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District Court, E.D. Pennsylvania • 2000

Salomon Smith Barney Inc. v. Vockel

137 F. Supp. 2d 599

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Takeaway

In short, this case shows that a party seeking an equitable injunction may be denied relief when it previously engaged in, encouraged, and profited from the same conduct it now asks the court to stop.

Background

Stewart Vockel, a financial consultant at Smith Barney, accepted an offer to join competing brokerage firm Paine Webber. While still employed by Smith Barney, he supplied Paine Webber with account statements for 254 of the 470 accounts he serviced. Paine Webber used the information to prepare and send clients solicitation packages containing Vockel’s letter, prefilled account-transfer forms, and new-account forms. Vockel resigned on the afternoon the packages were mailed, took additional client-related materials with him, and spent the following weekend calling clients about his move.

Vockel had signed Smith Barney confidentiality-related employment documents, although he never signed a noncompete agreement. Smith Barney alleged that he had misused confidential client information and sought a preliminary injunction barring further use or disclosure, requiring return of client documents, and requiring him to reverse transferred accounts. Smith Barney also commenced NASD arbitration seeking, among other relief, money damages.

The evidence showed that Smith Barney had recruited Vockel from Merrill Lynch in 1994 through materially similar tactics. Smith Barney requested his Merrill Lynch client statements while he still worked there, prepared and paid for client solicitation packages before his departure, instructed him to resign late on a Friday, and encouraged immediate client contact to induce transfers. Smith Barney substantially benefited when Vockel’s former Merrill Lynch clients followed him. After a Rule 65 hearing, the district court denied Smith Barney’s motion for a preliminary injunction and left the parties to their remedies in arbitration.

Issues

Issue #1

Whether Smith Barney could obtain preliminary injunctive relief against Vockel despite its own prior participation in substantially the same client-solicitation conduct it sought to enjoin.

Holding

No. Smith Barney came to equity with unclean hands, so the court would not grant a preliminary injunction, even assuming Smith Barney could otherwise satisfy the ordinary preliminary-injunction requirements.

Reasoning

A preliminary injunction is an extraordinary remedy. Ordinarily, the moving party must show a reasonable likelihood of success on the merits, a reasonable likelihood of irreparable harm without relief, and that the balance of harms and public interest support relief. The court did not resolve those factors because the equitable defense of unclean hands independently barred the requested injunction.

The clean-hands doctrine denies equitable relief when the party seeking the court’s aid has acted unconscionably, in bad faith, or contrary to equitable principles in conduct bearing an immediate and necessary relation to the relief requested. The inquiry focuses on the plaintiff’s conduct, not on whether the defendant also behaved improperly.

Smith Barney’s 1994 recruitment of Vockel from Merrill Lynch closely mirrored the conduct it now condemned. Smith Barney obtained Merrill Lynch client data before Vockel’s resignation, arranged and financed pre-departure solicitation materials, directed him to resign late on a Friday, and encouraged him to contact clients immediately to move their accounts. Smith Barney also paid him a substantial signing bonus and later profited from the transferred business.

The prior misconduct was directly connected to the requested injunction. Smith Barney asked the court to stop Vockel from using client information and soliciting transfers in a manner that Smith Barney had itself encouraged and exploited when it hired him. The court would not act as an instrument for preserving profits derived from the same allegedly wrongful practice.

The court did not approve Vockel’s conduct or decide who owned the clients or accounts. But because Smith Barney had not shown clean hands in relation to the equitable relief sought, the court denied the injunction and left the parties to monetary and other remedies available through NASD arbitration.