The welterweight bout took place Wednesday during the main card of UFC Fight Night 29 in Sao Paulo, Brazil. Palhares (15-5) secured the finish in 31 seconds.
UFC president Dana White, who broke the news on ESPN, likened the situation to a 2010 incident involving British welterweight Paul Daley. Daley (33-12-2) received a lifetime ban from the UFC after sucker punching Josh Koscheck in Montreal.
"We've had an incident with a guy named Paul Daley, from England, who hit somebody after the fight was over," White said. "The fight was over, and everybody was in the corner waiting for the decision. He went over and hit the guy.
"We cut him, and he'll never fight in the UFC ever again. This is the second incident we've had with Palhares, where he had the lock and didn't let it go. Finally he let it go, but I'm going to cut him, too."
The New Jersey State Athletic Control Board suspended Palhares for 90 days in 2010, after he refused to release a heel hook against Tomasz Drwal.
In a prefight interview, Pierce (17-6) told ESPN.com, "He'll do anything to win because he's either desperate or an [a--h---]."
Pierce (17-6) was scheduled to undergo an MRI on Thursday. According to a UFC official, "Indications show most likely he'll be OK."