Opinion
Civ. No. 00-5361 (WGB).
February 15, 2001.
Bruce P. Keller, Esq., David H. Bernstein, Esq., Michael R. Potenza, Esq., DEBEVOISE PLIMPTON, New York, NY., Attorneys for Plaintiff.
Joseph Hayden, Jr., Esq., DECOTIIS, FITZPATRICK, GLUCK, HAYDEN COLE, LLP, Teaneck, N.J., Attorneys for Plaintiff.
Steven A. Zalesin, Esq., Joshua A. Goldberg, Esq., PATTERSON, BELKNAP, WEBB TYLER LLP, New York, NY., Attorneys for Defendant.
Francis X. Dee, Esq., CARPENTER, BENNETT MORRISSEY, Newark, N.J. Attorneys for Defendant.
O P I N I O N
Defendant Johnson Johnson-Merck Consumer Pharmaceuticals Company ("JJ") moves to increase the amount of the bond posted by Plaintiff Novartis Consumer Health, Inc. ("Novartis") to $10 million. For the following reasons, the security bond will be increased to $9.18 million.
For a detailed background of the facts, the parties are referred to the Court's December 22, 2000 Opinion.
Novartis and JJ produce competing over-the-counter ("OTC") drugs that treat heartburn. Novartis produces and markets the Maalox brand of antacids while JJ produces and markets the Mylanta brand. JJ's newest addition to its line of OTC antacids is Mylanta Night Time Strength ("MNTS").
On October 31, 2000, Novartis filed a complaint against JJ alleging that, in violation of section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a) and the New Jersey Consumer Fraud Act, N.J.S.A. § 56:8-1, et seq., JJ's advertisements regarding MNTS and the name of the product itself are false and misleading.
On December 8, 2000, Novartis filed a motion for preliminary injunction. After hearing oral argument on Novartis's motion on December 18 and 19, 2000, by Opinion and Order dated December 22, 2000, this Court granted Novartis's application for a preliminary injunction against JJ's designation of "Night Time Strength." Pursuant to Fed.R.Civ.P. 65(c), the Court ordered that as a condition of the preliminary injunction, Plaintiff post security in the amount of $1,000,000, but that the amount of the bond may be modified upon receipt of additional documentation from the parties.
Subsequently, JJ filed its notice of appeal to the Third Circuit on January 12, 2001. By Opinion and Order dated January 17, 2001, this Court denied JJ's motion for a stay pending appeal. JJ now moves to increase the amount of the bond posted by Novartis.
II. DISCUSSION
A. Standard for Determining Bond Amount
Fed.R.Civ.P. 65(c) provides in pertinent part:
No restraining order or preliminary injunction shall issue except upon the giving 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.
Setting the amount of the bond is within the district court's discretion. Franks' GMC Truck Ctr. v. General Motors Corp., 847 F.2d 100, 103 (3d Cir. 1988). When determining the amount of the bond, the court "should be guided by the purpose underlying Rule 65(c), which is to provide a mechanism for reimbursing an enjoined party for harm it suffers as a result of an improvidently issued injunction or restraining order."Hoechest Diafoil Co. v. Nan Ya Plastics Corp., 174 F.3d 411, 421 (4th Cir. 1999).
Therefore, the amount of security to be set by the judge usually covers the potential incidental and consequential costs in addition to "either the losses the unjustly enjoined or restrained party will suffer during the period he is prohibited from engaging in certain activities or the complainant's unjust enrichment caused by his adversary being improperly enjoined or restrained." 11A Wright, Miller Kane, Federal Practice Procedure: Civil 2d § 2954, at 292 (1995).
The district court should "err on the high side" when setting the bond amount. Mead Johnson Co. v. Abbott Laboratories, 201 F.3d 883, 888 (7th Cir.), cert. denied, 121 S.Ct. 276 (2000). "[A]n error in the other direction produces irreparable injury, because the damages for an erroneous preliminary injunction cannot exceed the amount of the bond."Id. (citing W.R. Grace Co. v. Rubber Workers, 461 U.S. 757, 770, n. 14 (1983)); see also Continuum Company, Inc. v. Incepts, Inc., 873 F.2d 801, 804 (5th Cir. 1989) (noting that because defendant might suffer damages in excess of the bond amount if the injunction was wrongfully issued, "it should be shielded against that contingency if protection can be provided without imposing undue hardship on [the plaintiff].")
Additionally, Novartis contends, and JJ does not specifically dispute, that any damages that JJ might recover from the bond are "limited to those suffered during the time period specified in the bond, which presumably would not include any time prior to the entry of th[e] preliminary injunction." Merck Co., Inc. v. Lyon, 941 F. Supp. 1443, 1464 (M.D.N.C. 1996) (citing 11A Wright, Miller Kane, Federal Practice Procedure: Civil 2d § 2973, at 468).
If, however, the injunction is ultimately reversed, a wrongfully enjoined defendant does not automatically recover the entire amount of the bond; rather, the defendant can only recover those damages that it establishes (1) were proximately caused by the injunction; and (2) are not speculative. Virginia Plastics Co. v. Boistim, Inc., 820 F.2d 76 (3d Cir. 1987).
Relying on Virginia Plastics Co. v. Boistim, Inc., 820 F.2d 76 (3d Cir. 1987), Novartis claims that because JJ can only recover non-speculative costs it incurs as a proximate result of the injunction, the bond amount must be set according to that same standard. In contrast, JJ insists that a less strenuous standard applies. It correctly states that the standard set forth in Virginia Plastics arose in the context of determining how much a defendant can recover from the bond after an injunction is reversed, rather than of calculating the amount of the bond to be posted.
Common sense, however, does not permit setting a bond at an amount that includes damages for claims that are not directly attributable to the injunction, which the defendant cannot possibly recover under Virginia Plastics, 820 F.2d at 81, n. 6. Therefore, the security will not include damages for claims against the party who brought the action other than those directly attributable to the improvidently issued injunction. 11A Wright, Miller Kane, Federal Practice Procedure: Civil 2d § 2954, at 292; Virginia Plastics Co. v. Boistim, Inc., 820 F.2d 76, 77, n. 1 (3d Cir. 1987); see also Matek v. Murat, 862 F.2d 720 (9th Cir. 1988); cf. Atlantic City Coin Slot Service Co., Inc. v. IGT, 14 F. Supp.2d 644, 673-74 (D.N.J. 1998) (declining to include in bond amount the enjoined defendant's anticipated profits and operating expenses because such expenses resulted from the defendant's own business decisions, which were based on its assumption that it would ultimately prevail in litigation).
Next, although Novartis is correct that under Virginia Plastics, a wrongfully enjoined defendant cannot recover on a bond for speculative damages, at this juncture, in a case such as this where the defendant alleges future damages, for example, loss of market position and anticipated marketing expenses to launch a new brand name, the amount of damages that may result from an improvidently granted injunction will necessarily be speculative to some degree. As JJ has noted, the damages it ultimately may incur will depend on how long the injunction remains in effect and how much of its investment it can salvage. Unlike damages that are not directly attributable to the injunction and are not recoverable under any circumstances, it is possible that future events unfold to render speculative damages provable as actual losses. Indeed, should the injunction be reversed, JJ will not automatically be entitled to that sum; it would have to "prove its loss, converting the `soft' numbers to hard ones." Mead Johnson, 201 F.3d at 888. See also CVI/Beta Ventures, Inc. v. Custom Optical Frames, Inc., 893 F. Supp. 508, 525 (D.Md. 1995),aff'd 92 F.3d 1203 (Fed. Cir. 1996).
Although the Court recognizes that JJ need not prove its losses unless and until an injunction is reversed, the Court will not, however, increase the bond without any credible evidence to support JJ's claimed potential losses. See e.g. Heck Implement, Inc. v. Deere Co., 926 F. Supp. 138, 141 (W.D.Mo. 1996) (requiring no bond because loss was "entirely speculative"); Bear U.S.A., Inc. v. A.J. Sheepskin Leather Outerwear, Inc., 909 F. Supp. 896, 910, n. 25 (S.D.N.Y. 1995) (setting bond at court's best estimate given defendant's failure to produce "any credible evidence as to the quantum of injury that realistically might be expected to sustain in the event the injunction is wrongfully issued");Continuum Company, 873 F.2d at 804 (continuing stay of district court's order increasing bond amount from $200,000 to $2 million because defendant "proffered little more than conclusory evidence to the district court to support its contention that the bond should be increased").
B. Analysis
JJ asserts that if the injunction remains in place for as much as six weeks, it will lose the MNTS brand forever. Declaration of Peter Miller ("Miller Decl."), ¶ 4. JJ claims that as a result of damages flowing from that loss, the bond must be increased to $10 million. See discussion infra.
The injunction went into effect on December 29, 2000. The six-week window elapsed on February 9, 2001.
Novartis, however, challenges JJ's assertion that the MNTS brand will be forever lost if the injunction remains in place for as much as six weeks. Novartis contends that JJ's position is contradicted by JJ's conduct. Novartis argues because JJ sought an expedited appeal on a schedule that does not require it to file its opening brief until after the six-week window elapses, this evidences JJ's intent to use the MNTS name again in the event of a reversal. Alternatively, Novartis maintains that because the expedited appeal will not be decided until after the six-week window, if Mr. Miller is telling the truth, the appeal will be moot because JJ will already have permanently lost the MNTS brand.
Notwithstanding Novartis's contentions to the contrary, the Court finds that JJ's position is not contradicted by its conduct. JJ has acted expeditiously in seeking an appeal of the injunction. Additionally, even if the appeal is moot with respect to whether the harm to JJ can be undone, it does not obviate the need for JJ, should it succeed on appeal, to be able to sufficiently recover damages under the bond.
To further challenge JJ's contention that it will be forced to permanently abandon the MNTS name after the injunction has been in place for as long as six weeks, Novartis maintains that it is not uncommon for antacid marketers to take breaks in their advertising. For example, JJ apparently ran virtually no advertising for 16 weeks (April through July 2000) for its Mylanta liquid antacid products, none of which were relaunched in August when advertising resumed. Supplemental Declaration of Jill Lewis ("Lewis Supp. Decl."), ¶ 6, Ex. 2.
Moreover, Novartis theorizes that "retailers likely have significant quantities of the product already at warehouses or on-site for retail sale" and that consequently, MNTS "can, and will, be sold far beyond the six-week deadline posited by Mr. Miller." Lewis Supp. Decl., ¶ 4. Additionally, the injunction does not require that JJ relaunch MNTS under a new name. For these reasons, Novartis concludes that any claimed marketing expenses associated with relaunching MNTS under a new product name are not directly attributable to the injunction.
JJ defends its position by pointing out that while a company might take breaks in advertising, it would not normally stop shipping to retailers. It suggests that because retailers do not wait long to have their merchandise replenished, it would irreparably lose shelf space and market share. Additionally, JJ claims that unlike the established antacid products for which advertising was suspended between April and July 2000, MNTS is a new entrant into the market and as Novartis argued in its motion for preliminary injunction, lost market share cannot be reclaimed.
Because the injunction does not require JJ to pull MNTS off of the store or retail warehouse shelves, JJ's assertion that it will lose market share and shelf space merely after six weeks, a deadline which appears to have been arbitrarily set, is entirely speculative, conclusory, and unsupported by any evidence; however, Novartis's claim that retailers will likely not run out of inventory after six weeks is equally speculative and unsupported.
Despite the lack of evidence to support either parties' claims regarding how a six week injunction will affect the MNTS brand name, Novartis's suggestion that JJ can ever successfully return to the MNTS brand name if the injunction is lifted is belied by its position during the application for preliminary injunction. At that time, Novartis insisted that loss of market share is the epitome of irreparable harm because it is so difficult to recover. See, e.g. American Home Products Corp. v. Abbott Labs., 522 F. Supp. 1035, 1038 (S.D.N.Y. 1981). Following that logic, whether it is after six weeks or sixty weeks of the injunction being in effect, if and when the MNTS brand loses market share, JJ will have suffered irreparable harm. By Novartis's own admission, because the lost market share will be so difficult to recover, JJ will have permanently lost the MNTS brand name.
Also, because JJ's damages will be limited to the security bond in the event of an improvidently issued injunction, the Court must err in favor of JJ and assume the worst case scenario that JJ will have to relaunch MNTS under a new label as a direct result of the injunction. See Mead Johnson, 201 F.3d at 888. Moreover, the Court notes that Novartis has not alleged that a $10 million bond will cause it undue hardship.
Therefore, assuming that JJ permanently loses the MNTS brand name and consequently, it must relabel and relaunch the product, JJ claims that even if it tries to salvage its research and development costs, it will still lose (1) the value of its brand marketing expenses ($5.7 million); (2) costs incurred in complying with the preliminary injunction ($1.3 million); and (3) the present value of the MNTS brand name ($3 million). Miller Decl., ¶ 6. Each of these 3 categories relied on by JJ to support an increase of the bond will be addressed in turn below.
1. Brand Marketing Expenses
Novartis claims that the $5.7 million in brand marketing expenses were all incurred before the injunction issued and therefore, cannot be the proximate result of the injunction.
JJ, however, maintains that Novartis has misconstrued its claims. It does not contend that it can recover expenses incurred prior to the injunction; rather, it maintains that in the event that the injunction remains in place for any significant amount of time resulting in the permanent loss of the MNTS brand, the expenses JJ incurred in launching MNTS provide the best predictor of what it would cost to bring a new product to market.
The Court agrees with JJ. Assuming the worst case scenario that JJ has to rename the MNTS product as a result of an improvidently granted injunction, JJ would have to again incur marketing expenses. It is reasonable to estimate that such expenses may be the same or similar to those incurred in launching MNTS.
2. Costs of Complying With Injunction
JJ contends that the alleged cost of complying with the injunction includes (1) $800,000 for the eventual destruction of existing inventory because it is less expensive to destroy than to relabel; (2) $800,000 in trade returns; and (3) $500,000 to "sell through existing trade inventory." Miller Decl., ¶ 8, Ex. B. The $2.1 million total cost, less 40% attributable to the tax consequences of the "loss," equals $1.3 million.
According to the Court's calculations, $2.1 million less 40% is $1.26 million. The parties do not explain the discrepancy. The Court will therefore assume that the parties simply rounded up to the nearest hundred thousand.
Novartis challenges JJ's claimed cost of complying with the injunction as conclusory, speculative, and not proximately related to the injunction.
i. Cost of Relabeling
First, Novartis questions why JJ would destroy, rather than relabel the existing MNTS product when in Novartis's view, the expense of relabeling would be minimal. Lewis Suppl. Decl., ¶ 13. While Novartis may disagree with JJ regarding whether relabeling or destroying the product would be less expensive, whatever the cost is, Novartis cannot argue that it is not directly attributable to the injunction. Moreover, while the amount of that loss is, at this juncture, just an estimate, the Court finds that for now, it is a sufficiently reasonable estimate of its damages. Therefore, the $800,000 for the eventual destruction of inventory will be included in the bond amount. The net total after calculating for the 40% tax consequence is $480,000.
ii. Trade Returns
Next, Novartis insists, and the Court agrees, that the claimed $800,000 in trade returns is not directly related to the injunction. As noted by Novartis, the injunction does not require such trade returns. Additionally, JJ's submission pursuant to 15 U.S.C. § 1116(a), regarding the manner and form in which JJ has complied with the injunction order, does not indicate that it has requested any trade returns. Consequently, the $800,000 for trade returns will not be included in the security bond.
iii. Sell-Through Cost
Finally, Novartis argues that JJ's alleged $500,000 to "sell through existing trade inventory" is also not directly attributable to the injunction, but rather, is a normal cost of doing business. "Sell-through" costs are those incurred to ensure that product in the distribution pipeline actually reaches the consumers. Lewis Supp. Decl., ¶ 12. Despite ample opportunity to do so, JJ has not provided any explanation for how these "sell-through" costs are directly attributable to the injunction. For instance, it is unclear to the Court whether such costs relate to inventory that has already been sent out for distribution to retailers or whether it relates to inventory that has not been distributed as a result of the injunction. Because common sense would seem to dictate that "sell-through" costs would not be incurred on inventory that has not yet been distributed, and absent other clarifying information, the Court will presume that the "sell-through" costs incurred by JJ relate to inventory that has already been sent out. In that event, JJ has and will continue to profit from that expenditure by the sale of inventory that is currently on store shelves and warehouses. Therefore, the $500,000 "cost to sell through existing trade inventory" is not directly attributable to the injunction and will not be included in the bond amount.
3. Value of MNTS Brand Name
JJ contends that the MNTS brand name has a unique and irreplaceable value to the Mylanta franchise that is presently worth $3 million. Miller Decl., ¶ 9.
In response, Novartis correctly points out that in support of JJ's motion, JJ offers no explanation or support for how that figure was reached and provides no evidence from a valuation expert or otherwise. But the position taken previously by Novartis in support of its motion for preliminary injunction belies its current contention that JJ's $3 million figure is entirely speculative. In arguing that an injunction was warranted, Novartis claimed that while the liquid formulations of Maalox lost market share, during the same periods, MNTS gained market share. Declaration of Rick Gleber ("Gleber Decl."), ¶ 17. Novartis then concluded that "[i]n raw dollar figures, [Maalox's] drop in market share translates to a minimum loss of $3 million annually." Id. Further, Novartis went on to state that if anything, the $3 million "underestimates the actual damages Novartis will suffer, because it makes the conservative assumption that the Mylanta Night Time impact on Maalox share will not increase over time." Id. Three million is therefore a reasonable estimate of the loss of present value that JJ might suffer while the injunction is in place.
III. CONCLUSION
For the reasons noted herein, JJ's motion for an increased bond is granted; however, the bond will only be increased to $9,180,000. That amount includes: (1) $5,700,000 for marketing expenses; (2) $480,000 for after tax cost of complying with the injunction by eventually destroying existing inventory; and (3) $3,000,000 for the loss of the present value of the MNTS brand name.
An appropriate Order follows.
O R D E R
This matter having come before the Court on Defendant's motion for an increase in the amount of bond; and
The Court having considered the submissions of the parties; and
The Court having decided this matter without oral argument pursuant to Fed.R.Civ.P. 78; and
For the reasons set forth in the Court's Opinion issued this day; and
For good cause shown;
It is on this ___ day of February, 2001 ORDERED that Defendant's motion for an increased bond is granted, but only to the extent that the bond will be increased to $9,180,000; and
IT IS FURTHER ORDERED that the existing injunction shall continue in full force pending Plaintiff's posting of the additional security; and
IT IS FURTHER ORDERED that Plaintiff shall post the additional security in the amount of $8,180,000 prior to February 22d 2001, at 5 p.m.