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