Make Sure You Can Afford to Pay a Bond Before Seeking an Injunction

In order to obtain a an injunction under federal law, the moving party has to show each of the following:

(i) It has a likelihood of success on the merits of its claim.

(ii) Without injunctive relief, it would risk suffering irreparable harm.

(iii) Such harm outweighs the irreparable harm that the non-moving party would suffer if an injunction were to enter.

(iv) Entering an injunction is in the public interest.

In addition, however, Rule 65(c)  of the Federal Rules of Civil Procedure states that:

The court may issue a preliminary injunction or a temporary restraining order only if the movant gives security 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.

Indeed, as a recent case from the District of Massachusetts confirms, this is no small technicality, and something to which any company should give due consideration before having its outside litigation counsel seek injunctive relief.

In Arborjet, Inc. v. Rainbow Treecare Scientific Advancements, Inc., the parties executed a sales agency agreement whereby Rainbow was to sell Arborjet’s products. That agreement went on to state that:

[I]n view of the confidential information regarding Arborjet’s business affairs, plans and necessities, [Rainbow] will not engage in affairs intended to replicate Arborjet’s products or processes.

Notwithstanding this plain language, Rainbow eventually developed its own product that directly competed against one of Arborjet’s products. Arborjet sued Rainbow for, among other things, breach of contract, and sought a preliminary injunction to prevent Rainbow from marketing, distributing or selling the competing product. After multiple briefs and a hearing, the District Court Judge found that Arborjet had met the criteria necessary to enter a preliminary injunction. Significantly, however, that judge also stated the following:

Rainbow’s counsel informed the Court at the … hearing that Rainbow has sold $375,000 of [the product at issue] “in the last few months.” It projects $2.5 million in sales of the product in 2015. In light of those prospective sales, the Court will require the posting of a security bond in the amount of $500,000.

In order to post such a bond, Arborjet had to either pay a bonding company a non-refundable fee (which usually amounts to 10 percent of the bond amount) or pay the full $500,000 into court, which funds would be held as long as the injunction was in place. To its credit, Arborjet posted the bond, although it now has the specter of the bond amount being awarded to Rainbow if Arborjet eventually loses the case.

As Arborjet confirms, when it comes to injunctions (as in economics), there is no free lunch. If you want injunctive relief, you may well have to pay handsomely for that right. So next time a business executive is clamoring for an injunction, in-house counsel would be wise to make sure that the executive is aware that not only will there be out of pocket expenses to move for an injunction, but if one is warranted, the court also may make issuance contingent on the company putting up a substantial bond. Further, while some contract lawyers try to avoid this issue entirely by including in their contracts that “X” will not have to post a bond in order to obtain injunctive relief, and there is no down-side to so doing, be aware that such a provision will not automatically bind the court.

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