## Facts

- Merrill Lynch employed several account executives who signed agreements stating specified client-related records remained Merrill Lynch’s property during and after employment and restricting removal/retention of copies and solicitation of Merrill Lynch clients for one year after termination.
- The employees resigned and joined a competing brokerage firm.
- The employees admitted retaining limited client information obtained while employed and soliciting those clients after leaving.
- Merrill Lynch sued in federal district court seeking an injunction to stop use of its records and solicitation of its clients.
- The employees sought to compel arbitration under NYSE rules requiring arbitration of disputes between a member and an associated person “arising out of the employment or termination of employment,” and invoked the Federal Arbitration Act (FAA).

## Issues

1. Whether the post-termination dispute over client information and solicitation “arises out of” employment or termination under NYSE arbitration rules and is therefore arbitrable under the FAA.
2. Whether a district court may issue and maintain a broad preliminary injunction after being asked to compel arbitration, or whether such relief conflicts with enforcing the arbitration obligation.

## Decision

- The Eighth Circuit reversed the district court.
- The court held the dispute was arbitrable under the NYSE rule because it originated in the employment relationship and turned on obligations set by the employment agreements and exchange-based duties.
- The court held the district court erred by denying the motion to compel arbitration and by granting injunctive relief that effectively displaced arbitral resolution.
- The case was directed to arbitration in accordance with NYSE rules and the FAA.

## Legal Principles

- NYSE arbitration language covering disputes “arising out of the employment or termination of employment” is construed broadly to include controversies that originate in the employment relationship, even when the alleged misconduct occurs after termination.
- Under the FAA, courts must enforce agreements to arbitrate according to their terms, and doubts about scope are resolved in favor of arbitration.
- Once a dispute is found arbitrable, the court’s function is generally limited to compelling arbitration and staying judicial proceedings; judicial remedies should not be used to bypass or pre-decide matters committed to arbitration.
- Contract provisions that expressly operate after termination (e.g., ownership of records after termination and post-employment solicitation limits) support treating post-termination disputes as arising out of employment or termination.

## Conclusion

The Eighth Circuit required arbitration of a brokerage firm’s dispute with former representatives over post-termination retention of client information and client solicitation, and it reversed the district court’s injunction because the controversy fell within the NYSE arbitration obligation enforceable under the FAA.


Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286 (8th Cir. 1984)