Remedies for Wrong Preliminary injunctions

Remedies for Wrong Preliminary Injunctions: The Case for Disgorgement of Profits and only Partial Liability for Harms

Ofer Grosskopf and Barak Medina[*]

1. Introduction

Litigating parties are not held responsible for wrong judicial decisions, and thus need not compensate their counterparts for harms inflicted or disgorge profits generated by the reversed decision.[1] However, this convention has at least one important exception: remedies are awarded, mainly in the form of compensation for harms, in cases of “wrong preliminary injunctions.”

A preliminary injunction is a pre-trial order issued with an explicit awareness of the possibility that it will be proved wrong. This awareness is reflected not only in the courts’ reluctance to issue such orders, but also in the demand from 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. Liability for such harms can be imposed whenever “it is ultimately found that the enjoined party had… the right to do the enjoined act.”[2] Yet, the plaintiff’s liability[3] frequently covers only a fraction of the actual costs and harms inflicted by the injunction. In addition, courts award restitution only of money paid or specific property transferred in accordance with the preliminary injunction, but reject most claims for restitution of benefits gained by the plaintiff on the basis of the wrong preliminary injunction. Can these practices be justified?

The issuance of preliminary injunction temporarily assigns a legal entitlement to the moving party, such as the power to stop the defendant from acting in certain ways. It serves to save the irreparable social harms that would have been inflicted had the court not issued the preliminary injunction. At the same time, since the provisional injunction is issued without a full inquiry on the merits of the case, wrong preliminary injunctions may inflict irreparable social harms. The decision whether to issue a preliminary injunction should thus strive to minimize the irreparable harm arising from an erroneous assignment of entitlements at the preliminary stage. Consequently, the underlying aim of remedies for wrong preliminary injunction 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 irreparable social harms that are lower than those expected if it is not issued. Second, from an ex-post perspective, the remedy can contribute to the minimization of the 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 wrong preliminary injunction. Second, it is unjustified to compel the plaintiff to compensate the defendant for all harms inflicted by the wrong preliminary injunction.

In a nut shell, these results are based on three reasons. The remedy shapes the plaintiff’s incentives to apply for the preliminary relief, and the defendant’s motivation to object to it. Arguably, the remedy should be designed to direct the plaintiff to apply for a preliminary injunction only when its issuance is socially efficient. This position, recently promulgated by Brooks and Schwartz (2005), assigns the remedy the ambitious goal of shifting the discretion whether to issue a preliminary injunction from the court to the plaintiff. We show, however, that this aim is unattainable, since the remedy cannot make the moving party internalize the full social costs and benefits of its decision. Retaining the court’s discretion in deciding whether to issue a preliminary injunction is thus inevitable. We suggest, however, that the remedy can serve a more limited aim in this respect—removing illegitimate incentives for applying for preliminary injunction to extract a benefit from a wrong preliminary injunction. The remedy of restitution of benefits is optimally designed to achieve this aim, whereas liability for harms is suboptimal. We also delineate the optimal scope of the moving party’s liability for harms and demonstrate that the plaintiff should assume only partial liability for the defendant’s harms.

A second possible aim of the remedy is to improve the court’s decision-making process in the preliminary stage. The remedy affects the size of the irreparable harms. A remedy that eliminates part of the harm from wrong preliminary injunction can improve the court’s decision ex-ante, by reducing the type of information that it should take into account. The remedy can also lower the level of certainty that the plaintiff is required to show in order to justify the issuance of a preliminary injunction. This too provides a justification for a resitutionary remedy.

A third possible purpose of the remedy, which reflects an ex-post perspective, is the mitigation of the social costs of wrong preliminary injunctions. An essential distinction in this context is between two types of harms—a direct net loss of social welfare (“deadweight-loss”) and a transfer of wealth from a party who is legally entitled to it to a non-entitled party (“undeserved-wealth-transfer”). An ex-post remedy that transfers wealth eliminates the undeserved-wealth-transfer component of the decision whether to issue a preliminary injunction. In contrast, compensation for deadweight-loss merely reallocates the burden of its cost from one party to another, but does not eliminate the social cost. In this respect, the traditional definition of irreparable harm as a “harm that cannot be cured by a remedy after trial” (Laycock, 1991, p. 113) should be qualified, since a deadweight-loss is socially irreparable even if a party’s private loss can be cured by a remedy after trial. Implementing this consideration again yields a firm justification for the restitutionary remedy. It also shapes the optimal scope of liability for harm, by providing a justification for requiring the plaintiff to assume liability for only one type of the defendant’s harms—harms that result from undeserved-wealth-transfer but not deadweight-loss.

From a broader perspective, the analysis enriches our understanding of the variety of aims of restitutionary remedies. Two familiar aims are internalizing positive benefits (e.g. Landes and Posner, 1978; Porat, 2007) and deterring wrong behavior (e.g., Friedmann, 1980; Grosskopf, 2001). The case of wrong 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 preliminary injunction in particular, are socially desirable activities. One of the main instruments available to encourage disputants to turn to the judicial system is the grant of immunity from tortious liability for harms inflicted by a judicial decision. 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 (e.g., Rosenberg and Shavell, 1985; Bebchuk,1988). 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 wrong preliminary injunctions can thus demonstrate 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 minded of their misuse.

The Article proceeds as follows: Section 2 summarily describes the law of remedies for wrong preliminary injunction. It surveys the doctrinal reasons for imposing on the moving party only partial liability for the defendant’s harms (2.1) and then presents the very limited availability of the remedy of restitution for wrong preliminary injunction under current law (2.2). The next two Sections lay the theoretical ground for the analysis. Section 3 discusses the underlying purpose of the decision whether to issue a preliminary injunction: minimization of the irreparable loss of rights resulting from an erroneous assignment of entitlements at the preliminary stage. Section 4t then analyzes the three possible paths in which the remedy for wrong preliminary injunction can serve to minimize irreparable social harms. Section 5 evaluates two remedies on the basis of these considerations. The analysis reveals the limitations of the remedy of compensation for harms, and yields a distinction between harms that the defendant should be compensated for and those that it should not (5.1). It then shows that the remedy of restitution is better suited to achieve the three possible aims of remedies for wrong preliminary injunction (5.2).

2. The Law of Remedies for Wrong Preliminary Injunction

There are two possible types of remedies for wrong preliminary injunction: compensating the enjoined party for its losses, and recovering the gains accruing to the plaintiff. This Section provides a brief overview of the current legal doctrines and practices regarding these two remedies.

2.1 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 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.” On the basis of this provision courts impose liability upon the bond, to compensate the defendant for its costs and damages from wrong preliminary injunction. Liability upon the bond may be imposed whenever the preliminary injunction has deprived the defendant of rights to which it was entitled.[4] The defendant need not prove that the issuance of the preliminary injunction was an abuse of discretion at the time it was issued. 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 wrong preliminary injunction. Three main doctrines can serve to explain this outcome.

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.[5] Notwithstanding the language of Rule 65(c), the prevailing view is that courts retain their discretionary power to deny full, or even any, recovery on the bond.[6] A second reason for partial liability is the value of the bond. 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 under-estimated (Dobbs, 1993, p. 205). Moreover, courts frequently set the bond amount on the basis of considerations that are not related to the defendant’s expected costs and harms, such as the plaintiff’s financial means (Morton, 1995, p. 1892) or the public interest in the suit.[7] Given that 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.[8]

Finally, the plaintiff does not bear the full cost of a wrong preliminary injunction, for it is not liable for the injunction’s effects on third parties. The bond posted under Rule 65(c) does not cover the injuries inflicted on those who were not formally restrained but nevertheless suffered an injury, such as suppliers and consumers who were harmed due to the preliminary injunction’s adverse effect on competition in the relevant market. Such third parties may have a cause of action in restitution for actual payments that they paid to the plaintiff (as discussed below, in Section 2.2), but they are not entitled to compensation for their damages (e.g., Phipps, 2007).

The combined effect of these doctrines is that the plaintiff ends up assuming only part of the social harm caused by the wrong preliminary injunction (Dobbs, 1974).

2.2 Restitution of Benefits

In several decisions the Supreme Court has recognized the right to restitution of money paid in accordance with a judgment that was subsequently reversed.[9] Article 74 of the Restatement of Restitution summarizes this line of cases by stating that “a person who has conferred a benefit upon another in compliance with a judgment, or whose property has been taken thereunder, is entitled to restitution if the judgment is reversed or set aside.” This rule applies to wrong preliminary injunctions too, and the prevailing view is that such claims of restitution are not capped by the amount of the bond.[10]

However, the remedy of restitution for wrong preliminary injunction is currently very limited. It is available almost exclusively in cases in which a sum of money or a specific property had been transferred from the defendant to the plaintiff on the basis of the preliminary injunction, so that only “restitution in kind” is available.[11] Indeed, all thirty-two illustrations given by the Reporters of the Restatement of Restitution are cases in which “money has been paid” or “property has been transferred.”[12] This restriction is further emphasized in §17 of the draft of the Restatement of the Law (third) on Restitution and Unjust Enrichment, which explicitly limits restitutionary rights in the case of “judgment subsequently reversed or avoided” to “transfer or taking of property.”[13] Since most preliminary injunctions do not order money to be paid or property to be transferred but rather freeze the status quo, this narrow reading makes restitution for wrong preliminary injunction unattainable in most cases.[14] Moreover, even in the rare cases in which the court concedes that the remedy should be more freely available, the restitutionary claim is usually rejected on evidentiary grounds or on the basis of the court’s equitable discretion.[15]