Opinion
CV-01-17 (RR)(VVP)
April 3, 2002
REPORT AND RECOMMENDATION
This matter has been referred to me by the Honorable Reena Raggi for a report and recommendation on the pro se defendants' request, made by letter dated August 27, 2001 for recovery on a bond in the amount of $7,5OO posted by the plaintiff in connection with the entry of an order granting preliminary injunctive relief to the plaintiff.
1. Procedural History
This action was commenced on January 3, 2001. On the same day, Judge Raggi issued an order to show cause and temporary restraining order prohibiting the defendants from a broad range of activities in connection with the sale and distribution of a video entitled "The Holy Land — Birthplace of Jesus." The temporary restraining order required the plaintiff to post a bond of $7,500 by the close of business on January 4, 2001 as security for the issuance of the restraining order, see Fed.R.Civ.P. 65(c), and the plaintiff posted the bond as required. On January 5, 2001, the temporary restraining order was modified by agreement of the parties to permit the defendants to solicit sales of the video at a trade show in Las Vegas, Nevada. No sales of the product could be consummated, however, without prior approval of the court. The temporary restraining order was converted to a preliminary injunction at a hearing held on April 12, 2001.
The docket reflects that the modification was put on the record before Judge Raggi on January 9, 2001, but it appears clear from other documents in the record and from the sequence of events that, with the court's approval, the understanding was actually reached on January 5, 2001 in order to permit the defendants to attend the Las Vegas conference from January 7 to 9.
When the plaintiff thereafter failed to comply with an expedited discover schedule and failed to appear at three settlement conferences ordered by the court, the undersigned issued a report and recommendation that the action be dismissed and that the preliminary injunction be vacated. No opposition was filed, and Judge Raggi subsequently dismissed the action with prejudice on August 21, 2001 for failure to prosecute, and vacated the preliminary injunction. Final judgment was entered August 27, 2001.
By letter dated August 27, 2001, the pro se defendants applied to Judge Raggi for the "7500.00 dollar bonds, which was posted by the Plaintiffs." An order dated September 5, 2001 was issued requiring the plaintiff to submit any opposition to defendants' application by September 14, 2001. No opposition was received. A hearing to determine what damages, if any, the defendants are entitled to recover because of the issuance of the preliminary injunction was held on April 1, 2001, at which the individual pro se defendants appeared. No appearance was made by any attorney on behalf of the defendant corporation, BG Soft International, Inc. Nor was any appearance made by any attorney of behalf of the plaintiff corporation, BG Soft Ltd.
A motion to withdraw made by the plaintiff's counsel, upon advice from his client that he was discharged, was granted before the hearing.
2. The Hearing
At the hearing, the defendants Israel Roditi and Nadav Kauderer testified and produced documents that were received as exhibits. Their testimony established that the defendant corporation incurred and paid various expenses in preparing for the Las Vegas convention. These expenses included an attendance fee of $5,250 which permitted BG Soft International to set up a booth at the convention to promote their product, as well as expenses for product packaging and displays totaling $6,982.79. See DX 2, 4, 5. The corporation had attended one previous convention in September 2000 in Atlantic City which had generated no sales of the product. The Las Vegas convention similarly generated no orders for the corporation's product. Roditi and Kauderer attributed the poor results in Las Vegas to disparaging statements made at the convention by representatives of the plaintiff, which also set up a booth at the convention, see DX 3, who told potential buyers that the defendants' product was an unlawful, infringing copy of the plaintiff's product. The testimony of Roditi and Kauderer also established that prior to the convention the corporation had incurred an expense of $4,956.82 to make 3,115 copies of their video product, although they produced no evidence that the corporation actually paid this expense. Finally their testimony established that the corporation paid a total of $5,000 in attorneys' fees in connection with this action, including the plaintiff's application for preliminary injunctive relief.
"DX" refers to defendants' exhibits at the hearing.
In addition to expenses incurred by the corporation, the testimony of Roditi and Kauderer addressed sales that the corporation sought to make but which were not consummated because of the temporary restraining order and preliminary injunction. These included one order for 50 videos made by Starcrest Products of California, Inc. for the total amount of $370.50. See DX 7. In addition, several discount stores in Manhattan had agreed to take the product on a consignment basis. The agreements with the stores contemplated that the videos would be sold for $14.99 each, and that the proceeds of the sales would be shared equally between the stores and BG Soft International. Agreements were reached to place approximately 500 videos in various locations under this arrangement. Finally, the corporation had engaged in some discussions with a broker, Aegis International, about an agreement to sell 1500 videos to the broker at $5.41 per video together with an understanding that the broker would be given exclusive rights to distribute the video in some undefined geographic territory.
3. Discussion
"Under Fed.R.Civ.P. 65(c), a party subjected to a preliminary injunction in district court who is later found to have been `wrongfully enjoined' may recover against the security bond damages suffered as a result of the injunction. Blumenthal v. Merrill Lynch, Pierce, Fenner Smith, Inc., 910 F.2d 1049, 1051 (2nd Cir. 1990) (citing Edgar v. MITE Corp., 457 U.S. 624, 649, 102 S.Ct. 2629, 2644, 73 L.E.2d 269 (1982) (Stevens, J., concurring)). An enjoined party has been "wrongfully enjoined" if it is ultimately found that the party at all times had the right to do the enjoined act, See, e.g., Blumenthal, 910 F.2d at 1054 (citing Medafrica Line, S.P.A. v. American West African Freight Conference, 654 F. Supp. 155, 156 (S.D.N.Y. 1987); Factors Etc., Inc., Pro Arts, Inc., 562 F. Supp. 304, 308 (S.D.N.Y. 1983); Wainwright Securities Inc. v. Wall Street Transcript Corp., 80 F.R.D. 103, 107 (S.D.N.Y. 1978)). The "wrongfulness" inquiry in this situation is not whether the district court erred in issuing the injunction, but rather whether in the light of the ultimate decision on the merits after a full hearing an injunction should not have been issued in the first instance. See id. at 1054-55.
A wrongfully enjoined party may recover against the surety bond only those damages that were proximately caused by the issuance of the injunction. See, e.g., Blumenthal, 910 F.2d at 1056; Intercapital Debt Trading Ltd v. Cantor Fitzgerald Inc., No. 94 Civ. 9275 (LMM), 1996 WL 167820, at *2 (S.D.N.Y. April 10, 1996). Thus, the damages award is limited to those damages "arising from the operation of the injunction itself and not from damages occasioned by the suit independently of the injunction." Medafrica Line, S.P.A. v. American West African Freight Conference, 654 F. Supp. 155, 156 (S.D.N.Y. 1987). Although damages need not be proved with mathematical certainty, they cannot be speculative. See Intercapital Debt Trading Ltd., 1996 WL 167820, at *2. Attorney's fees are typically not recoverable against the bond, absent a statutory directive. FruitconsultAg v. Amodess J.V., No. CV-97-3951, 1997 WL 777935, at *2 (E.D.N.Y. Oct. 17, 1997). The decision whether to award damages, as well as the amount to be awarded, is within the discretion of the district court, based upon considerations of equity and justice. Intercapitai Debt Trading Ltd., 1996 WL 167820, at *1; see also Interlink Int'l Fin. Servs., 145 F. Supp.2d 312, 314-15 (S.D.N.Y. 2001) (citing Ferguson v. Tabah, 288 F.2d 665, 675 (2d Cir. 1961).
Given the above considerations, the record supports a finding that the defendants were wrongfully enjoined. Although there has been no determination, after a full hearing on the merits, that the defendants had at all times the right to distribute and sell the product at issue, they were deprived of that opportunity by the plaintiff's abandonment of the action. The plaintiff should not be able to escape liability under the bond by its own default. See Medafrica Line, S.P.A., 654 F. Supp. at 156 (dissolution of preliminary injunction and dismissal of action held sufficient to establish wrongful injunction).
The defendants have also produced sufficient proof for an award of damages to BG Soft International to compensate it for the lost sale of 50 videos to Starcrest, as well as for its portion of the lost sales of the products that were to be placed on consignment in various stores in the New York City area. The amounts of those items of damages are $370.50 and $3,750, respectively. The testimony concerning potential lost sales to Aegis International, however, does not support an award of damages because no agreement had been reached concerning that sale, and the losses are therefore speculative. Nor are damages recoverable for the various expenses incurred prior to the convention As the defendants were permitted to attend the convention and display their products, the injunction was not the proximate cause of any losses with respect to these expenditures.
The latter amount is calculated by multiplying the 500 videos that were to be subject to consignment agreements by $7.50, the proceeds the corporation was to received from each sale.
The defendants have failed to establish a basis for recovery of the other expenditures they proved. As to the attorney's fees, although the copyright laws permit the court in its discretion to award attorney's fees to prevailing parties, see 17 U.S.C. § 505; Crescent Publishing Group, Inc. v. Playboy Enterprises, Inc., 246 F.3d 142, (2nd Cir. 2001), such fees should not be awarded here where the record as it now stands raises considerable doubt about whether the defendants would have prevailed on the merits. The court also rejects the defendants' argument that they should be awarded damages for the loss of their business. Although they have established that BG Soft International is no longer a going concern, the defendants have not established that BG Soft International's failure was proximately caused by the injunction. There is no evidence that the business would have been profitable; indeed, the evidence of the company's poor results at both of the trade shows it attended suggests that its video would not have been a commercial success. Moreover, the defendants offered no evidence that they made any effort to market the product after the injunction was lifted in August 2001. To award any damages based on the failure of the business would therefore be speculative.
Accordingly, for the foregoing reasons, this magistrate judge recommends that damages be awarded to BG Soft International, Inc. against the security bond in the amount of $4,120.05.
* * * * * * * * * *
Any objections to the Report and Recommendation above must be filed with the Clerk of the Court with a copy to the undersigned within 10 days of receipt or this report. Failure to file objections within the specified time waives the right to appeal the District Court's order. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b); see, e.g., Thomas v. Am, 474 U.S. 140, 155, 106 S.Ct. 466, 474, 88 L.Ed.2d 435 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298 (2d Cir.), cert. denied, 113 S.Ct. 825 (1992); Small v. Secretary of Health and Human Serv., 892 F.2d 15, 16 (2d Cir. 1989) (per curiam).
No objection having been filed, the court hereby adopts he recommendation of M.J. Pohorelsky awards defendant B.G. Soft International in the amount of $4,120.05.