Friday, April 18, 2014

Setting the Amount of an Injunction Bond (and a Brief Digression about the Wright Brothers)

In previous posts (see here, here, and here), I've noted that in many countries (including Canada, France, Germany, Spain, and the U.K.) a patentee is liable to an infringement defendant for the latter's actual damages in the event that a court awards the patentee a preliminary injunction that is later vacated or reversed on appeal.   In the U.S., by contrast, the patentee's liability is capped by the amount of the injunction bond.  As explained by Grosskopf and Medina, the U.S. can result in serious undercompensation of the damages suffered as a result of a wrongly issued injunction:
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.” . . .  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. . . .  [T]he prevailing view is that courts retain their discretionary power to deny full, or even any, recovery on the bond.
A second reason for partial liability is the value of the bond. Notwithstanding the language of Rule 65(c), the sum of the bond is often lower than the costs incurred and damages suffered by parties who were wrongfully restrained. The court sets the bond at an early stage of the litigation when the defendant's possible costs and harms are often underestimated. Moreover, courts frequently set the bond amount on the basis of considerations such as the plaintiff's financial means or the public interest in the suit, which are not related to the defendant's expected costs and harms. Because the bond sets the upper limit for the defendant's recovery, the plaintiff often bears only part of the defendant's actual costs and harms.
Finally, the plaintiff does not bear the full cost of a wrongfully-issued preliminary injunction because she is not liable for the injunction's effects on third parties. . . . The combined effect of these doctrines is that the plaintiff ends up assuming only part of the social harm caused by the wrongfully-issued preliminary injunction.
Ofer Grosskopf & Barak Medina, Remedies for Wrongfully-Issued Preliminary Injunctions:  The Case for Disgorgement of Profits, 32 Seattle U. L. Rev. 903, 907-09 (2009).)  

Not surprisingly, perhaps, there doesn't appear to be a lot of guidance in the case law concerning how to go about setting the amount of the bond (although my research on this issue is still at an early stage).  Section 2954 of the Wright, Miller, Kane, Marcus & Steinman treatise on Federal Practice and Procedure, for example, cites only three patent cases addressing this issue; and only one of these, Sanofi-Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1384-85 (Fed. Cir. 2006), is an appellate decision.  In relevant part, the opinion states:
Lastly, Apotex challenges the court's decision to set bond in the amount of $400 million, which it asserts fails to provide sufficient security because it represents only 10% of the annual market and ignores Apotex's loss of market share. Sanofi responds that the amount far exceeds any damage Apotex may face, particularly in light of the fact that there was no recall of Apotex's generic product after it launched its product on August 8, 2006.
The posting of a bond is governed by Federal Rule of Civil Procedure 65(c) which provides that:

No restraining order or preliminary injunction shall issue except upon the giving*1385 of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.

Fed.R.Civ.P. 65(c). The amount of a bond is a determination that rests within the sound discretion of a trial court. Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 136 (2d Cir.1997) (noting that a district court has wide discretion under Rule 65(c) in setting the amount of a bond). The court based its determination on evidence presented before the court that concerned Apotex's “potential lost profits, lost market share and associated costs of relaunch” in the event of wrongful enjoinment. Sanofi–Synthelabo, slip op. at 57. We find no basis for disturbing the court's assessment of the facts, and thus conclude that the court did not abuse its discretion in setting the bond amount.
Aside from the court's use of the hideous word "enjoinment," the procedure used to determine the amount of the bond doesn't sound too bad--though I'd still like to get a better sense of how much effort district courts typically put into estimating the defendant's "potential lost profits, lost market share and associated costs," and would welcome any input from readers on this issue.  From a policy perspective, of course, the question still remains whether capping the amount of liability in the amount of the bond makes sense or not, which is one of the issues I plan to address in a project I am currently working on titled Wrongful Patent Enforcement:  A Comparative Law and Economics Analysis.   

Interestingly, the issue of injunction bonds was also present in a famous U.S. patent case that I taught earlier this week, Wright Co. v. Paulhan, 177 F. 261 (S.D.N.Y. 1910).  (The Wright Brothers' patent suits are the subject of this essay, and a forthcoming book, by Lawrence Goldstone, which I am quite eager to read.)  This was a patent infringement suit by the Wright Brothers' corporation against a French aviator, Louis Paulhan, who was flying his allegedly infringing plane at exhibitions in the U.S. during the early months of 1910.  Judge Learned Hand (then a district court judge) granted a preliminary injunction (which was later reversed on appeal).  Interestingly, according to the March 19, 1910, issue of Scientific American, "M. Paulhan was required to put up a $25,000 bond for one month in case he wished to continue making exhibition flights in the United States," though he "succeeded in getting the requirements changed to a weekly bond of $6,000."  In other words, the defendant was allowed to post a bond to continue engaging in the allegedly infringing activity.  It's not clear to me from the article whether this condition was, effectively, a condition for a stay of the injunction pending trial or a stay pending appeal; and I have been wondering whether a court today could, in effect, condition a preliminary injunction on the defendant's nonpayment of a bond, consistent with the Federal Rules.  (It looks like something similar was done in another patent case from that era, Kryptok Co. v. Harris, 216 F. 642 (S.D.N.Y. 1914).)  Having posed the issue on an IP Law Professor's listserv earlier this week, and having solicited the views of my colleagues who teach civil procedure, the answer appears to be probably no--although Professor Douglas Laycock suggested that Judge Hand might have been influenced by a somewhat similar practice that the New York state courts sometimes employed during that same period, namely enjoining a nuisance and then suspending the injunction to allow a court of equity to assess damages. See Douglas Laycock, The Neglected Defense of Undue Hardship (and the Doctrinal Train Wreck in Boomer v. Atlantic Cement), 4 J. Tort Law 1, 17-18 (2012).  Interesting from both a historical and a theoretical perspective, though.

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