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MORGAN STANLEY DW INC. v. ROTHE

May 22, 2001

MORGAN STANLEY DW INC. PLAINTIFF,
V.
JOHN E. ROTHE, DEFENDANT.



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

MEMORANDUM OPINION

GRANTING THE PLAINTIFF'S MOTION FOR A TEMPORARY RESTRAINING ORDER

I. INTRODUCTION

On May 11, 2001, John Rothe resigned effective immediately from his job as a financial advisor at Morgan Stanley DW Inc. ("the plaintiff" or "Morgan Stanley"). Mr. Rothe ("the defendant") immediately accepted a job with a rival company, CIBC Oppenheimer ("Oppenheimer"), thus setting the stage for a textbook employer-employee dispute about a covenant-not-to-compete.

On May 16, 2001, the plaintiff filed a verified complaint and a motion for a temporary restraining order and a preliminary injunction.*fn1 The plaintiff, a Delaware corporation maintaining its principal place of business in New York City, brings this suit in federal court under diversity jurisdiction pursuant to 28 U.S.C. § 1332. The plaintiff alleges that on July 7, 1998, the defendant signed an Account Executive Trainee Employee Agreement ("the Agreement") as a condition of his initial and continuing employment with Morgan Stanley. The plaintiff now claims that the defendant has violated that agreement by taking files with him after resigning from Morgan Stanley and by contacting Morgan Stanley's clients to persuade them to sever their relationship with Morgan Stanley and transfer their accounts to the defendant's new employer, Oppenheimer.

The plaintiff asks for temporary and preliminary injunctive relief pending an expedited hearing on the merits before a panel of arbitrators pursuant to paragraph 10335(g) of the National Association of Securities Dealers ("NASD") Code of Arbitration Procedure.

The defendant counters that injunctive relief is inappropriate for four main reasons: (1) this matter belongs in arbitration; (2) the plaintiff is unlikely to prevail on the merits in arbitration; (3) enforcement of the agreement would violate NASD rules by denying public customers the right to exercise their own investment decisions; and (4) money damages can adequately address the purported harms suffered by the plaintiff. See Opp'n to Pl.'s Mot. for Injunctive Relief ("Opp'n") at 19. Accordingly, the defendant argues that the court should deny the plaintiffs motion for preliminary-injunctive relief.

For the reasons that follow, the court will grant the plaintiffs motion for a temporary restraining order.

II. BACKGROUND

In 1996, while he was in college, Mr. Rothe, 26, began working at Morgan Stanley's Washington office as an intern. See Rothe Decl. at 2. After graduating from the University of Maryland in 1997, he Joined Morgan Stanley as a full-time sales assistant. See id. While he was a sales assistant, he obtained his securities licenses and registrations. See id. On June 1, 1998, Morgan Stanley gave Mr. Rothe a promotion and he joined the financial advisor training program. See id. About one month later, on July 7, 1998, he signed the Account Executive Trainee Employment Agreement. See id.

Several of the material facts in this case are not in dispute. The parties agree that on July 7, 1998, John Rothe signed and executed the Agreement. See Compl., Ex. A; Decl. of John E. Rothe dated May 17, 2001 ("Rothe Decl.") at 2. The parties also acknowledge that Mr. Rothe resigned from his position as a financial advisor at Morgan Stanley's Washington, D.C. office "effective immediately" on May 11, 2001. See Compl., Ex. B (Def.'s resignation letter to Mr. Jerry Castro, Branch Manager, dated May 11, 2001). As Yohannes Tilahun, the sales manager of the Washington office, states, "On May 11, 2001 at 5:15 p.m., Defendant resigned from Morgan Stanley without prior notice to join the Washington, D.C. office of CIBC Oppenheimer . . ., a direct Morgan Stanley competitor." See Pl.'s Mot. for a T.R.O. and Prelim. Inj. ("Pl.'s TRO Mot."), Ex. A. (Aff. of Yohanes Tilahun ("Tilahun Aff.")) at 2 (emphasis in original).

Beyond these points, the parties find little to agree on.

The plaintiff seeks a temporary restraining order to prevent what it calls the "unlawful misappropriation by Defendant John Rothe . . . of confidential information pertaining to hundreds of Morgan Stanley accounts, representing in excess of $10 million in assets under Morgan Stanley management and over $250,000 in Morgan Stanley commissions over the last 12 months, and Defendant's effort to divert these accounts, assets and commission revenues" to Oppenheimer. See Pl.'s Mem. at 1. According to the plaintiff, Mr. Rothe, while still employed by Morgan Stanley, prepared to engage in, and now continues to engage in, the following acts that violate the terms of the Agreement: (1) removing, retaining, and/or copying confidential information pertaining to Morgan Stanley customers, and/or customer lists, including the names and/or addresses of hundreds of Morgan Stanley accounts formerly served by Defendant at Morgan Stanley; (2) disclosing and producing this confidential customer information to Oppenheimer; and (3) using this confidential customer information to solicit Morgan Stanley customers. See id. at 2; see also Ex. A (Tilahun Aff.).

Morgan Stanley claims that Mr. Rothe has committed the torts of conversion, unfair competition and breach of the duty of loyalty. The plaintiff also charges that Mr. Rothe has misappropriated Morgan Stanley's trade-secret customer lists and breached the express terms of the Agreement he signed as a condition of his employment. See Pl.'s Mem. at 2.

Morgan Stanley points out that in addition to containing the restriction on Mr. Rothe's future employment, the Agreement also called for the issuance of a temporary restraining order and a preliminary injunction to preserve the status quo pending the outcome of arbitration if the defendant breached the terms of his agreement. See Compl., Ex. A.

In consideration for Mr. Rothe's signing the agreement and becoming an employee, Morgan Stanley asserts that it agreed to, and in fact did, register and compensate Mr. Rothe, give him training and a job as a financial consultant and provide him with Morgan Stanley operational and sales systems, research and development, sales assistants and support, as well as the benefit of its reputation and goodwill. See Pl.'s Mem. at 3. Moreover, the company alleges that it provided Mr. Rothe with Morgan Stanley customers through: (1) "walk-ins"; (2) "call-ins"; (3) reassignments; (4) clients from Morgan Stanley-sponsored seminars; (5) leads from lists purchased from mail-order firms; (6) leads from Morgan Stanley national advertising campaigns; (7) leads from customer responses to national television campaigns; (8) leads responding to Morgan Stanley newspaper coupons; (9) leads calling Morgan Stanley's toll-free telephone number; (10) leads from blanket mailings to zip codes; and (11) other customer leads and sales advantages resulting from Morgan Stanley's goodwill, reputation, and name recognition in the securities industry. See id.

Furthermore, the plaintiff claims that before the defendant joined Morgan Stanley, Mr. Rothe "had no experience as a financial consultant in the securities brokerage industry." See Pl.'s TRO Mot., Ex. A, Tilahun Aff. at 2. Mr. Tilahun also alleges that the company gave Mr. Rothe on-the-job training throughout his employment and, at all times, paid his annual registration fees with the NASD, the New York Stock Exchange, and the American Stock Exchange. See id. In addition, Mr. Tilahun makes the following specific allegations:

7. Despite Defendant's contractual and other obligations to Morgan Stanley, and despite the fact that Morgan Stanley is informing its customers where to reach Defendant, we have learned that immediately upon his resignation late May 11, 2001, Defendant began initiating contact with clients he formerly serviced at Morgan Stanley to solicit them to transfer their accounts to Oppenheimer.
8. In particular, our investigation has indicated so far that at least one client received a package of solicitation materials on Saturday, May 12, 2001 (the day after Defendant resigned), requesting that the client transfer its accounts to Oppenheimer.
9. In addition, our investigation has revealed that Defendant removed all of the original files of one significant Morgan Stanley client. That client maintained eight Morgan Stanley accounts with assets in excess of five million dollars. The original documents missing include account and taxpayer information, margin papers, correspondence, and check receipts, among other vital and confidential information regarding the client.

Id. at 2-3. The plaintiff asserts that all these alleged actions constitute violations of Mr. Rothe's agreement. Accordingly, Morgan Stanley seeks injunctive relief pending an expedited hearing on the merits before a panel of arbitrators in accordance with Rule 10335(g) of the NASD Code of Arbitration Procedure.

Countering that a temporary restraining order is not the appropriate remedy in this case, Mr. Rothe states that Morgan Stanley should seek relief from the arbitration process alone. He asks the court to deny the plaintiffs motion with prejudice and to direct Morgan Stanley to proceed promptly to arbitration of this matter on the merits before the NASD. See Opp'n at 4.

Mr. Rothe also argues that even if an injunction were proper in this case, Morgan Stanley's proposed order would violate the rules of the NASD. See Opp'n at 3. That is, the company's proposed order would include a restriction on Mr. Rothe's right to accept business from the customers at issue. See id. The NASD's Board of Governors, however, "just last week approved the publication of a rule interpretation making clear that the NASD rules prohibit `any member firm [such as Morgan Stanley] from taking any action that interferes with [a] customer's right to transfer his or her account.'" See id.; Ex. 2 (NASD news release dated May 7, 2001).

Next, Mr. Rothe argues that the Agreement that Morgan Stanley asked him to sign was "overly broad." See Opp'n at 3. In addition, he attempts to cast doubt on the enforceability of the Agreement, which, he says, he "was forced to execute without discussion or negotiation several years after becoming employed by the firm. . . ." See id. Moreover, Mr. Rothe states that "he developed the vast majority of his "book of business" through his friends and family." See Rothe Decl. at 2-3. Thus, he takes issue with Morgan Stanley's claim to have a proprietary interest in these clients.

In sum, the defendant argues that the plaintiff has failed to make a showing strong enough to justify the issuance of injunctive relief. The court disagrees. Accordingly, the court will grant the ...


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