by Sean T. McLaughlin

Traditionally, a party seeking injunctive relief from the courts bears the burden of proving four elements: (1) a substantial likelihood of success on the merits of their claims; (2) a substantial threat that failure to grant the injunction will result in irreparable injury; (3) the threatened injury outweighs any damage that the injunction will cause to the adverse party; and (4) the injunction will not have an adverse effect on the public interest.  See Johnson Controls, Inc. v. Guidry, 724 F. Supp. 2d 612 (W.D. La. July 12, 2010); Mississippi Power & Light v. United Gas Pipeline Co., 760 F. 2d 618 (5th Cir. 1985).  Due to the first element – a substantial likelihood of success on the merits – a court that is asked to rule upon a request for injunctive relief in effect pre-judges the entire case.  Although in most cases this is not problematic (and can potentially lead to the matter being resolved without the need for a full trial on the merits), the presence of a mandatory arbitration clause in the parties’ contract can lead to problems.

Specifically, a concern arises that a court deciding a request for injunctive relief would improperly inject itself into a controversy that is to be decided by the arbitrator.  Due to the fact that the Federal Arbitration Act (“FAA”) strongly favors and encourages the enforceability of arbitration clauses, something has to give: either a court should decline to enter injunctive relief in such situations and such requests must be directed to the arbitrator; or a court should grant injunctive relief without utilizing the traditional four-element test.

Although the circuits have reached differing results on this issue, the current state of the law in the U.S. Fifth Circuit is that a court can grant injunctive relief without utilizing the traditional four-element test if the contract contains language authorizing such a result.  In RGI, Inc. v. Tucker & Associates, Inc., 858 F. 2d 227 (5th Cir. 1988), the U.S. Fifth Circuit affirmed the district court’s issuance of a preliminary injunction pending the resolution of the parties’ arbitration.  In that case, Tucker obtained a contract from the Navy to provide document management services.  Tucker then sub-contracted 45% of the work to RGI.  The subcontract between Tucker and RGI mandated that all disputes be resolved by binding arbitration.  In addition, the subcontract contained a provision mandating that the subcontract “shall continue in full force and effect” until the arbitrator’s decision was rendered.  Tucker subsequentially discovered that RGI was underpaying its employees.  The DOL investigated same and ordered RGI to remedy its violations.  Because Tucker did not wish to be held liable for RGI’s failure to remedy its violations, Tucker unilaterally terminated its contract with RGI. 

In response, RGI filed an action in the district court (1) seeking an order to enforce arbitration between it and Tucker; and (2) seeking an injunction reinstating the subcontract pending arbitration.  The district court granted the injunction (ordering Tucker to specifically perform its contractual obligations) and ordered arbitration.  Tucker appealed the district court’s issuance of the injunction.

 

The U.S. Fifth Circuit affirmed.  In doing so, the Court noted that a circuit split exists regarding whether the FAA bars the issuance of an injunction pending arbitration.  The Court noted that some circuits have held injunctive relief is inappropriate in such circumstances because “the judicial inquiry necessary to determine the propriety of injunctive relief necessarily would inject the courts into the merits of issues more appropriately left to the arbitrator.”[1]  However, the Court side-stepped that issue due to specific language contained in the Tucker/RGI subcontract, wherein the parties had agreed that the contract would remain in full force pending the decision of the arbitrators.  The Court held that when such language is present, the usual test for the issuance of injunctive relief is inapplicable:

 

Hovey leaves open the possibility of a court’s entering a preliminary injunction where the parties had contemplated its use beforehand. See Hovey, 726 F.2d at 1291.

 

In such a circumstance, the court need not involve itself in balancing the various factors to determine whether a preliminary injunction should be issued. See Mississippi Power & Light v. United Gas Pipeline, 760 F.2d 618, 621 (5th Cir.1985). Thus, where the court need not be concerned with the merits of the case, the reasoning in Hovey is not in conflict with that of Teradyne. 

 

Instead of applying the traditional four-element test, the Court simply enforced the contract as written and ordered Tucker to remedy its breach and to specifically perform its contractual obligations (i.e., resume paying RGI) until the arbitrators rendered a decision:

 

This bargained-for provision clearly contemplates that the status quo is to continue pending arbitration. In contravention of this provision, Tucker has sought to terminate the contractual relationship with RGI pending arbitration. Thus it was appropriate for the district court to issue the preliminary injunction to insure that the arbitration clause of the contract will be carried out as written. Because the district court’s decision to issue the preliminary injunction falls in an area of apparent consensus among the Circuits as to preliminary injunctions under the Federal Arbitration Act, we need go no further to decide this appeal. 

 

This type of injunction – whereby a party seeks to enjoin a party from breaching a contract pending arbitration – is commonly referred to as a “status quo injunction.”  However, it is important to note that the key to the availability of such an injunction from the courts is the contract itself.  If the contract does not provide that an injunction is available in such a situation, then the holding of RGI is inapplicable and injunctive relief from the courts is likely unavailable.  SAIA Motor Freight Lines, Inc. v. Benesight, Inc., 2001 WL 1223582 (E.D. La. Oct. 12, 2001) (denying the plaintiff’s request for injunctive belief in the absence of contractual language providing for same because the plaintiff failed to produce evidence of its “irreparable harm.”); Feldman/Matx Interests, LLP v. Settlement Capital Corp., 140 S.W. 3d 879 (Tex. App. Houston July 13, 2004) (denying the plaintiff’s request for injunctive relief in the absence of contractual language providing for same because it would “require the courts to consider the merits of the underlying dispute.”).

 

Although RGI is not a new opinion, it remains the current state of the law in the U.S. Fifth Circuit.  Since mandatory arbitration provisions are becoming commonplace, a close examination of the contract’s provisions regarding the availability of injunctive relief should be one of the first steps taken when a party is threatening a breach.  Indeed, if the contract provides for a status quo injunction, the potential that a court can order a party to continue to perform its obligations pending the outcome of the arbitration (a process that can potentially take years) is something that must be accounted for.

 


[1] Id. at 229.