NASD Regulation Requests Comment On Injunctive Relief And Expedited Proceedings

Comment Period Expires: October 31, 1997

Executive Summary

NASD Regulation, Inc. (NASD Regulation^SM) is seeking from members, associated persons, and others, comments on the procedures for obtaining injunctive relief and expedited proceedings under Rule 10335 of the Code of Arbitration Procedure (Code).

Questions concerning this Request For Comment should be directed to Deborah Masucci, Vice President, Office of Dispute Resolution, NASD Regulation, at (212) 858-4400; or Elliott R. Curzon, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8451.

Background

On January 3, 1996, the National Association of Securities Dealers, Inc. (NASD^®) implemented a one-year pilot arbitration procedure to govern injunctive relief claims between or among members and associated persons. The pilot procedure, codified in Rule 10335 (Rule) (formerly Section 47), was extended for another year on January 3, 1997, in order to permit NASD Regulation's Office of Dispute Resolution to gain additional experience with the Rule in anticipation of making the Rule a permanent addition to the Code. NASD Regulation is seeking comments from members, associated persons, and others concerning how the injunctive relief rule and expedited proceedings work and how to improve the Rule and procedures. The text of Rule 10335 is set forth following this Notice.

Rule 10335 provides, among other things, that:

• Parties may seek temporary injunctive relief either in court or in arbitration.



• Parties who seek temporary injunctive relief in court must simultaneously submit the claim to arbitration for permanent relief.



• Parties may obtain interim injunctive relief in arbitration in the form of either an Immediate Injunctive Order or a Regular Injunctive Order.



• Permanent injunctive relief may be obtained in arbitration as part of the final relief sought by a party in connection with a claim.



• Applications for interim injunctive relief are expedited.



• Where a court grants interim injunctive relief to one of the parties, arbitration proceedings on the dispute must be expedited.

From January 3, 1996, when the Rule took effect, through August 18, 1997, the Office of Dispute Resolution has had the following experiences with injunctive relief actions.

• 433 cases were filed seeking injunctive relief.



• The national average number of days between filing and the arbitrator's initial injunctive relief order was approximately 7.5 days.



• Few cases went forward to a hearing on the merits following issuance of an injunctive order by either a court or arbitrator because most of the cases were: (i) settled shortly after filing; (ii) settled just before an injunctive hearing in arbitration; or (iii) settled shortly following an injunctive hearing in arbitration.



• Most of the cases filed under the Rule concerned associated persons leaving one firm for employment at another firm (often referred to as "raiding" cases). The associated person's former firm was generally, though not in all instances, the petitioner in arbitration. In most such cases, the firm filed the action to prevent a former employee from soliciting clients the employee serviced at the firm. The causes of action asserted in many of the cases included: (i) breach of contract; (ii) misappropriation or conversion of trade secrets (customer information); and (iii) defamation (relating to the circumstances of the employee's departure from the firm).

In connection with the plan to extend the effectiveness of Rule 10335 or make it permanent, NASD Regulation is soliciting comments on the functioning of the Rule. Since the Rule was adopted, NASD Regulation's Office of Dispute Resolution (Office) has received comments from users of the Rule. These comments form the basis for the questions set forth below.

Availability Of Temporary Injunctive Relief In Court

Some users of Rule 10335 have complained that, although the Rule permits a party to obtain temporary injunctive relief (a temporary restraining order or TRO) in court prior to seeking other relief in arbitration, some courts have become reluctant to entertain requests for TROs because temporary relief is available in arbitration under the Rule.

Question 1. Should the Rule be modified to eliminate the TRO equivalent in arbitration?

Question 2. Should the Rule be modified to eliminate the TRO equivalent in arbitration and eliminate the option of resorting to the courts for TROs, or to vacate TROs, leaving the parties the remedies (including injunctions) available in an expedited proceeding?

Question 3. If the TRO equivalent is retained in arbitration, should the Rule be modified to eliminate the option of resorting to the courts for TROs, thereby requiring parties to seek all relief in arbitration?

Question 4. If the option of obtaining a TRO in court is not eliminated, should parties be barred from seeking a court injunction if an arbitration panel has already denied the request?

Question 5. If the option of obtaining a TRO in court is not eliminated, should the parties be barred from seeking relief other than the TRO in court? For example, should they be barred from seeking discovery and/or a preliminary injunction in court?

Terminology

Some users of the Rule have noted that the terminology of the Rule is confusing. The Rule provides for Immediate and Regular Injunctive Orders, and both types can be "interim" in nature. The Rule also does not specify whether an injunctive order can be permanent.

Question 6. Should the rule be modified to adopt the terminology and practice generally used in courts relating to injunctive relief (TRO, Preliminary Injunction, Permanent Injunction)?

Time Limits On Injunctive Relief

Some users of the Rule have noted that it does not specify time limitations on the effectiveness of temporary or preliminary relief, or the time limitations specified are contingent on a party seeking the next step in arbitration.

Question 7. Should the Rule provide that TROs or preliminary injunctions expire after certain specific times, or upon the failure of a party to seek further relief?

Question 8. Should the arbitrators be required to specify an expiration date for TROs or preliminary injunctions?

Question 9. Should the Rule provide a procedure for extending or extinguishing a court- or arbitrator-issued TRO or preliminary injunction?

Discovery

Ordinarily, discovery is not available in connection with a TRO, often because it is an emergency proceeding and the relief is of very short duration. Discovery is reserved for later in a proceeding, either limited discovery designed to ascertain facts necessary to support or defeat an application for a preliminary injunction, or comprehensive discovery relating to the main action for complete relief.

Question 10. Should the Rule specifically provide for discovery in injunctive relief proceedings, or do the other provisions of the Code that provide for the exchange of information in connection with the substantive claims for relief give the arbitrators sufficient authority to address discovery issues in connection with claims for injunctive relief?

Service Of Process

Paragraph (c) of the Rule provides that service of the application for injunctive relief in the form of a Statement of Claim and a statement of facts demonstrating the necessity for injunctive relief is to be made by the claimant. Rule 10314 of the Code provides that, in ordinary arbitration cases, the Statement of Claim is served on respondents by the Director of Arbitration (Director). Some users of the injunctive relief process have noted that these provisions create confusion about who serves the Statement of Claim and the manner in which an action should be initiated. Further, parties in an injunctive relief action are not always served simultaneously.

Question 11. Should the service provisions be amended to require that all papers relating to an injunctive relief action be served simultaneously?

Question 12. Should the parties or the Director serve papers that relate to injunctive relief actions?

Hearing Procedure

The Rule provides that a party may apply for a "Regular Injunctive Order" under paragraph (d)(2). The procedures in paragraph (d)(2) specify very short time frames for Regular Injunctive proceedings. Paragraph (g) of the Rule also provides that if a court has issued an injunction, the arbitration must proceed on an expedited schedule in accordance with procedures specified by the panel of arbitrators, but it does not provide for specific deadlines or schedules. The Rule also does not preclude parties from seeking a Regular Injunctive Order under paragraph (d)(2) if they have obtained temporary relief. Nevertheless, some courts, after granting an application for a TRO, have ordered further proceedings to occur under paragraph (g). Some users believe that parties should be able to obtain a Regular Injunctive Order under paragraph (d)(2) even though they obtained the initial relief in court.

In addition, the Rule does not specify whether hearings on applications for injunctive orders under the Rule should be comprehensive evidentiary hearings on the merits of a dispute, or abbreviated inquiries concerning facts and issues relating to the applicant's entitlement to a temporary or permanent injunction.

Question 13. Should parties be able to request a Regular Injunctive Order under paragraph (d) even if a court has ordered the parties to proceed under paragraph (g)?

Question 14. Should the Rule be amended to specify more clearly the type of hearing and the evidentiary showing required for each type of injunctive relief requested?

Question 15. Should there be page limitations on submissions in injunctive relief actions?

Question 16. Should the Rule be amended to permit a single arbitrator, who is hearing several applications for interim injunctive relief involving the same applicant or respondent, to consolidate the actions?

Arbitrator's Authority

The Rule is not clear about the authority of arbitrators to modify or vacate an injunction issued by a court. The Rule also is not clear about the authority of sole arbitrators appointed under the Rule to sanction any party who does not comply with an arbitrator's order.

Question 17. Should the Rule be amended to specify that arbitrators have the authority to modify or vacate any injunctive order issued by a court?

Question 18. Should the Rule be amended to specify that arbitrators have the authority to sanction any party that does not comply with an arbitrator's orders?

Forum Shopping

The Rule requires a party seeking a temporary injunction in court to file simultaneously a claim for permanent relief in arbitration. NASD Regulation has noted that some firms that have obtained court injunctions are filing their arbitration proceedings with another forum that does not require such proceedings to be expedited (the forum will, however, expedite proceedings upon the request of both parties). In this circumstance, the party that obtained injunctive relief in court benefits from the delay by filing in a forum other than NASD Regulation's.

Question 19. Are there benefits to parties seeking injunctive relief to be able to have their claims heard in other forums?

Question 20. Should parties who have sought temporary injunctive relief in court be barred from seeking permanent relief in forums that have not adopted procedures for adjudicating expedited injunctive relief claims unless the party that sought the injunctive relief agrees to expedite the proceeding?

Question 21. Should the NASD's rules be amended to provide that failure to file an arbitration action after obtaining temporary injunctive relief in court as required by the Rule, or that filing an arbitration action in a forum that does not expedite such proceedings will be considered a failure to submit to arbitration, subjecting the member to disciplinary action?

Other Issues

Mixed Industry/Public Cases. The availability of the procedures under the Rule has been limited to intra-industry cases. Although rare, the Office has encountered cases involving an industry party (an employee or former employee of a member) and the spouse of the party.

Question 22. Should the injunctive relief procedures be available in such cases and should the effect of any injunctive order extend to the nonindustry party?

Fees. NASD Regulation understands that some users of the injunctive relief proceedings believe that the fees charged for the proceedings should be refunded if the proceeding is not expedited. The Office is aware that on occasion circumstances arise which prevent expedited resolution of the proceedings. Parties who have sought injunctions sometimes request delays in order to secure necessary discovery and sometimes the arbitrators will grant requests for delays from responding parties. These circumstances are beyond the control of the Office and, indeed, are a predictable outcome in the process of resolving a dispute. The fees are designed to defray the costs of administering expedited proceedings and the Office often expends significant resources administering these cases even if the final resolution is not expedited. While NASD Regulation will continue to monitor the Office's actual costs of administering injunctive relief proceedings and will consider fee adjustments as necessary for the process to remain as cost-effective as possible, fee refunds are unlikely.

Request For Comment

NASD Regulation encourages all members and interested parties to respond to the issues raised in this Notice. Comments should be mailed to:

Joan Conley
Office of the Corporate Secretary
NASD Regulation, Inc.
1735 K Street, NW
Washington, D.C. 20006-1500;

or e-mailed to:
[email protected]

Comments must be received by October 31, 1997. Before becoming effective, any rule change developed as a result of comments received must be adopted by the NASD Regulation, Inc. Board of Directors, may be reviewed by the NASD Board of Governors, and must be approved by the SEC.

Text Of Rule 10335 Of The Code Of Arbitration Procedure 10335. Injunctions

In industry or clearing disputes required to be submitted to arbitration pursuant to Rule 10201, parties to the arbitration may seek injunctive relief either within the arbitration process or from a court of competent jurisdiction. Within the arbitration process, parties may seek either an "interim injunction" from a single arbitrator or a permanent injunction from a full arbitration panel. From a court of competent jurisdiction, parties may seek a temporary injunction. A party seeking temporary injunctive relief from a court with respect to an industry or clearing dispute required to be submitted to arbitration pursuant to Rule 10201 shall simultaneously file a claim for permanent relief with respect to the same dispute with the Director in the manner specified under this Code. This Rule contains procedures for obtaining an interim injunction. Paragraph (g) of this Rule relates to the effect of court-imposed injunctions on arbitration proceedings. If any injunction is sought as part of the final award, such request should be made in the remedies portion of the Statement of Claim, pursuant to Rule 10314(a).