Remedies for Wrongfully-issued Preliminary Injunctions: the Case for Disgorgement of Profits

• Publication year: 2009

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 32, No. 4SUMMER 2009

Remedies for Wrongfully-Issued Preliminary Injunctions: The Case for Disgorgement of Profits

Ofer Grosskopf and Barak Medina(fn*)

Introduction

Final judicial decisions are infallible,(fn1) and as such, they can neither impose illegitimate harm nor confer unjust enrichment.(fn2) But non-final and interim decisions are fallible, and when such a decision is reversed or set aside, the question is what harms inflicted and benefits gained as a result of the reversed decision should be reassigned? By and large, reversed judgments raise only a duty to restore direct benefits that one received from his counterpart in compliance with the revoked decision- money that has been paid thereunder or property that has been misallo-cated due to the judgment.(fn3) Litigating parties are not held responsible for wrong judicial decisions and thus need not compensate their counterparts for harms inflicted or disgorged profits generated by the reversed decision. However, this convention has at least one important exception: remedies that are awarded, mainly in the form of compensation for harms, in cases of wrongfully-issued preliminary injunctions.

A preliminary injunction is a pre-trial order issued with an explicit awareness of the possibility that it will be proved wrong.(fn4) This awareness is reflected not only in the courts' reluctance to issue such orders, but also in the demand for the moving party to post a bond that would cover the harms inflicted on any party who is found to have been wrongfully enjoined or restrained.(fn5) Liability under such a bond can be imposed whenever "it is ultimately found that the enjoined party had ... the right to do the enjoined act."(fn6) Yet the plaintiffs liability frequently covers only a fraction of the actual costs and harms inflicted by the injunction.(fn7) In addition, courts award restitution only of money paid or specific property transferred in accordance with the preliminary injunction, but courts reject most claims for restitution of benefits gained by the plaintiff on the basis of the wrongfully-issued preliminary injunction.(fn8) Are these practices justified?

Consider, for example, the case of a preliminary injunction that enjoined the defendant from producing and marketing a product based on the plaintiffs claim that the defendant's activities violated the plaintiffs patent. Once the court rejects the plaintiffs claims at the end of trial, and decides that the defendant was entitled to produce and market the product, should the defendant be fully compensated for harms inflicted due to the wrongfully-issued preliminary injunction, including loss of profits? Should the plaintiff be required to disgorge profits she gained from the provisional injunction's adverse effect on competition in the relevant market? What remedies, if any, should be available to third parties who also suffered harm, such as the defendant's potential consumers and suppliers? This Article aims to explore questions of this kind.

The issuance of a preliminary injunction temporarily assigns a legal entitlement to the moving party, such as the power to stop the defendant from acting in a certain way. It serves to prevent the irreparable social harms that would have been inflicted had the court not issued the preliminary injunction.(fn9) At the same time, because the provisional injunction is issued without a full inquiry into the merits of the case, wrongfully-issued preliminary injunctions may inflict irreparable social harms. One making the decision whether to issue a preliminary injunction should therefore strive to minimize the irreparable harm arising from an erroneous assignment of entitlements at the preliminary stage. Consequently, the underlying aim of remedies for wrongfully-issued preliminary injunctions is two-fold. First, from an ex-ante perspective, the remedy should be designed to increase the likelihood that a preliminary injunction is issued only when it is expected to induce less irreparable social harms than those expected if it is not issued. Second, from an ex-post perspective, the remedy should contribute to the minimization of irreparable social harms inflicted when a preliminary injunction is issued.

This Article demonstrates that these considerations lead to two central conclusions. First, it is desirable to award the remedy of restitution, which requires the moving party to disgorge all the benefits obtained at the expense of the defendant as a result of the wrongfully-issued preliminary injunction. Second, it may be unjustified to compel the plaintiff to compensate the defendant for all harms inflicted by the wrongfully-issued preliminary injunction.

From a broader perspective, the analysis enriches our understanding of the variety of aims of restitutionary remedies. Traditionally, restitutionary remedies are considered by the law and economics literature as a vehicle for either internalizing positive externalities(fn10) or deterring wrongful behavior.(fn11) The case of a wrongfully-issued preliminary injunction demonstrates a third possible aim of disgorgement of profits-the removal of improper motives to engage in an overall socially desirable behavior. Applying for judicial relief in general, and for a preliminary injunction in particular, are socially desirable activities. It may seem that in order to encourage disputants to turn to the judicial system, the moving party should be given immunity from tortious liability. However, such immunity might invite misuse. Plaintiffs may turn to the court, not only when they believe in their cause, but also to extract undeserved benefits.(fn12) Establishing an expansive duty to disgorge profits derived from unsuccessful litigation can mitigate the threat of frivolous suits without jeopardizing the principle of free access to the courts. The case of remedies for wrongfully-issued preliminary injunctions thereby demonstrates that restitution can serve as a middle ground between the ideal, which drives us to confer rights and liberties, and reality, which forces us to be mindful of their misuse.

This Article proceeds as follows. Part I summarizes the law of remedies for wrongfully-issued preliminary injunctions. Part LA surveys the doctrinal reasons for imposing on the moving party only partial liability for the defendant's harms, while Part LB presents the very limited availability of the remedy of restitution for wrongfully-issued preliminary injunctions under current law. Part II lays the theoretical ground for the analysis. Part II.A discusses the underlying purpose behind issuing a preliminary injunction: the minimization of the irreparable loss of rights resulting from an erroneous assignment of entitlements at the preliminary stage. Part II.B presents the standard for issuing a preliminary injunction. Part II.C analyzes the possible paths by which the remedy for wrongfully-issued preliminary injunctions achieves this aim. Part III deals with the ex-post perspective, and shows that the remedy of restitution is better suited to achieve the aim of minimizing irreparable social harms. Part IV inquires into the role remedies for wrongfully-issued preliminary injunctions play in shaping the parties' incentives in deciding whether to apply for a preliminary injunction, and shows the superiority of the restitutionary remedy in this respect.

I. The Law of Remedies for Wrongfully-Issued

Preliminary Injunctions

There are two possible types of remedies for wrongfully-issued preliminary injunctions: compensating the enjoined party (usually the defendant) for his losses, and recovering the gains accrued to the plaintiff.(fn13) This Part provides a brief overview of the current legal doctrines and practices regarding these two remedies.

A. Compensation for Harms

According to Rule 65(c) of the Federal Rules of Civil Procedure, the applicant for a preliminary injunction is required to give a security (a bond) "in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained."(fn14) On the basis of this provision, courts impose liability upon the bond to compensate the defendant for his costs and damages resulting from a wrongfully-issued preliminary injunction. Liability upon the bond may be imposed whenever the preliminary injunction has deprived the defendant of rights to which he was entitled.(fn15) The defendant need not prove that the issuance of the preliminary injunction was an abuse of discretion at the time it was issued.(fn16) However, in practice, the plaintiff often bears only part of the actual costs incurred and harms suffered as a result of the issuance of a wrongfully-issued preliminary injunction. Three doctrines induce this outcome.

The first is that the trial court has the power-and perhaps even the duty-to consider the equities of the case before imposing liability upon the bond and awarding damages by extracting from the bond that was created prior to the proceedings.(fn17) This doctrine was set forth in the Supreme Court's 1882 decision in Russell v. Farley,(fn18) in which the Court reasoned that since "no Act of Congress, or rule of this court" compelled a court to require a bond before issuing a preliminary injunction, even in cases in which the court did require a bond, it has "the power to mitigate...