What happens when a dispute is subject to an arbitration agreement but, unless a court enters an injunction preserving the status quo pending arbitration, the arbitration proceeding will be rendered meaningless? Does a motion to compel arbitration strip a court of its power to grant an injunction?
Suppose, in a case involving an alleged Ponzi scheme, a receiver seeks a preliminary injunction pending arbitration to freeze funds which may otherwise be transferred beyond the reach of creditors. Can he get one, or does the court have to stay for arbitration?
Suppose a professional basketball team has a dispute with one of its players. Can it obtain a preliminary injunction prohibiting the player from joining another team pending arbitration?
Suppose a company claims it has the right to purchase another company's assets but the asset purchase agreement has an arbitration provision. Can the company get an injunction to stop a sale of the assets to another company before arbitrating because there may not be much point in arbitrating after the assets are transferred?
One of the drawbacks of arbitration, despite its purported speed and efficiency, is that the procedure takes time. The parties have to agree on the arbitrators, set an arbitration date, and conduct a hearing. If a party must go through the administrative process before obtaining injunctive relief, that party may suffer irreparable harm which may render any arbitration award meaningless.
Oddly, in Texas the answer to the question whether injunctive relief can be obtained pending arbitration may depend on whether the dispute is in state court or federal court.
In federal court every circuit to consider the question, except the Eighth Circuit, has held that a court can, and should, grant a preliminary injunction in an arbitrable dispute whenever an injunction is necessary to preserve the status quo pending arbitration.1
The Fifth Circuit acknowledged the circuit split in RGI Inc. v. Tucker & Associates, Inc., 858 F.2d 227, 229 (5th Cir. 1988), but concluded that it could avoid the issue because the agreement in that case specified that if the dispute was submitted to arbitration, the contract would continue in full force, authorizing an injunction.
The Fifth Circuit recently ducked the question again in Janvey v. Alguire, 2011 U.S. App. LEXIS 15262 (5th Cir. July 27, 2011). There, the court decided it need not reach the question because the district court had not yet ruled on the motion to compel arbitration. It posed the issue as: Whether a court may preserve the status quo pending its resolution of a motion to compel arbitration, not pending the actual arbitration itself. The Fifth Circuit agreed that the district court had the power to enter a preliminary injunction to preserve the status quo but expressly "reserved for another day the issues of whether the district court divests itself of the discretion to maintain the status quo once it decides the case before it is arbitrable and, if not, what the limits of that discretion may be."
In contrast to most federal courts, the two state court cases that have considered the question have held that the issuance of preliminary injunction is not appropriate when the underlying claims are subject to arbitration.2
Because both the federal and state courts were construing the Federal Arbitration Act (FAA) one would think the results would be consistent. However, the Texas Supreme Court has not always agreed with the federal courts' interpretation of the FAA.3 Perhaps the Texas Supreme Court will have occasion to address the issue one day.
Footnotes
1. Teradyne, Inc. v. Mostek Corp., 797 F.2d 43 (1st Cir. 1986)(enjoining debtor from disposing of assets pending arbitration); Roso-Lino Beverage Distribs., Inc. v. The Coca-Cola Bottling Co., 749 F.2d 124 (2d Cir. 1984)(reversing denial of preliminary injunction because district court believed decision to refer dispute to arbitration stripped it of power to grant injunctive relief); Erving v. Virginia Squires Basketball Club, 468 F.2d 1064 (2d Cir. 1972)(affirming preliminary injunction enjoining basketball player from playing for another club pending arbitration); Ortho Pharm. Corp. v. Amgen, Inc., 882 F.2d 806 (3rd Cir. 1989)(ordering biotechnology company to withdraw request to FDA pending arbitration); Merrill Lynch, Pierce Fenner & Smith, Inc. v. Bradley, 756 F.2d 1048 (4th Cir. 1985)(upholding injunction preventing former employee from using records or soliciting clients pending arbitration); Performance Unlimited, Inc. v. Questar Publishers Inc., 52 F.3d 1373 (6th Cir. 1995)(district court erred in holding that it could not enter preliminary injunction because dispute was subject to arbitration); Sauer-Getriebe KG v. White Hydraulics Inc., 715 F.2d 348 (7th Cir. 1983), cert. denied, 464 U.S. 1070 (1984)(enjoining transfer of assets until arbitration); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Salvano, 999 F.2d 211 (7th Cir. 1993)(recognizing equitable power of court to grant injunctive relief in arbitrable dispute); PMS Distrib. Co. v. Huber & Suhner, A.G., 863 F.2d 639 (9th Cir. 1988)(holding arbitration agreement does not strip court of authority to issue an injunction); Merrill Lynch, Pierce Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286 (8th Cir. 1984)(preliminary injunction against former employees to prevent them from using former employer's records and soliciting clients pending arbitration was precluded by Section 3 of the Federal Arbitration Act). But see Ferry-More Seed Co. v. Food Corn, Inc., 729 F.2d 589 (8th Cir. 1984)(two months after the Hovey decision, another Eighth Circuit panel affirmed grant of preliminary injunction in arbitrable dispute.)
2. Metra United Escalante v. The Lynd Co., 158 S.W. 3d 535, 539 (Tex. App.—San Antonio 2004, no pet.)(issuance of preliminary injunction not appropriate when the underlying claims are subject to arbitration under the FAA); Welderman/Matz Interest LLP v. Capital Corp., 140 S.W. 3d 879 (Tex. App.—Houston [14th Dist.] 2004)(injunctive relief requiring the court to consider the merits of the underlying dispute would interfere with arbitrators' independent determination of the issues).
3. Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex. 2011)(holding that the Texas Arbitration Act allows parties to contract for expanded judicial review of arbitration awards, rejecting the U.S. Supreme Court's contrary interpretation of the FAA).
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