The Asset Purchase Agreement is to be "governed by and construed in accordance with the laws of the State of New York applicable to contracts performed wholly within such state, except to the extent (if any) such laws may be superseded by Federal laws." Id., P 15(g).
In or about April to May 1993, the Steinbergs initiated two separate arbitration proceedings (collectively, the "Arbitration Proceedings") against Gruntal before the NASD. The Steinbergs commenced the Arbitration Proceedings, which have been assigned NASD Case Numbers 93-01699 and 93-01887, by submitting two statements of claim to the NASD Director of Arbitration.
Complaint, Ex. B; Rappaport Cert., P 5. Both these statements of claim relate to the Steinbergs' account with Philips. Complaint, Ex. B.
The first statement of claim, dated 20 April 1993 (the "20 April Statement of Claim") alleges certain improprieties and breaches of duty by Philips brokers Todd Semon and Bob Semon, as well as by Philips itself. Id. According to the 20 April Statement of Claim, the alleged breaches of duty occurred between 21 October 1987 and approximately the end of November 1987. Id. At that time, both Bob Semon and Todd Semon were employed by Philips. Id. The 20 April Statement of Claim alleges that, as of its writing, Todd Semon worked for Gruntal. Id. The 20 April Statement of Claim requests damages totalling $ 44,486.00. Id.
The second statement of claim, dated 7 May 1993 (the "7 May Statement of Claim"), alleges certain improprieties and breaches of duty by Bob Semon. Id. These breaches were alleged to have occurred between 18 October 1987 and 15 February 1988. Id. At that time, Bob Semon was employed by Philips. Id. The 7 May Statement of Claim alleges that, as of its writing, both Bob Semon and Todd Semon were employed by Gruntal. Id. The 7 May Statement of Claim requests damages totalling $ 17,300.00. Id.
Both the 20 April Statement of Claim and the 7 May Statement of Claim allege that "preliminary" copies thereof were "personally delivered to Michael Pulver, the local attorney for Gruntal." Id. According to the 20 April Statement of Claim and the 7 May Statement of Claim, Gruntal did not respond to these communications. Id.
Gruntal, however, states that it made clear to both the Steinbergs and the NASD "that Gruntal never entered into any contract or agreement of any nature with the [Steinbergs] to arbitrate any dispute before the NASD, or indeed before any other arbitration forum." Rappaport Cert., P 6. Gruntal states it presented the Asset Purchase Agreement to both the Steinbergs and the NASD, and requested that the arbitration claims be dismissed. Id.
According to Gruntal, the Steinbergs persisted in their prosecution of the Arbitration Proceedings against Gruntal. Id. The NASD declined to rule on Gruntal's request for dismissal, and referred the question of arbitrability to the arbitration panel. Id. Gruntal received notice to this effect on 15 September 1993. Id. Gruntal states the NASD has "formally advised all parties that it will be scheduling hearing dates by [5 October 1993]." Moving Brief at 10.
Gruntal filed this action on 29 September 1993. The Complaint seeks "a declaratory judgment declaring that Gruntal has no obligation to [the Steinbergs] to arbitrate the claims raised by the [Steinbergs] in the Arbitration Proceedings." Complaint, P 21. The Complaint further seeks a preliminary and permanent injunction enjoining the Steinbergs from "pursuing their claims in the Arbitration Proceedings." Id., P 26.
Also on 29 September 1993, Gruntal made application for an order to show cause why a preliminary injunction should not issue, enjoining the Steinbergs from pursuing the Arbitration Proceedings against Gruntal pending the outcome of this case on the merits. The court entered the requested Order to Show Cause on the same date.
In examining requests for preliminary injunctions, federal standards are applied. Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 799 (3d Cir. 1989); System Operations, Inc. v. Scientific Games Dev. Corp., 555 F.2d 1131, 1141 (3d Cir. 1977). As the Third Circuit has stated, even where "the right upon which [a] cause of action is based is state created, Rule 65(a) of the Federal Rules of Civil Procedure contemplates a federal standard as governing requests addressed to federal courts for preliminary injunctions." Instant Air, 882 F.2d at 799 (quoting System Operations, 555 F.2d at 1141).
The Circuit has established that, to prevail on its application for a preliminary injunction, the moving party must show:
(1) the probability of irreparable injury to the moving party in the absence of relief; (2) the [absence of] a possibility of harm to the non-moving party if relief were granted; (3) the likelihood of success on the merits; and (4) the public interest [in granting preliminary relief].
Alessi v. Pennsylvania, Dept. of Pub. Welfare, 893 F.2d 1444, 1447 (3d Cir. 1990); see also S & R Corp. v. Jiffy Lube Int'l, Inc., 968 F.2d 371, 374 (3d Cir. 1992); Merchant & Evans, Inc. v. Roosevelt Bldg. Prods. Co., 963 F.2d 628, 632 (3d Cir. 1992); Opticians Ass'n of Am. v. Independent Opticians of Am., 920 F.2d 187, 191-92 (3d Cir. 1990); Instant Air, 882 F.2d at 800; Fechter v. HMW Indus., Inc., 879 F.2d 1111, 1116 (3d Cir. 1989); Apollo Technologies Corp. v. Centrosphere Industrial Corp., 805 F. Supp. 1157, 1191 (D.N.J. 1992); Glenside West Corp. v. Exxon Co., U.S.A., 761 F. Supp. 1118, 1132 (D.N.J. 1991); CPC Int'l, Inc. v. Caribe Food Distrib., 731 F. Supp. 660, 664 (D.N.J. 1990); Bascom Food Prods. Corp. v. Reese Finer Foods, Inc., 715 F. Supp. 616, 624 (D.N.J. 1989).
Of these four requirements, the Circuit has placed particular weight on the probability of irreparable harm and the likelihood of success on the merits, stating: "We cannot sustain a preliminary injunction ordered by the district court where either or both of these prerequisites are absent." Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186, 197 (3d Cir. 1990) (quoting In re Arthur Treacher's Franchisee Litigation, 689 F.2d 1137, 1143 (3d Cir. 1982)); see also Instant Air, 882 F.2d at 800; Morton v. Beyer, 822 F.2d 364, 367 (3d Cir. 1987); Freixenet, S.A. v. Admiral Wine & Liquor Co., 731 F.2d 148, 151 (3d Cir. 1984).
Significantly, the Circuit has repeatedly stated that a "grant of injunctive relief is an extraordinary remedy which should be granted only in limited circumstances." Frank's GMC Truck Center, Inc. v. General Motors Corp., 847 F.2d 100, 102 (3d Cir. 1988); accord Chez Sez III Corp. v. Union, 945 F.2d 628, 634 (3d Cir. 1991), cert. denied, U.S. , 117 L. Ed. 2d 493, 112 S. Ct. 1265 (1992); Instant Air, 882 F.2d at 800; United States v. Philadelphia, 644 F.2d 187, 191 n.1 (3d Cir. 1980); see also Driscoll Potatoes, Inc. v. N.A. Produce Co., 765 F. Supp. 174, 176 (D.N.J. 1991).
1. Likelihood of Success on the Merits
Parties seeking injunctive relief must make a preliminary showing that they are likely to succeed on the merits of their claims. This requirement is satisfied if the moving party "make[s] a showing of a reasonable probability, not the certainty, of success on the merits." SK&F Co. v. Premo Pharmaceutical Labs., Inc., 625 F.2d 1055, 1066-67 (3d Cir. 1980) (citations omitted). Nevertheless, a preliminary injunction cannot be issued when there are disputed issues of fact. Hunterdon Transformer Co. v. Cook, F. Supp. , 89-3132, 1990 U.S. Dist. LEXIS 1382 *3-4 (D.N.J. 6 Feb. 1990) (citing Charles Simkin & Sons, Inc. v. Massiah, 289 F.2d 26, 29 (3d Cir. 1961)); see also Oxford House-Evergreen v. Plainfield, 769 F. Supp. 1329, 1342-43 (D.N.J. 1991).
Gruntal requests declaratory judgment that it is not obligated to arbitrate the claims at issue in the Arbitration Proceedings. See Complaint, P 21. Gruntal's likelihood of success on the merits of the Complaint therefore depends first on whether declaratory relief would be appropriate in this case, and second on whether declaratory judgment is likely to be entered in Gruntal's favor.
a. Declaratory Judgement
Section 2201 of United States Code Title 28
provides authority for district courts to issue declaratory judgments. Section 2201 does not grant jurisdiction; rather, it provides a mode of relief for aggrieved persons. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 94 L. Ed. 1194, 70 S. Ct. 876 (1950); Liberty Mutual Insurance Co. v. Insurance Corp. of Ireland, Ltd., 693 F. Supp. 340 (W.D.Pa. 1988).
A declaratory judgment is inappropriate solely to adjudicate past conduct. Crown Cork & Seal Co., Inc. v. Borden, Inc., 779 F. Supp. 33, 35 (E.D.Pa. 1991). "The real value of the judicial pronouncement - what makes it a proper judicial resolution of a 'case or controversy' rather than an advisory opinion - is in the settling of some dispute which affects the behavior of the defendant towards the plaintiff." Rhodes v. Stewart, 488 U.S. 1, 4, 102 L. Ed. 2d 1, 109 S. Ct. 202 (1988) (quoting Hewitt v. Helms, 482 U.S. 755, 761, 96 L. Ed. 2d 654, 107 S. Ct. 2672 (1987)) (emphasis in original).
To satisfy the case or controversy requirement,
an action must present "(1) a legal controversy that is real and not hypothetical, (2) a legal controversy that affects an individual in a concrete manner so as to provide the factual predicate for reasoned judicial resolution."
Armstrong World Industries, Inc. v. Adams, 961 F.2d 405, 410 (3d Cir. 1992) (quoting International Bhd. of Boilermakers v. Kelly, 815 F.2d 912, 915 (3d Cir. 1987)). The Third Circuit has further explained: "The fundamental test is whether the plaintiff seeks merely advice or whether a real question of conflicting legal interests is presented for judicial determination." Zimmerman v. HBO Affiliate Group, 834 F.2d 1163, 1170 (3d Cir. 1987); see Global Leasing Inc. v. Henkel Corp., 744 F. Supp. 595, 597 (D.N.J. 1990).
If the declaratory judgment is sought to protect against a feared, future event, "the plaintiff must demonstrate that the probability of that future event occurring is real and substantial, 'of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.'" Salvation Army v. Department of Community Affairs, 919 F.2d 183, 192 (3d Cir. 1990) (quoting Steffel v. Thompson, 415 U.S. 452, 460, 39 L. Ed. 2d 505, 94 S. Ct. 1209 (1974)). The determination of whether a particular controversy is sufficiently immediate and real must be made on a case by case basis. Global Leasing Inc., 744 F. Supp. at 597.
Whether to grant relief pursuant to section 2201 is vested in the court's discretion. "Although the threat of legal action may present a real controversy, . . . the remedy of a declaratory judgment is discretionary even where a justiciable controversy exists." Zimmerman, 834 F.2d at 1170; see Step-Saver Data Systems, Inc. v. Wyse Technology, 912 F.2d 643, 646-47 (3d Cir. 1990). A "court should refuse to proceed if it finds that a declaratory judgment action will not serve a useful purpose or is otherwise undesirable. . . . A court must ask whether the requested declaratory judgment will (1) clarify and settle legal relations in issue and (2) terminate and afford greater relief from the uncertainty, insecurity, and controversy giving rise to present action." United Sweetener USA, Inc. v. Nutrasweet Co., 766 F. Supp. 212, 216 (D.Del 1991).
Turning to the facts at bar, it appears Gruntal is entitled to a declaration its rights concerning arbitration in this matter. Gruntal's submissions establish that two arbitration proceedings against Gruntal are currently pending before the NASD. See Rappaport Cert., PP 5-6; Complaint, Ex. B. By the Arbitration Proceedings, Gruntal is exposed to potential liability exceeding $ 60,000. See Complaint, Ex. B.
Moreover, the issue of the arbitrability of the dispute is currently before the NASD arbitration panel. See Rappaport Cert., P 6. There is therefore a concrete possibility that the NASD panel will compel Gruntal to arbitrate in the absence of a judicial determination as to arbitrability.
As the Third Circuit has stated, a party reluctant to arbitrate "has a right to a judicial determination of his obligation to arbitrate." PaineWebber, Inc. v. Hartmann, 921 F.2d 507 (3d Cir. 1990); see AT&T Technologies v. Communications Workers of America, 475 U.S. 643, 649, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986) ("The question of arbitrability . . . is undeniably an issue for judicial determination."); PaineWebber, Inc. v. Hofmann, 984 F.2d 1372 (3d Cir. 1993) (same; holding plaintiff securities broker-dealer entitled to declaratory judgment as to obligation to arbitrate); Morristown Daily Record v. Graphic Communications Union, Local 8N, 832 F.2d 31, 33 (3d Cir. 1987) ("Whether a dispute is arbitrable is a question for the court to resolve. Absent the parties' clear expression to the contrary, that threshold question is to be decided by the court, not the arbitrator." (citations omitted)); Downing v. Merrill Lynch, Pierce, Fenner & Smith, 725 F.2d 192, 195 (2d Cir. 1984) (plaintiff was "entitled to a declaratory judgement as to whether he had an agreement with [defendant] to arbitrate disputes. . . ."). Gruntal's right to a judicial determination as to the arbitrability of this matter is placed in real and immediate danger by the Arbitration Proceedings.
Under these facts, Gruntal has presented an actual legal controversy which affects it in a concrete manner. See Armstrong, 961 F.2d at 410. The threat to Gruntal posed by the pending Arbitration Proceedings is of sufficient immediacy and reality to warrant judicial resolution at this time. See Salvation Army, 919 F.2d at 192. Accordingly, it is likely that Gruntal will be entitled a declaration of its rights regarding arbitration.
b. Gruntal's Obligation to Arbitrate
The only question that remains with respect to the issue of likelihood of success concerns the probability that Gruntal will be declared free from obligation to arbitrate with the Steinbergs.
Arbitrability disputes connected with a transaction involving interstate commerce are governed by the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (the "FAA"). PaineWebber, 921 F.2d at 510; see Moses H. Cone Memorial Hospital v. Mercury Construction Corp, 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983) ("Federal law in the terms of the [FAA] governs [the issue of arbitrability] in either state or Federal court."). The transactions at issue in the Arbitration Proceedings were carried out by telephone between the Steinbergs, residents of Maryland, and the Fort Lee Office, located in New Jersey. See Complaint, P 3; id., Ex. B. Because the instant dispute is connected with transactions involving interstate commerce, the issue of arbitrability is governed by the FAA. See PaineWebber, 921 F.2d at 510.
"In enacting [the FAA], Congress declared a strong national policy favoring arbitration. . . ." Southland Corp. v. Keating, 465 U.S. 1, 10, 79 L. Ed. 2d 1, 104 S. Ct. 852 (1984). "The [FAA] establishes that, as a matter of Federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . ." Moses H. Cone Memorial Hospital, 460 U.S. at 24-25.
Notwithstanding this policy favoring arbitration, "the FAA does not require parties to arbitrate when they have not agreed to do so. . . ." Volt Information Sciences v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 478, 103 L. Ed. 2d 488, 109 S. Ct. 1248 (1989). As the Supreme Court has stated: "Arbitration is a matter of contract and a party cannot be required to submit to arbitration [in] any dispute which he has not agreed so to submit." AT&T Technologies, 475 U.S. at 648; see Hofmann, 984 F.2d at 1381 ("Arbitration is a matter of contract, so no party should be forced to arbitrate a claim it never agreed to submit to arbitration."); Morristown Daily Record, 832 F.2d at 33 ("The arbitrators derive their authority from the parties' voluntary agreement.")
"Before compelling an unwilling party to arbitrate, [the FAA] requires the court to engage in a limited review to ensure that the dispute is arbitrable-- i.e., that a valid agreement to arbitrate exists between the parties and that the specific dispute falls within the substantive scope of that agreement. If a court determines that a valid arbitration agreement does not exist . . . it is obliged to enjoin arbitration." PaineWebber, 921 F.2d at 511 (emphasis supplied).
Turning to the facts at bar, it appears Gruntal is not a party to any contract with the Steinbergs, much more a contract concerning arbitration. See Rappaport Cert., P 6. Indeed, there is no indication that Gruntal conducted any business with the Steinbergs. See id.
It appears the Steinbergs maintained accounts and conducted business with Philips. However, the Asset Purchase Agreement expressly excludes Gruntal from any of Philips' obligations arising out of the actions of Philips prior to 19 April 1993. See Complaint, Ex. A, P 2. It appears the transactions at issue in the Arbitration Proceedings took place, in their entireties, at least two months before 19 April 1993. See Id., Ex. B. Therefore, under the Asset Purchase Agreement, it appears Gruntal is not liable for any of Philips' obligations, to arbitrate or otherwise, with respect to the events at issue in the Arbitration Proceedings.
The only discernible basis for a contractual obligation to arbitrate on Gruntal's part is Gruntal's membership in the NASD. See Rappaport Cert., P 2. The rules of the NASD, by which all members of the NASD must abide, contain a Code of Arbitration Procedure. The NASD Code of Arbitration Procedure states in relevant part:
Sec. 1. This Code of Arbitration Procedure is prescribed and adopted . . . for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the [NASD] . . . .
(2) between or among members and public customers, or others . . . .
Sec. 12 (a) Any dispute, claim or controversy eligible for submission under Part I of this Code between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this code . . . .