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MERRILL LYNCH, PIERCE, FENNER & SMITH v. RODGER

November 4, 1999

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., PLAINTIFF,
v.
DONALD L. RODGER, ROBERT A. BOWEN, AND JAMES W. IGO, DEFENDANTS.



The opinion of the court was delivered by: Caldwell, District Judge.

MEMORANDUM

I. Introduction

The plaintiff, Merrill Lynch, Pierce, Fenner & Smith, Inc., filed this suit seeking temporary injunctive relief against three financial consultants (commonly known as stock brokers), formerly in its employ, until there is an arbitral resolution of its claim against them for violating certain restrictive covenants in their employment agreements. The defendants are Donald L. Rodger, Robert A. Bowen, and James W. Igo, now working for Prudential Securities Incorporated.

We are considering Merrill Lynch's motion for a preliminary injunction under Fed.R.Civ.P. 65(a). The motion seeks to enjoin the defendants from, among other things, soliciting any business from any Merrill Lynch client that they served or whose names became known to them while they were employed by Merrill Lynch.

On November 2, 1999, we held a hearing on the motion. Based on the parties' submissions and the evidence produced at the hearing, the following is the background to the motion, including pertinent procedural history.

II. Background.

A. Factual Background.

The three defendant stockbrokers formerly worked for Merrill Lynch at its office in York, Pennsylvania as financial consultants. Defendant Rodger began in 1979, Bowen in August 1986, and Igo in November 1995. Upon beginning their employment with Merrill Lynch, they each signed employment agreements containing restrictive covenants. Rodger signed an agreement captioned a "Financial Consultant Agreement," Bowen an agreement captioned an "Account Executive Agreement," and Igo an agreement captioned a "Financial Consultant Employment Agreement and Restrictive Covenants."

The contractual language varied but, in pertinent part, all three agreements imposed the following obligations on the defendants. First, the defendants agreed that all records of Merrill Lynch, including client names and addresses, were the property of Merrill Lynch and were to be treated as Merrill Lynch's confidential information. Second, after their employment ended, the defendants would not solicit for a period of one year Merrill Lynch clients that they had served, or any other Merrill Lynch clients they had come to know about while employed by Merrill Lynch. Defendant Rodger's and Bowen's agreements limited this restriction to clients residing within 100 miles of the Merrill Lynch office where the defendants worked.

Third, all three agreements provided for some form of equitable relief. Rodger and Bowen agreed that they would:

  consent to the issuance of a temporary restraining
  order or a preliminary or permanent injunction to
  prohibit the breach of any provision of this
  contract, or to maintain the status quo pending the
  outcome of any arbitration proceeding which may be
  initiated.

Complaint, exhibits A and B).

Igo's agreement was more detailed as to equitable relief. If he breached any of the pertinent provisions, it provided as follows:

  I agree that Merrill Lynch will be entitled to
  injunctive relief. I recognize that Merrill Lynch will
  suffer immediate and irreparable harm and that money
  damages will not be adequate to compensate Merrill
  Lynch or to protect and preserve the status quo.
  Therefore, I CONSENT TO THE ISSUANCE OF A TEMPORARY
  RESTRAINING ORDER or A PRELIMINARY or PERMANENT
  INJUNCTION. . . .

(Complaint, exhibit C) (capitals in original). This clause further specified that the injunctive relief could include not just a prohibition on solicitation but on "accepting business from any Account who was solicited" in violation of the agreement "or whose records and information was used" in violation of it.

Rodger's and Bowen's agreements specifically provided that the agreements would be "construed, and the validity, performance and enforcement thereof shall be governed by the laws of the State of Pennsylvania." Igo's agreement had a choice-of-law provision that was not as direct but which also called for the application of Pennsylvania law.

Late in the afternoon of Friday, October 15, 1999, the defendants resigned from Merrill Lynch without notice and immediately began working for Prudential. They took with them names and addresses of clients they had serviced while at Merrill Lynch.

On the same day, Prudential used this information taken from Merrill Lynch records to mail letters to most of these clients and signed by the defendant who had handled their account, informing them that the defendant had moved to Prudential and, inferentially, soliciting their business. Enclosed with the letter was a transfer form for each account already filled out with the client's name. On Monday, October 15, 1999, Prudential sent out another group of letters.

At the same time, beginning on Friday night and continuing through the weekend, the defendants telephoned a number of clients and informed them of their new affiliation.

Shortly before they departed Merrill Lynch, the defendants were servicing a significant number of clients. Rodger was responsible for some $160 million in assets (significantly reduced shortly before his departure for reasons we need not discuss) and would have generated about $900,000 in annualized commissions for Merrill Lynch in 1999. Bowen was responsible for some $180 million in assets in partnership with another broker which generated from his efforts about $400,000 in commissions for Merrill Lynch during the last 12 months. Igo was responsible for some $62 million in assets which would have generated about $400,000 in annualized commissions for Merrill Lynch for 1999. About 15 to 20% of the assets of the Merrill Lynch York office was being handled by these defendants.

Rodger was not always a broker at Merrill Lynch. For ten years, he was an office manager. He became a broker in 1989 and at that time was assigned some $35 million in assets from a retiring broker. He was eventually put in charge of the D.L. Rodger Group, an informal partnership within Merrill Lynch which included Bowen and Igo. The Group had inherited some clients from retiring Merrill Lynch brokers.

At the November 2 preliminary-injunction hearing, Rodger testified that the TRO has prevented him from contacting clients, and if continued, in effect, would cause him to start over in the business at age 56. All three brokers testified that an injunction would cause financial hardship, but all three admitted that they realized at the time their decisions to leave Merrill Lynch might result in litigation against them.

Also at the hearing, the defendants submitted 24 affidavits from customers serviced by the defendants. These customers affirmed which defendant they considered to be their broker, that they wanted to transfer their accounts from Merrill Lynch to Prudential so that their accounts could continue to be handled by the broker of their choice, and that they had "not been solicited, implored, pressured, coerced, urged, extolled or threatened . . ." to make this choice, which they make freely. They "demand that Merrill Lynch transfer [their] assets without further delay and do nothing to interfere with [their] rights to do so." (Brackets added).

These demands were made in accord with rules of the New York Stock Exchange (NYSE) and NASD governing the responsibility of brokerage firms to honor their clients' requests to transfer their accounts to another firm. Both NYSE Rule 412(a) and NASD Rule 11870(a) require a brokerage to honor such a request expeditiously.*fn1

B. Procedural History.

The plaintiff does not seek damages or permanent injunctive relief. Instead, it seeks only temporary injunctive relief to enforce the restrictive covenants until its claim against its ex-employees can be litigated in arbitration under Rule 10335(g) of the National Association of Securities Dealers (NASD) Code of Arbitration Procedure. To that end, at the same time it filed suit in this court, Merrill Lynch filed a statement of claim in arbitration against the defendants.

Also on October 18, the plaintiff moved for a temporary restraining order prohibiting the defendants from soliciting Merrill Lynch clients, including clients they may have serviced, or using any documents they may have taken with them. We granted the TRO the same day. On October 20, we modified the order to specify that it ...


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