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Recovery from a TRO Bond is Available When the Defendant was Wrongfully Restrained: Second Circuit
Practical Law Legal Update 8-593-8645 (Approx. 4 pages)
Recovery from a TRO Bond is Available When the Defendant was Wrongfully Restrained: Second Circuit
by Practical Law Litigation
| Published on 06 Jan 2015 • USA (National/Federal) |
Aggressive plaintiffs seeking interim relief from courts in the Second Circuit can be liable to defendants that were wrongfully restrained. The US Court of Appeals for the Second Circuit recently ruled that the defendant could recover a substantial portion of the security that the plaintiff posted once the preliminary injunction was denied even where there was no final adjudication of merits of the dispute.
When applying for a temporary restraining order (TRO), plaintiffs are typically required to post a bond or other security against a finding that the defendant was wrongfully enjoined or restrained (FRCP 65(c)). Because the amount of recovery available to the defendant is limited by the amount of the bond (see, for example, Blumenthal v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 910 F.2d 1049, 1056 (2d Cir. 1990)), courts often require substantial security to offset the possibility that the defendant's damages will not be covered (see Practice Note, Preliminary Injunctive Relief: Initial Considerations (Federal): Costs of Application and Bond).
Plaintiff U.S. D.I.D. Corp., a reseller of telecommunications services to calling card providers, alleged that its supplier, Windstream Communications, Inc., threatened to terminate D.I.D.'s service on the ground that D.I.D. was reselling Windstream's services in violation of a contractual provision prohibiting resale. D.I.D. sought a TRO preventing Windstream from, among other things, suspending services or increasing rates. D.I.D. obtained a TRO against the defendant the same day it filed its lawsuit (U.S. D.I.D. Corp. v. Windstream Commc'ns, Inc., No. 13-206-CV, , at *2 (2d Cir. Dec. 22, 2014)). The district court required that D.I.D. deposit $314,672.80, an amount equal to twice the charges on Windstream's most recent monthly invoice, as security.
The district court ultimately denied D.I.D.'s motion for a preliminary injunction and dissolved the TRO, concluding that:
- Although D.I.D. had established irreparable harm at the time the TRO was first issued, any risk of harm that remained resulted from D.I.D.'s failure to use the time when the TRO was in effect to obtain a new service provider.
- D.I.D. failed to establish a likelihood of success on the merits of the underlying contractual dispute because D.I.D. was in material breach of the agreement.
- D.I.D.'s claim that Windstream's notice of termination was ineffective because it did not meet the contractual 30-day termination notice requirement was moot because under New York law, a termination notice that incorrectly identifies the termination date nevertheless becomes effective as of the correct termination date.
Before Winstream was required to answer the complaint, D.I.D. filed a notice of dismissal without prejudice under FRCP 41(a)(1)(A)(i). Windstream requested recovery from the TRO security in an amount equal to the unpaid bill for the telecommunications services D.I.D. continued to receive, but had not paid for, during the period the TRO was in force.
The issue presented to the district court was whether there had been a final adjudication on the merits, a necessary prerequisite to recovery from the security. The district court concluded that the dismissal qualified as a final adjudication on the merits because:
- D.I.D. decided to enter a voluntary dismissal immediately after the court's denial of D.I.D.'s motion for a preliminary injunction and the dissolution of the TRO.
- There was no reasonable explanation for D.I.D.'s voluntary dismissal other than the court's determination that D.I.D. was unlikely to prevail on the merits.
Based on these rulings, the district court calculated the damages recoverable against the TRO security at $227,271.92.
The Second Circuit affirmed but remanded for further calculations regarding the amount awarded. In reaching its decision, the court concluded that:
- The district court had jurisdiction to grant recovery on the TRO security after the case was dismissed because federal courts may consider collateral issues after an action is no longer pending.
- Having decided that its claims should not be pursued to trial, the plaintiff could not insist that the defendant have no opportunity to establish that it was wrongfully restrained.
- A final adjudication on the merits is not always required for recovery on FRCP 65(c) security.
The court agreed with the district court that restitution was a proper method of calculating damages for recovery on FRCP 65(c) security. The court considered whether Windstream had been wrongfully restrained during the entire period the TRO was in place. The court reasoned that if the TRO functioned to enforce the termination notice provision for a portion of the time during which the TRO was in effect, the unpaid service charges incurred during that portion of time were not damages that Windstream suffered as a result of complying with a wrongful TRO. In other words, Windstream cannot claim damages based on wrongful restraint when it was not entitled to take the action that was restrained.
The court remanded the case to the district court to:
- Revisit the portion of the award of recovery on the TRO security that included damages for Windstream during the 30-day notice period, when Windstream was contractually barred from taking any action against D.I.D.
- Determine whether the "wholesale" rates claimed by Windstream as restitutionary damages reflect the market value of the services Windstream was wrongfully compelled to provide to D.I.D.
After remand, the payment to Windstream will likely remain substantial. This case demonstrates that the decision to seek a TRO or preliminary injunction should not be made lightly. For more information on the key issues counsel should consider before applying for a TRO or a preliminary injunction in federal court, see Practice Note, Preliminary Injunctive Relief: Initial Considerations (Federal).