Frank Russell Co. v. Wellington Management Co.

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit

8-18-1998

Frank Russell Co. v. Wellington Mgt Co
Precedential or Non-Precedential:

Docket 98-1315

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Recommended Citation
"Frank Russell Co. v. Wellington Mgt Co" (1998). 1998 Decisions. Paper 197.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/197

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Filed August 18, 1998

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-1315

FRANK RUSSELL COMPANY, FRANK RUSSELL TRUST
COMPANY, FRANK RUSSELL INVESTMENT COMPANY,
and FRANK RUSSELL INVESTMENT MANAGEMENT
COMPANY

v.

WELLINGTON MANAGEMENT COMPANY, LLP,
Appellant

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 98-CV-1703)

Argued on July 14, 1998

Before: SLOVITER AND ROTH, Circuit Judges, and
FEIKENS, District Judge*

(Filed August 18, 1998)

Cynthia M. Clarke (ARGUED)
Harvey E. Bines
Ira K. Gross
Sullivan & Worcester LLP
Boston, MA 02109

_________________________________________________________________

*Honorable John Feikens, United States Senior District Judge for the
Eastern District of Michigan, sitting by designation.
 Laurence Z. Shiekman
Michael H. Rosenthal
Pepper Hamilton LLP
Philadelphia, PA 19103-2799

Attorneys for Appellant

Steven M. Felsenstein
Jane Landes Foster
David C. Franceski, Jr.
Stradley, Ronon, Stevens
& Young, LLP
Philadelphia, PA 19103

Attorneys for Frank Russell
Investment Company

Kenneth M. Kolaski
Reed Smith Shaw & McClay LLP
Philadelphia, PA 19103

Donald J. Myers
Douglas K. Spaulding (ARGUED)
Michael B. Richman
David Ober
Reed Smith Shaw & McClay LLP
Washington, D.C. 20005

Attorneys for Frank Russell
Company, Frank Russell Trust
Company and Frank Russell
Investment Management Company

OPINION OF THE COURT

FEIKENS, District Judge.

Before us is an expedited appeal from an order of the
United States District Court for the Eastern District of
Pennsylvania ("District Court") preliminarily enjoining the
non-compete agreement that was upheld by the Superior
Court of Massachusetts. The District Court held that there
is a "virtual certainty" that a permanent injunction would

2
be obtained on the merits by the plaintiff-appellees and
thus ordered a preliminary injunction effectively foreclosing
the enforcement of the injunction.

The appeal raises these issues:

1. Does the Investment Advisers Act of 1940, 15 U. S.C.
S 80b-1 et seq., provide a cause of action for plaintiff-
appellee?

2. Does the Employee's Retirement Income Security Act
("ERISA"), 29 U.S.C. S 1001 et seq., provide a basis for
plaintiff-appellees to claim breaches of fiduciary duties by
defendant-appellant?

3. Is the District Court's preliminary injunction order
barred by the Anti-Injunction Act, 28 U.S.C. S 2283?

4. Is the District Court's preliminary injunction order
barred by the Younger abstention doctrine, see Younger v.
Harris, 401 U.S. 37 (1971)?

I. BACKGROUND

In 1996, when Arnold Schneider ("Schneider") decided to
leave his position as a partner in the Boston-based
defendant Wellington Management Company ("Wellington")
and started his own firm, Schneider Capital Management
("SCM"), in direct competition with Wellington, this dispute
began. Plaintiffs Frank Russell Company, Frank Russell
Trust Company, Frank Russell Investment Company, and
Frank Russell Investment Management Company
(collectively "Russell"), were Wellington clients serviced by
Schneider. When Schneider terminated his employment
with Wellington, Russell transferred several of its accounts
to SCM.

Schneider joined Wellington upon his graduation from
college in 1983, and began working as an analyst in its
Valley Forge, Pennsylvania office. He progressed steadily
through its ranks and became a partner of the firm in
1992. His extraordinary flair for picking mid-cap stocks led
to an average return that exceeded the Standard & Poor's
500 Index by 7.4% for nine consecutive years, and earned
him the honor of being recognized as the number one
performing value manager in the country for the 1993

3
through 1997 time period. Wellington handsomely
compensated Schneider for his efforts; he earned over $1.4
million in his last year of employment with thefirm.

Russell is active in providing financial services and
regularly tracks more than 2200 investment management
firms such as Wellington. ERISA plans and other
institutional investors pay for this information to aid in the
selection and monitoring of their investment managers.
This leads to a complicated relationship with Wellington
because in some instances Russell and Wellington have
joint clients and refer business to each other, while at other
times they are direct competitors. In the present
circumstance, Russell was a client of Wellington's and had
entrusted over $1 billion to Wellington's care. The relevant
contracts between Russell and Wellington gave Russell the
right to terminate the relationship without notice.
Wellington was required to give 30-days notice before it
terminated the contract. Of the four Russell entities, only
Frank Russell Trust Company ("FRTC"), involved assets
covered by ERISA. For that contract, Wellington specifically
acknowledged it was an ERISA fiduciary.

Wellington is a 54-member limited liability partnership
engaged in the business of providing investment advice to
its clients. For this, it is paid a fixed percentage of those
assets under its control and controls over $200 billion of
clients' money. Wellington divides responsibility among its
staff in such a way that certain employees are solely
responsible for attracting new business while others focus
exclusively on providing investment advice. Non-compete
agreements are crucial to this division of labor because
they prevent partners from "poaching" clients if they leave
the firm. Schneider signed such a non-compete agreement.
The non-compete clause prevents partners who leave the
firm from "providing investment advisory or investment
management services" in any capacity for a period of three
years, and prohibits doing business with "any client of the
Partnership" for a period of five years. Either of these
provisions may be waived at the managing partners'
discretion.

The events which triggered a cluster of lawsuits began
when Schneider tendered his letter of resignation on June

4
22, 1996. As required, Schneider gave six months notice
before his date of departure on December 22, 1996.
Duncan McFarland ("McFarland"), Wellington's managing
partner, did not believe Schneider would go into direct
competition with Wellington. Based on his prior experience
with departing partners, McFarland was confident that if
Schneider did intend to compete with Wellington, he could
be talked out of it. McFarland thought Wellington's
interests would best be served if Schneider and Wellington
would jointly approach Schneider's clients to try to
persuade them to keep their business at Wellington. Hoping
Schneider would favor such an arrangement, McFarland
spent the months following Schneider's June
announcement attempting to learn what Schneider planned
to do after he left Wellington.

Schneider had a different agenda. His intention was to
start his own investment advisory business, and he wanted
his new firm to service as many of his former Wellington
clients as possible. Schneider wanted to reach a "fee-
sharing" agreement with McFarland in which Wellington
would waive the non-compete covenants in exchange for a
portion of the revenue Schneider generated from
Wellington's former clients. Schneider was always vague as
to his future plans because he believed McFarland would
react negatively if he found out Schneider was going to
compete with Wellington. Schneider continually provided
McFarland with non-committal responses regarding his
post-Wellington plans despite the fact that he had taken
concrete steps to prepare for the opening of SCM.

In the meantime, Russell and Schneider had been in
contact regarding Schneider's impending departure. Russell
privately assured Schneider that it intended to follow him
to his new firm. In order to avoid the non-compete
agreement's restriction on soliciting Wellington clients,
Russell conducted its due diligence inquiry into SCM by
submitting written questions to Schneider. Schneider
responded by giving a complete update on his progress. The
responses to Russell's inquiries were more detailed than
Schneider's answers to similar verbal queries by
McFarland.

5
By November of 1996, McFarland became increasingly
concerned that Schneider intended to "steal" Wellington
clients. McFarland expressed his concerns at an emergency
meeting of the full partnership on December 3, 1996.
Schneider then spoke in his own defense. After Schneider
left the meeting, the partnership voted 47-5 to expel him
unless he accepted a proposal providing Wellington would
waive his non-compete agreement if he would agree not to
service any former Wellington clients. Schneider refused
this proposal and was summarily terminated.

On December 17, Russell canceled its contract with
Wellington and immediately moved its assets to SCM. Two
other former Wellington clients, the State of Utah
Retirement Board, and RJR Nabisco, made similar
transfers.

Wellington then initiated suit in the Massachusetts state
court and sought an injunction enforcing the non-compete
agreement Schneider signed. After holding a full trial on the
merits and presiding over the case for more than a year,
the Massachusetts court issued a 115-page opinion
upholding the five-year ban on doing business with
Wellington clients, and striking the three-year ban on
working in the investment advisory business on the
grounds that it was an unreasonable restriction. The
February 17, 1998, opinion also awarded Schneider certain
unpaid incentive compensation that is not presently in
dispute. That court enjoined Schneider (the "Massachusetts
injunction") from doing business with any Wellington client
for five years, effective 60 days after the entry of the order
(April 17, 1998). The delay in the effective date of the
judgment was designed to give Russell the 30-days notice it
would have had if Wellington terminated their contract.
While Russell was not a party to the Massachusetts
proceedings, it filed three affidavits in the case, presented
two days of testimony, and submitted an amicus brief.

On March 31, 1998, three weeks prior to the effective
date of the Massachusetts' injunction, Russell brought the
suit which involves this appeal in the Eastern District of
Pennsylvania. Represented by some of the same attorneys
who worked for Russell in the Massachusetts proceeding,
Russell sought an injunction enjoining Wellington from

6
enforcing the non-compete agreement. The Utah Retirement
Board, one of Schneider's other former Wellington clients,
brought a similar suit against Wellington in the United
States District Court of Utah. That district court denied the
requested injunctive relief, and the case is pending on
appeal in the United States Court of Appeals for the Tenth
Circuit. See Utah State Retirement Bd. and Office v.
Wellington Management Co., No. 98-4060 (10th Cir.).
Wellington also sought declaratory judgment against RJR
Nabisco, Schneider's other former Wellington client, in the
United States District Court for the District of
Massachusetts asking that the Massachusetts injunction be
declared enforceable. That case is still pending in the
district court. Wellington Management Co. v. RJR Nabisco,
Inc., No. 98-10916 (D. Mass.).

Russell argues it is entitled to enjoin Wellington from
enforcing the non-compete agreement because such
enforcement will cause Wellington to breach itsfiduciary
duties under ERISA and its duties under the Investment
Advisers Act. The breach of these duties, it argues, will
cause it to involuntarily switch investment advisors. The
new advisor, as is alleged to be the custom, will then sell
Russell's present holdings to avoid being tied to any
questionable investments Schneider may have made. This
sell-off will necessitate Russell having to incur commissions
and adverse tax consequences on the order of $13-25
million.

Since the Massachusetts injunction was scheduled to
become effective on April 17, 1998, the District Court
expedited the hearing on Russell's motion for a preliminary
injunction. In its opinion issued on April 13, shortly after
the hearing, the court found that Russell would suffer
irreparable harm if the non-compete agreement was
enforced and that Russell had "a virtual certainty" of
success on the merits. The District Court therefore enjoined
Wellington from enforcing the non-compete provision, in
effect precluding it from enforcement of the Massachusetts
injunction.

II. STANDARD OF REVIEW

We review the terms of the preliminary injunction for an
abuse of discretion, underlying questions of law receive de

7
novo review, and factual determinations are reviewed for
clear error. Acierno v. New Castle County, 40 F.3d 645, 652
(3d Cir. 1994). The standard of review of the Anti-
Injunction Act and the Younger abstention doctrine is de
novo. 1975 Salaried Retirement Plan for Eligible Employees
of Crucible, Inc. v. Nobers, 968 F.2d 401, 403 (3d Cir.
1992).

III. LIKELIHOOD OF SUCCESS ON THE MERITS

In order to obtain a preliminary injunction, the moving
party must show 1) irreparable injury, 2) a rea sonable
probability of success on the merits, 3) the harm to it
outweighs the possible harm to other interested parties,
and 4) harm to the public. Continental Group, Inc. v. Amoco
Chem. Corp., 614 F.2d 351, 356-57 (3d Cir. 1980). A court
then balances these four Continental factors to determine if
an injunction should issue. Russell argues it has a strong
likelihood of success on the merits because Wellington has
breached its fiduciary duties arising under ERISA and its
duties under the Investment Advisers Act.1 Wellington
allegedly breached these duties when 1) it sought to
enforce the Massachusetts injunction to the detriment of
Russell, and 2) when it signed Russell as a client in 1989
without informing Russell that its partners, one of which
was Schneider, were bound by non-compete agreements.

To determine whether or not Russell can show a
likelihood (or reasonable probability) of success on the
merits, Russell must be able to show that it has a cause of
action against Wellington based on the Investment Advisers
Act ("Act") or that Wellington violated duties, if any, it owed
to Russell under ERISA.

A. Investment Advisers Act

Of the four distinct Russell entities, Wellington only
managed ERISA assets for FRTC. This means Wellington's
fiduciary responsibilities, if any, to the other three Russell
companies arise exclusively from the Act. Before Russell
_________________________________________________________________

1. Russell also makes reference to Wellington'sfiduciary responsibilities
arising under Washington state law. No citation to any case or statute
invoking Washington law is ever made, so we do not address this
contention.

8
can attain any relief for the non-ERISA entities, it must
satisfy the threshold requirement of showing that the Act
entitles it to bring a cause of action against Wellington.

The Investment Advisers Act of 1940 "was the last in a
series of Acts designed to eliminate certain abuses in the
securities industry, abuses which were found to have
contributed to the stock market crash of 1929 and the
depression of the 1930's. ... A fundamental purpose,
common to these statutes, was to substitute a philosophy
of full disclosure for the philosophy of caveat emptor and
thus to achieve a high standard of business ethics in the
securities industry." SEC v. Capital Gains Research Bureau,
Inc., 375 U.S. 180, 186 (1963).

In Transamerica Mortgage Advisors, Inc. v. Lewis , 444
U.S. 11 (1979), the Supreme Court ruled on the issue
whether the Investment Advisers Act created a private right
of action. The Court held 15 U.S.C. S 80b-15 ("S 215")
creates a private right of action for a plaintiff who seeks to
void an investment advisor contract.2

This includes the right to bring a suit to obtain "the
customary legal incidents of voidness ... including the
availability of a suit for rescission or for an injunction
_________________________________________________________________

2. "(a) Waiver of compliance as void

Any condition, stipulation, or provision binding any person to waive
compliance with any provision of this subchapter or with any rule,
regulation or order thereunder shall be void.

(b) Rights affected by invalidity

Every contract made in violation of any provision of this subchapter
and every contract heretofore or hereafter made, the performance of
which involves the violation of, or the continuance of any relationship or
practice in violation of any provision of this subchapter, or any rule,
regulation, or order thereunder, shall be void (1) as regard the rights
of
any person who, in violation of any such provision, rule, regulation, or
order, shall have made or engaged in the performance of any such
contract, and (2) as regards the rights of any per son who, not being a
party to such contract, shall have acquired any right thereunder with
actual knowledge of the facts by reason of which the making or
performance of such contract was in violation of any such provision." 15
U.S.C. S 80b-15.

9
against continued operation of the contract, and for
restitution." Id. at 19. The Court noted that 15 U.S.C.
S 80b-6 ("S 206") failed to create an express right for a
private party to bring a damages remedy and that Congress
actually removed such a clause from the section prior to its
passage. Thus, the Court concluded that "[u]nlike S 215,
S 206 simply proscribes certain conduct, and does not in
terms create or alter any civil liabilities." Id. at 19. We
conclude that "there exists a limited private remedy under
the Investment Advisers Act of 1940 to void an investment
advisers contract, but that the Act confers no other private
causes of action, legal or equitable." Id. at 24.

Transamerica has a clear application to the present case.
If Russell seeks to void its contract with Wellington under
S 215, it has a cause of action. Otherwise, it does not.
Russell's contracts with Wellington have not been in force
since they were voluntarily canceled by Russell on
December 17, 1996. Clearly this lawsuit is not an attempt
to void an investment advisor contract. In effect, Russell
affirms the contract by bringing suit on the S 206 fiduciary
obligations the contract gave rise to. Transamerica
expressly prevents a private party from suing for a breach
of the S 206 duties.3

Since Russell cannot bring an action against Wellington
for breach of any duty arising under the Investment
Advisers Act, it has no likelihood of eventual success on
this issue.

B. ERISA

The contract Wellington signed with FRTC specifies that
Wellington is an ERISA fiduciary. Under ERISA,

a fiduciary shall discharge his duties with respect to a
_________________________________________________________________

3. Russell cites a number of cases and administrative proceedings where
a defendant was found to have violated S 206. See Capital Gains; SEC. v.
Moran, 922 F. Supp. 867 (S.D.N.Y. 1996); In the Matter of Aetna Capital
Management, and Aetna Financial Services, Inc., Admin. Proc. File No.
3-8119, 1993 SEC LEXIS 2090 (Aug. 19, 1993). These cases are in
conjunction with Transamerica's bar to private actions enforcing S 206
because they all involve actions initiated by the Securities and Exchange
Commission.

10
plan solely in the interest of the participants and
beneficiaries and -

(A) for the exclusive purpose of:
(i) providing benefits to participants and their
beneficiaries; and

(ii) defraying reasonable expenses of administerin g the
plan;

(B) with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man
acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like
character and with like aims;

29 U.S.C. S 1104(1) ("S 404"). Russell claims Wellington
breached these duties by seeking to enforce the
Massachusetts injunction and by failing to inform Russell
that a non-compete clause was part of the partnership
agreement. Additionally, Russell argues that enforcing the
non-compete agreement would be illegal because it would
be a prohibited transaction under ERISA.

1. Breach of duty by seeking to enforce the
Massachusetts Injunction

None of the cases cited by Russell directly holds that
ERISA fiduciary responsibilities prevent a fiduciary from
enforcing a non-compete agreement against a former
employee. Its closest case is Glaziers and Glassworkers
Union Local No. 252 Annuity Fund v. Newbridge Securities,
Inc., 93 F.3d 1171 (3d Cir. 1996). In Glaziers, the defendant
brokerage firm Janney Montgomery Scott, Inc. ("Janney")
discovered that Michael Lloyd, one of its brokers, might
have altered the date on a cashier's check to make it
appear he had made timely payment of a nearly $10,000
debt. Consequently, Janney forced Lloyd to resign. Janney
then filed a complete report of the incident to the National
Association of Securities Dealers. The administrators of the
plaintiff pension plans whose assets Lloyd serviced,
however, were not informed of Lloyd's potential dishonesty.
Janney kept the matter from the administrators because
there was no uncontroverted proof that Lloyd had
committed the suspected alteration. The pension plans

11
followed Lloyd when he left Janney, and ultimately had over
$2 million of their funds embezzled by Lloyd. The plans
sued Janney for breaching its ERISA fiduciary duties when
it failed to inform them of the reasons for Lloyd's
termination. The panel in Glaziers reversed the district
court's grant of summary judgment to Janney because,
viewed in the light most favorable to the plaintiffs, Lloyd's
apparently fraudulent conduct could have been a material
fact which Janney had a fiduciary duty to disclose.

Russell reads Glaziers for the proposition that Janney
violated its fiduciary duties when it did not volunteer the
reason for Lloyd's termination out of fear of a potential
defamation suit. Russell argues Wellington similarly
breached its fiduciary duties when it chose to enforce the
Massachusetts injunction for its own business reasons even
though enforcement conflicts with Russell's interests.
Russell's position suggests that any decision made by a
fiduciary needs to be done for the "exclusive" benefit of the
ERISA beneficiary. Glaziers expressly disavowed such a
position when it stated "[w]e do not, of course, hold that
one who may have attained a fiduciary status thereby has
an obligation to disclose all details of its personnel
decisions that may somehow impact upon the course of
dealings with a beneficiary/client." Id. at 1182.

Such a limitation on the scope of a fiduciary's duties
follows the statutory language of S 404. This section states
that fiduciary responsibilities only arise when the fiduciary
"discharge[s] his duties with respect to a plan." 29 U.S.C.
S 1104(1) (emphasis added). Cases hold that a decision
which is "strictly a corporate management business
decision ... impose[s] no fiduciary duties." Payonek v. HMW
Industries, Inc., 883 F.2d 221, 224-25 (3d Cir. 1989). See
also Haberen v. Kaupp Vascular Surgeons Ltd. Defined
Benefit Pension Plan, 24 F.3d 1491, 1497 (3d Cir. 1994)
("the critical question is whether [the defendants] were
acting in their management capacity when they reduced
[plaintiff's] salary. ... If they were, then they breached no
duty under ERISA for, as they contend, ERISA does not
impose fiduciary duties on employers acting in their
management capacity."); Hlinka v. Bethlehem Steel Corp.,
863 F.2d 279, 286 (3d Cir. 1988) (finding defendant had no

12
fiduciary duty because "[i]t can hardly be disputed that the
initiation of these programs was a business decision rather
than a fiduciary decision.").

Russell tries to avoid the implication of the "business
decision" exception by arguing it is applied only when the
fiduciary is an employer. In those circumstances it argues
courts invoke the "two hats" metaphor to distinguish
between when a company acts as employer (thus, "wearing
a non-fiduciary hat"), and when it acts in afiduciary
capacity ("wearing a fiduciary hat"). Since Wellington is not
an employer, Russell believes the business decision
exception is inapplicable.

We reject this contention. No authority supports Russell's
position that an employer is relieved of its ERISA
obligations when it acts strictly in a business capacity but
other fiduciaries are not similarly relieved. Section 404
simply states "a fiduciary shall discharge his duties with
respect to a plan solely in the interest of the participant."
It does not create different or extra duties for those
fiduciaries who are not employers. Section 404 exempts
any fiduciary from the obligations when it is not acting
"with respect to a plan." A fiduciary who acts in a strictly
business capacity is not acting "with respect to a plan."

Was Wellington's decision to seek enforcement of the
non-compete agreement taken strictly for internal business
reasons? While the District Court made no findings as to
this issue, the record strongly suggests it was an internal
business matter. Wellington's non-compete agreement has
been in effect for years prior to the present dispute. It
governs Wellington partners whether or not they conduct
business with an ERISA entity. The non-compete agreement
is an integral part of Wellington's corporate structure
because it enables the firm to have a separate department
devoted exclusively to recruiting clients without the risk
that these clients will be "stolen" by departing partners. The
non-compete agreement has been used as part of
Wellington's leverage to reach amicable arrangements with
prior departing partners.4 Any Russell client having an
_________________________________________________________________

4. We note, too, that the Massachusetts court has decided that the non-
compete clause is legitimate and enforceable under Massachusetts law.

13
ERISA plan serviced by the prior departing partners would
have been unaffected by the non-compete agreement. It is
only because Schneider disavowed any effect of the non-
compete agreement upon him that Wellington has been
forced to protect its interests. Part of the final (appealable)
judgment of the Massachusetts case means Russell will no
longer have the investment advisor of its choice. Such an
impact on an ERISA plan is far more attenuated than any
of a number of employer decisions leading to the
termination of a plan which have been held to be strictly
business decisions. See Payonek, 883 F.2d at 225 n.5 (and
cases cited therein). Thus, Wellington made a business
decision when it chose to enforce the non-compete
agreement.

2. Duty to disclose

Russell also argues that a breach of a fiduciary duty
occurred in 1989 when it originally signed with Wellington
as a client, but Wellington failed to inform it that
Wellington's partners were bound by non-compete
agreements. Russell again relies on Glaziers to argue this
was a breach of an ERISA fiduciary duty. Russell now cites
Glaziers for the proposition that Wellington violated its
S 404 "affirmative obligation" to disclose the material fact
that it used non-compete agreements "even absent a
request [for such information] by the beneficiary." Glaziers,
93 F.3d at 1181.

Russell is correct in stating Wellington had an affirmative
fiduciary duty to disclose material information. The
question is whether Wellington's failure to disclose its use
of non-compete agreements was a material omission"which
the beneficiary must know for its own protection." Id. at
1182. The District Court implicitly found that the non-
compete covenant was a material fact because Wellington
could use it to impose significant transaction costs on
Russell by discharging Schneider. This is an erroneous
conclusion.

Wellington correctly notes that no published authority
requires an ERISA fiduciary to reveal that one of its
employees is bound by a non-compete agreement. There are
any number of internal matters between Wellington and its

14
employees that could have caused Russell's account to be
inadequately serviced. These matters include things such
as staffing policies, vacation allotments, and potentially
inadequate compensation. Wellington obviously had no
obligation to reveal to Russell the minutiae of its internal
operations. It was only required to reveal that information
which, when viewed without the benefit of hindsight,
Wellington reasonably believed Russell would need to know
for its own protection. In this case, Wellington had the
express contractual right to terminate its relationship with
Russell, for any reason, on 30-days notice. Wellington
therefore always had the power to impose substantial
transaction costs on Russell. The fact that Wellington could
impose these same transactions costs through the
additional circuitous route of 1) terminating its relationship
with a full partner of the firm, and 2) winning a lawsuit
enforcing the non-compete agreement, is insufficient to
make the existence of a non-compete agreement a material
fact. Wellington's ability to impose these transaction costs
on Russell for any reason makes the non-compete
agreement, when viewed in the light of events as they stood
in 1989, an immaterial internal arrangement between
Wellington and its partners. Thus, Wellington breached no
duty by failing to inform Russell of its existence.

3. Prohibited Transaction

Finally, Russell argues 29 U.S.C. S 1106(a)(1)(c) only
allows Russell to contract with Wellington if the agreement
between the two parties is "reasonable" under 29 U.S.C.
S 1108(b)(2). The United States Department of Labor's
interpretive guidelines at 29 C.F.R. S 2550.408b-2(c) state:

No contract or arrangement is reasonable within the
meaning of section 408(b)(2) [29 U.S.C. S 1108(b)(2)] ...
if it does not permit termination by the plan without
penalty to the plan on reasonably short notice under
the circumstance to prevent the plan from becoming
locked into an arrangement that has become
disadvantageous.

Seizing upon the "without penalty" language, Russell
argues it will be forced to pay a $13-25 million penalty if it
cannot continue to use Schneider's services. Section

15
2550.408b-2(c) disallows such a penalty and therefore
Russell contends Wellington should be prohibited from
enforcing the non-compete agreement.

This argument fails for two reasons. First, we note that
Schneider is far more responsible for imposing the $13-25
million potential costs on Russell than Wellington is. It was
Schneider's choice to sign the non-compete agreement,
Schneider's choice to leave Wellington, and Schneider's
choice to accept Russell's business in violation of the
agreement. Russell had been aware of Schneider's intention
to leave Wellington, and Wellington's non-compete
agreement, at least as early as June of 1996 when
Schneider informed it of these facts. Hence, Wellington is
not the party responsible for Russell having to pay these
costs.

Second, Russell's argument completely misstates the
meaning of the word "penalty." The simple fact is that
Wellington will never see a dime of the $13-25 million
"penalty" it is allegedly seeking to impose. The "penalty" in
this case is not a liquidated sum Wellington charges to
Russell. Instead, the transaction costs arise out of the
nature of Russell's business. At any time when Russell
switches investment advisors it may incur these expenses.
Even if Russell were to remain a Wellington client, Russell
would presumably still incur the $13-25 million cost
because the new Wellington advisor would need to make
the same type of alterations to Russell's holdings as any
other advisor. Thus, Russell is not "locked" into doing
business with Wellington. Since S 2550.408b-2(c) only
prohibits a contract which "locks" the ERISA plan into
doing business on unfavorable terms, the non-compete
agreement does not violate this regulation and this theory
has no likelihood of success on the merits.

IV. ANTI-INJUNCTION ACT AND YOUNGER
ABSTENTION DOCTRINE

Wellington also argues that the Anti-Injunction Act and
the Younger abstention doctrine provide grounds to reverse
the District Court's grant of an injunction. The Anti-
Injunction Act, 29 U.S.C. S 2283, prevents a federal court
from staying proceedings in a pending state court case.5
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5. "A court of the United States may not grant an injunction to stay
proceedings in a State court except as expressly authorized by Act of

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The District Court's injunction barring Wellington from
seeking enforcement of the Massachusetts injunction seems
to facially violate this act. See Atlantic Coast Line R.R. Co.
v. Brotherhood of Locomotive Engineers, 398 U.S. 281
(1970). Instead of arguing that one of the Anti-Injunction
Act's statutory exceptions applies, Russell focuses on
showing the Anti-Injunction Act does not affect it because
of the judicially-created "stranger to the litigation" doctrine.
See County of Imperial, California v. Munoz, 449 U.S. 54
(1980). We note some difficulty in the argument that
Russell was a "stranger" to the Massachusetts proceeding
because it submitted three affidavits, two days of
testimony, and an amicus brief in that case. Because we
have an adequate means for deciding this case without
reaching this issue, we defer ruling on it.

The Younger abstention doctrine6 creates an additional
set of circumstances in which a federal court is prohibited
from enjoining an on-going state action. This occurs when
1) there is an on-going state judicial proceeding, 2) the
state proceeding implicates an important state interest, and
3) the state proceeding provides an adequate oppor tunity to
raise the constitutional issue. FOCUS v. Allegheny County
Court of Common Pleas, 75 F.3d 834, 843 (3d Cir. 1996).
The pending appeal in Massachusetts state court clearly
satisfies the first requirement of the Younger doctrine.
Massachusetts' interest in preventing the judgments of its
courts from being nullified, in part, by a federal court order
may arguably fulfill the second requirements.7 The third
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Congress, or where necessary in aid of its jurisdiction, or to protect or
effectuate its judgments." 28 U.S.C. S 2283.

6. So named because the Supreme Court first announced it in Younger
v. Harris, 401 U.S. 37 (1971).

7. It is difficult to find an important state interest involved in
Wellington's attempt to enforce its internal non-compete agreement.
However, once the Massachusetts Superior Court enjoined Schneider
from working for any former Wellington clients, Massachusetts then may
have acquired a compelling interest in seeing that the orders and
judgments of its court were "not rendered nugatory." Pennzoil Co. v.
Texaco, Inc., 481 U.S. 1, 14 (1987); see also Schall v. Joyce, 885 F.2d
101, 109 (3d Cir. 1989).

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element may be satisfied by showing that Russell's
relationship with Schneider was so "intertwined" that the
Massachusetts proceeding gave Russell the opportunity to
raise its federal claims. See New Jersey-Philadelphia
Presbytery of the Bible Presbyterian Church v. New Jersey
State Board of Higher Educ., 654 F.2d 868, 878 (3d Cir.
1981). Because these contested issues are not necessary for
a resolution of this case, we again decline to rule on them.

V. CONCLUSION

Having reviewed all of Russell's theories, it is clear that
Russell has little likelihood of success on any of them. With
such a weak showing on likelihood of success, Russell is
unable to satisfy the Continental balancing test regardless
of its strength on any other element. Therefore, we
REVERSE the District Court's order and REMAND with
instructions to DISSOLVE the preliminary injunction
preventing Wellington from enforcing the non-compete
agreement.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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