASD arbitration "leaves no room for ambiguity: the parties intended to allow `a court of competent jurisdiction' — the United States District Court for the Middle District of Florida — to provide injunctive relief. Therefore, we hold that the district court erred in denying injunctive relief on the ground that the parties intended the arbitrator to decide whether to grant such relief."), cert. denied, 18 S.Ct. 1303 (1998).
14. Therefore, the Court concludes that it has jurisdiction to issue a preliminary injunction to preserve the status quo pending a final determination of the merits of this dispute in arbitration.
Merrill Lynch Is Entitled to Preliminary Injunctive Relief
15. Having determined that this Court has jurisdiction to grant a preliminary injunction, the Court now turns to Merrill Lynch's application. Under Ninth Circuit standards, a party is entitled to preliminary injunctive relief when it shows either (1) a likelihood of success on the merits and the possibility of irreparable injury; or (2) the existence of serious questions going to the merits and the balance of hardships tipping in the movant's favor. MAI Systems Corp, v. Peak Computer, Inc., 991 F.2d at 511, 516 (9th Cir. 1993). "`These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases.'" Id. (quoting Diamontiney v. Borg, 918 F.2d 793, 795 (9th Cir. 1990)).
16. Merrill Lynch has alleged five causes of action: misappropriation of trade secrets, breach of contract, breach of fiduciary duty, unfair competition in violation of Business and Professional Code section 17200, and tortious interference with prospective economic advantage.
17. In this case, Merrill Lynch has established at the very least that there are serious questions on the merits, and that the balance of hardships tips sharply in its favor; and thus, has satisfied the standards for issuance of a preliminary injunction. First, Merrill Lynch is likely to succeed on the merits of its claim to protect its trade secret customer list and customer information.
18. California has adopted the Uniform Trade Secrets Act which provides for injunctive relief to protect an employer's trade secret customer list. See Cal. Civ. Code § 3426 e.t seq. California courts applying the Act, including the Ninth Circuit, repeatedly have issued injunctive relief enjoining employees from soliciting their former employer's customers. See MAI Systems, 991 F.2d at 520-22; Morlife, Inc. v. Perry, 56 Cal.App.4th 1514, 1522-23 (1997); Courtesy Temporary Serv., Inc. v. Camacho, 222 Cal.App.3d 1278, 1287 (1990); American Credit Indem. Co. v. Sacks, 213 Cal.App.3d 622 (1989); see also Hollingsworth Solderless Terminal v. Turley, 622 F.2d 1324, 1332-34 (9th Cir. 1980); Greenly v. Cooper, 77 Cal.App.3d 382, 392 (1977).
19. Moreover, courts applying the Uniform Trade Secrets Act have held that customer lists may be entitled to trade secret protection. Courtesy Temporary Serv., Inc. v. Camacho, 222 Cal.App.3d 1278, 1287 (1990); Morelife, Inc. v. Perry, 56 Cal.App.4th 1514, 1522-23 (1997).
20. The Court finds that Merrill Lynch has taken measures to protect the secrecy of its confidential customer list and customer information which are reasonable under the circumstances, including requiring Defendants to sign agreements which prohibited the use or disclosure of Merrill Lynch's confidential and proprietary customer information. Therefore, this information is entitled to trade secret status under the California Uniform Trade Secrets Act. See MAI Systems, 991 F.2d at 521 ("Furthermore, MAI took reasonable steps to insure the secrecy to [its customer] information as required by the UTSA. MAI required its employees to sign confidentiality agreements respecting its trade secrets, including the Customer Database.").
21. The Court also finds that Defendants' conduct constitutes a misappropriation of this customer information under the California Uniform Trade Secrets Act, Cal. Civ. Code § 3426-1, because "misappropriation occurs if information from a customer database is used to solicit customers." MAI Systems, 991 F.2d at 521.
22. Defendants' mailing of the written announcements alone did not constitute solicitation under California law. However, Defendants did solicit Merrill Lynch customers by placing direct and personal follow-up calls to Merrill Lynch customers. The evidence demonstrates that, on January 12, 2001, Defendants mailed written announcements to Merrill Lynch customers via messenger service, express mail and first class mail. On January 12 and 13, 2001, Defendants further contacted these same Merrill Lynch customers by telephone. During the phone calls initiated by Defendants, Defendants discussed with the customers the potential transfer of the customers' accounts, the differences between Merrill Lynch and Smith Barney, and, in at least one conversation. why Smith Barney is better than Merrill Lynch. This evidence demonstrates that Defendants most likely stepped over the line between an announcement of new employment and solicitation in their telephone contacts with the Merrill Lynch customers. This conduct constitutes a breach of contract and extends beyond the scope of the announcement doctrine under California law. See MAI Systems, 991 F.2d at 521.
23. Second, Merrill Lynch is likely to succeed on the merits to enforce its Agreements with Defendants which contain reasonable restrictions prohibiting Defendants from soliciting any clients whose accounts they serviced or whose names they learned while employed by Merrill Lynch and from using or disclosing any confidential information, documents or records pertaining to these clients. These Agreements are enforceable under California law. See John F. Matull Assocs., Inc. v. Cloutier, 194 Cal.App.3d 1049, 1054 (1987) (finding that section 16600 of the California Business and Professions Code does not "invalidate an employee's agreement not to disclose his former employer's confidential customer lists or other trade secrets or not to solicit these customers."); Fowler v. Varian Assocs., Inc., 196 Cal.App.3d 34, 44 (1987) ("[A]greements designed to protect an employer's proprietary information do not violate section 16600.").
24. The Court determines, therefore, that Merrill Lynch has demonstrated a likelihood that it will prevail on the merits of its claims to protect its trade secret customer list, to enforce the Defendants' Agreements, and to prevent unfair competition.
25. Next, the Court concludes that Merrill Lynch will suffer irreparable harm absent the entry of injunctive relief.
26. California courts have held that the solicitation of a company's clients by one of its former employees causes irreparable harm. See, e.g., American Credit, 213 Cal.App.3d at 637-38; Courtesy, 222 Cal.App.3d at 1278; State Farm Mut. Auto Ins. Co. v. Dempster, 174 Cal.App.2d 418 (1960).
27. The Court finds that in the present case Merrill Lynch will suffer irreparable harm as a result of the breach of client confidentiality, conversion of Merrill Lynch's property and information, incalculability of damages, loss of goodwill, and the threat to office stability and procedures caused by Defendants' violations. See, e.g., Bradley, 756 F.2d at 1055 ("Merrill Lynch faced irreparable, non-compensable harm in the loss of its customers" as a result of defendant's breach of non-solicitation agreement); Merrill Lynch, Pierce, Fenner Smith Inc. v. Stidham, 658 F.2d 1098, 1102 n. 8 (5th Cir. 1981) ("The injury here is such that damages could not adequately compensate. Were defendants permitted by the law to exploit the clientele of their former employers, every investment that reasonably flowed from the exploitation should be included in the damages award. How such a figure could be arrived at escapes us."); Kramer, 816 F. Supp. at 1244 ("Plaintiffs argue with equal strength that irreparable and immeasurable harm lies in the fact that Merrill Lynch clients, when they discover that their financial information, market transactions, and investment assets which they presumed were held in confidence have been disclosed, will lose trust and confidence in Merrill Lynch."); Hegarty, 808 F. Supp. at 1560 n. 3 (concluding that damages from loss of customers are incalculable and further noting that "monetary damages cannot compensate Plaintiff for Defendant's unilateral breach of client confidentiality . . . [nor] the example Defendant's action set for other Merrill Lynch employees. . . .").
28. Furthermore, the balance of hardships tips heavily in favor of granting injunctive relief because an injunction merely prohibits Defendants from misappropriating the trade secrets of Merrill Lynch, and requires them to comply with the reasonable terms of their Agreements. An injunction will not prevent the Defendants from continuing their employment in the securities industry, will not interfere with their ability to acquire even a fairly limited number of clients of the thousands of potential clients in the area, or from working for Smith Barney in the community in which Defendants have chosen to work. See Boughton v. Socony Mobil Oil Co., 231 Cal.App.2d 188, 192 (1964) (while Section 16600 bans restraints on pursuit of an entire business, "where one is barred from pursuing only a small or limited part of the business, trade or profession, the contract has been upheld as valid.").
29. The Court also finds that issuance of an injunction will promote the public interest in (i) the protection of trade secret client lists and other confidential and trade secret information, see Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974) ("It is hard to see how the public would be benefitted by disclosure of customer lists."); Zimmerman, 1996 WL 707107 at *2 ("[T]here is a strong public interest in favor of protecting trade secrets."), and (ii) the enforcement of reasonable contracts, see Johanneman v. Merrill Lynch, Pierce, Fenner Smith Inc., 1993 WL 835533 (E.D. Ky. 1993) ("The court is of the opinion that it would be in the public interest to enforce the reasonable term of employment contracts."); Kramer, 816 F. Supp. at 1248 ("To deny injunctive relief in this case would . . . jeopardize the integrity of the securities industry to the detriment of the public interest [and] . . . would cast doubt on the integrity of contractual agreements.").
30. In addition, the Court finds that Defendants must be enjoined from accepting business or account transfers from clients whom they wrongfully solicited prior to the entry of the Court's temporary injunction order. This is necessary because "[n]ot only should the employee be enjoined from the solicitation of his former customers, but the court's order should prohibit the new employer from obtaining the benefits of such an unfair practice, thereby making the remedy complete." George v. Burdusis, 21 Cal.2d 153, 163, 130 P.2d 399 (1942).
31. To hold otherwise would allow Defendants to reap the benefits of their unlawful use of trade secret information and solicitations and encourage other similarly situated employees to engage in the same conduct in the future. See Morlife, 56 Cal.App.4th at 1527 (The court "enjoined appellants from doing business with any of the 32 entities who switched their business from Morlife to Burlingame after being unlawfully solicited."). Moreover, Defendants have agreed to this prohibition by the terms of their employment Agreement. See Agreements at paragraphs 4-5.
32. In conclusion, Merrill Lynch has satisfied the elements for, and is entitled to, a preliminary injunction.
33. Finally, Rule 10335(g) of the NASD Code of Arbitration Procedure provides that if a court issues an injunction against one of the parties to an arbitration agreement, then the arbitration "concerning the matter of the injunction shall proceed in an expedited manner according to a time schedule and procedures specified by the panel appointed under [the NASD] Code." See NASD Code of Arbitration Procedure Rule 10335(g). Accordingly, the Court orders the parties to proceed to expedited arbitration hearings on the merits before a panel of NASD arbitrators pursuant to NASD Rule 10335(g).
PRELIMINARY INJUNCTION ORDER
AND NOW, this 2 day of February, 2001, after thorough consideration of all the arguments by counsel for the parties, and for the reasons set forth in the accompanying findings of fact and conclusions of law, it is hereby ORDERED that:
1. A Preliminary Injunction shall issue immediately and become effective upon Plaintiff's posting of a security in the amount of $200,000.00.
2. Defendants are enjoined and restrained, directly and indirectly, and whether alone or in concert with others, including any agent, representative, officer, or employee of Defendants' current employer, Smith Barney, from:
(a) soliciting any business from, or initiating any further contact or communication with any customer of Plaintiff whom Defendants served or whose name became known to Defendants while in the employ of Plaintiff including for the purpose of inviting, encouraging, or requesting the transfer of any accounts from Plaintiff (excluding members of Defendants' immediate families);
(b) accepting any business or account transfers from any customers of Plaintiff whom Defendants, or anyone acting on Defendants' behalf or in concert with Defendants, have solicited at any time in the past for the purpose of doing business with Defendants' new employer (excluding members of Defendants' immediate families);
(c) accepting any business, including account transfers, from any customer whose records or information Defendants used in violation of their contractual and trade secret obligations to Plaintiff, including Defendants' Financial Consultant Employment Agreement and Restrictive Covenants, and any customer whom Defendants may have contacted through the use of information by Defendants while in the employ of Plaintiff (excluding members of Defendants' immediate families); and
(d) using, disclosing, or transmitting for any purpose, including the solicitation or acceptance of business or account transfers, the information contained in the records of Merrill Lynch; and that all original records and copes and/or other reproductions thereof, in whatever form, be returned to Merrill Lynch immediately.
3. Defendants, and anyone acting in concert or participation with Defendants, including Defendants' counsel and any agent, employee, officer or representative of Defendants' current employer, is further ordered to return to Plaintiff's Los Angeles, California office any and all records or information pertaining to Plaintiff's customers which were obtained from Plaintiff whether in original, copied, computerized, handwritten or any other form, and purge any such information from his possession, custody, or control, within 24 hours of notice to Defendants or their counsel of the terms of this Order provided, however, that any information so purged shall be printed prior to purging and be returned to Plaintiff pursuant to this paragraph and consistent with paragraph (2)(d) above.
4. Pursuant to the requirements of sections 3 and 4 of the Federal Arbitration Act. 9 U.S.C. § 3-4, the parties are directed to commend and to proceed with arbitration in accordance with Rule 10335(g) of the National Association of Securities Dealers Code of Arbitration Procedure.
IT IS SO ORDERED.