In many forms of business litigation, including intellectual property but extending to other areas as well, a plaintiff may seek to enjoin the defendant from its allegedly wrongful conduct during the pendency of trial, ostensibly preserving the parties’ competitive position through resolution of the dispute.
In 2020, with the passage of the Trademark Modernization Act (TMA), Congress sought to clarify a long-disputed point: whether a plaintiff in a trademark action should be entitled to a presumption of irreparable harm upon demonstrating a likelihood of success. Historically, some courts and jurisdictions have tended to grant such a presumption; others have been more deliberative. Thus, the TMA amended 15 U.S.C. § 1116(a) to state unambiguously that a plaintiff seeking a preliminary injunction “shall be entitled to a rebuttable presumption of irreparable harm . . . upon a finding of likelihood of success on the merits.”
That seems to clear the air with respect to trademark cases, but recent decisions in other cases indicate that most courts, in considering whether to grant preliminary injunctive relief, continue to apply the long-standard four-factor test: (1) whether the plaintiff is likely to succeed on the merits; (2) whether the plaintiff is likely to suffer irreparable harm in the absence of such relief; (3) whether the balance of equities favors the plaintiff or the defendant; and (4) whether the public is best served by the grant of an injunction or by its denial. It will be interesting to see if courts in other cases adopt a presumption of harm, but for now a clear pattern has yet to emerge.
This article covers recent rulings involving preliminary injunctions in various settings and then discusses the factors experts and counsel may wish to consider when choosing to oppose (or seek) a preliminary injunction.
Historically, courts have differed on the question of irreparable harm. Some have tended toward a presumption of irreparable harm if the plaintiff has successfully demonstrated that it is likely to prevail on the merits; others have preferred a more deliberative process. The U.S. Supreme Court seemed to put the issue to rest in eBay Inc. v. MercExchange, L.L.C., emphasizing the importance of equitable inquiry under the above four-factor test: “We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.”
The last clause is worth noting in that the Court appears to dismiss any difference some might try to find in the nature of the infringement (patent versus trademark, for example) or between preliminary and permanent relief. Indeed, in crafting its opinion, the Court cited cases that involved a permanent injunction for violation of the Federal Water Pollution Control Act and a preliminary injunction for violation of the Alaska National Interest Lands Conservation Act.
Most lower courts followed suit; of those that addressed the issue, most echoed the Second Circuit’s conclusion in Salinger v. Colting that the logic of eBay was not limited to patent cases: “On the contrary, eBay strongly indicates that the traditional principles of equity it employed are the presumptive standard for injunctions in any context.” In Robert Bosch LLC v. Pylon Manufacturing Corp., the Federal Circuit agreed:
Prior to the Supreme Court’s decision in eBay, . . . we applied an express presumption of irreparable harm upon finding that a plaintiff was likely to succeed on the merits of a patent infringement claim. . . . We take this opportunity to put the question to rest and confirm that eBay jettisoned the presumption of irreparable harm as it applies to determining the appropriateness of injunctive relief.
Still, even after eBay (but before the TMA), some district courts (and at least one circuit court) appeared inclined to forgo the individualized inquiry seemingly compelled by eBay. For example, in a trademark case in the District of Connecticut in 2019, the district court reasoned that a successful showing of consumer confusion establishes both a likelihood of success on the merits and irreparable harm. Brushing past eBay, the court cited a 1928 opinion of the Second Circuit for the proposition that the use of another entity’s mark and reputation “is an injury, even though the borrower does not tarnish it, or divert any sales by its use.” Similarly, in 2018, a District of Minnesota court found that “to the extent that Plaintiff has shown a likelihood of success on its trademark-infringement claim, the Court can presume irreparable harm,” citing a 2007 (post-eBay) decision in the same district. Two years later, however, a different court in the District of Minnesota held the opposite: “Plaintiff argues that irreparable harm should be presumed in a trademark case where likelihood of success on the merits is demonstrated. In the wake of the Supreme Court’s decision in [eBay], it is questionable whether it is proper to presume irreparable harm in any case.” A review of more recent (post-TMA) cases indicates that, at least in non-trademark cases, the tendency of the courts is to follow the eBay admonition requiring individualized inquiry:
This article’s purpose is not to question the decisions of these courts. Experts and counsel should be aware that legal standards (or the application thereof)—even in the wake of the TMA—may differ with the subject matter and jurisdiction at hand. If the court is inclined toward a presumption of irreparable harm, even the most reasoned economic analysis may be ignored. In other cases, the courts may be open to a well-structured argument opposing (or supporting) a finding of irreparable harm.
In the latter case, one should take heed of the Federal Circuit’s repeated exhortations that an inquiry into irreparable harm seeks to identify harm “that no damages payment, however great, could address.” One reasonable interpretation of those words is that if the harm to the plaintiff can be measured, it is not irreparable. Or, as the D.C. Circuit noted more than 65 years ago:
The key word in this consideration is irreparable. Mere injuries, however substantial, in terms of money, time and energy necessarily expended in the absence of a stay, are not enough. The possibility that adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm.
As the rest of this article demonstrates, determining whether adequate compensatory relief will be available at the conclusion of trial is typically well within the scope of damages testimony.
Whether in support or defense of a preliminary injunction motion, the first and most obvious issue counsel and their experts may be asked to address is the likelihood of irreparable harm to the plaintiff during the pendency of trial should injunctive relief not be granted. In considering that question, both counsel and their experts must first understand certain critical distinctions that should be made in considering the possibility of irreparable harm at the pretrial phase versus posttrial.
The Salinger court stressed that neither eBay nor the Supreme Court’s subsequent decision in Winter v. Natural Resources Defense Council, Inc., permits a lower threshold for the grant of a preliminary versus permanent injunction: “Issuing a preliminary injunction based only on a possibility of irreparable harm is inconsistent with our characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Indeed, the Supreme Court has elsewhere stated that the standard for a preliminary injunction is “essentially the same as” for a permanent injunction.
The last comment notwithstanding, a key distinction must be made: At the preliminary injunction phase, the question before the court is whether the plaintiff is likely to suffer harm during the pendency of trial that cannot later be remedied. But at the close of trial, any losses incurred by the plaintiff during the pendency of the litigation would be viewed not as indeterminate future losses but—at least in part—as past losses. This changes the calculus considerably; an ex post analysis of the plaintiff’s losses will benefit from access to the plaintiff’s actual sales and profitability during the period in question. This differs little from a standard damages analysis. While it may not always be a simple matter—and there are circumstances in which even ex post damages may indeed be incalculable—if the loss of sales can be reasonably accounted for, and damages awarded thereon, any harm to the plaintiff would in many cases be fully compensated.
What then constitutes irreparable harm? Neither the courts nor Congress have favored us with an exhaustive list. The Federal Circuit, however, has identified four possible consequences of infringement that may serve as valid grounds for a finding of irreparable harm: price erosion, loss of goodwill, damage to reputation, and loss of business opportunities.
Loss of business opportunities. The Federal Circuit’s inclusion of the phrase “loss of business opportunities” is at once obvious and perplexing. Surely, if there has been no effect on the prospects of the business, now or in the future, there can be no claim of harm, irreparable or otherwise.
Under this broad umbrella, however, borrowing key words and phrases from a number of opinions, the plaintiff may assert that the defendant’s actions have adversely affected sales, thereby reducing the plaintiff’s market share. The plaintiff may point to a loss of retailer or distributor relationships, or assert that each infringing sale deprives the plaintiff of the loyalty of a potentially lifelong customer, or note the loss of follow-on sales—so-called ecosystem effects. The inference is that the infringement has caused or will cause long-lasting and indeterminate damage to the plaintiff’s business, compelling the grant of injunctive relief. Indeed, in many cases, that will be true.
Yet each of these—lost sales (whether past, future, or “follow-on”), lost retailer and distributor relationships, and lost customers—are routine elements of damages calculations. None is so intrinsically uncertain that it cannot be adequately measured, given the right circumstances, particularly if the plaintiff is a well-established company with an established product line, with a relatively stable market share, and in a relatively stable industry with established competitors.
Indirect losses from ecosystem effects are also calculable in some circumstances. Ecosystem effects are simply the expected value of future purchases (including repeat purchases as well as ancillary products and services) from customers lost as a result of the alleged infringement. The upper bound of such losses can be calculated as (1) the number of existing customers lost to the defendant as a result of the alleged misconduct during the pendency of trial, plus (2) the number of new customers the plaintiff would have expected to gain during the pendency of trial but did not, due to the alleged misconduct, multiplied by (3) the present value of the profits the plaintiff would have earned from the expected volume of supplies, accessories, and replacement units to be purchased by each such customer. The number of new and existing customers lost is often estimable from the plaintiff’s historical sales data.
Similarly, profits to be derived from the expected volume of future sales—sometimes referred to as the customer’s lifetime value—are often estimable. Customer lifetime value is well understood and commonly used both in business and in damages analysis. Again, these are the types of questions damages experts routinely face.
In short, harm arising from a loss of business opportunities, whether in the form of lost sales or market share, lost relationships, lost customers, or an increase in costs, can often be measured using standard approaches and assumptions and with reliable results. In such cases, standard damages remedies should be sufficient to compensate the plaintiff for its losses—that is, to make the plaintiff whole—resulting in a loss that is not irreparable.
Price erosion. A loss of sales volume may not capture all of a plaintiff’s losses. Losses may also be attributable to a reduction in the price of the plaintiff’s goods or services that were not diverted by the alleged infringer. A reduction in price, or price erosion, is the difference between the price actually received for a given product or service and the price at which it would have been sold in the absence of the alleged wrongdoing.
As with lost sales, price erosion is a routine element of damages analysis in commercial litigation. Damages attributable to price erosion are calculated as (1) the number of units sold by the plaintiff at the supposedly reduced price, multiplied by (2) the difference between the expected price and the actual price at which each unit was sold. Typically, an adjustment must also be made to reflect any change in demand that may be occasioned by the change in price, as well as changes in cost. It is true that in markets with volatile prices or low sales volumes, for example, price erosion may be difficult to measure reliably. In such cases, a finding of irreparable harm may be unavoidable. Given the right circumstances, however, adverse price effects can be reliably measured using standard approaches and assumptions.
Loss of goodwill and damage to reputation. There appears to be little meaningful distinction between the Federal Circuit’s terms “loss of goodwill” and “damage to reputation”—at least in an economic sense—except arguably that the former is somewhat more expansive than the latter. They are certainly closely related concepts in any sense and should be discussed together.
The term “goodwill” has two separate, though related, meanings. In accounting, goodwill is recognized as an asset on a company’s balance sheet following the acquisition of another firm; it refers to the excess of the purchase price of the acquired firm over the value of the identifiable assets (net of liabilities). Such value may be due in part to the acquired firm’s brand and reputation. Although that value may subsequently be reduced (through impairment), such reductions necessarily relate to the value of the acquired asset. If none of the harms the plaintiff describes involve the recorded value of an acquired asset, the claims cannot pertain to the goodwill that appears on the plaintiff’s balance sheet.
The common English use of the word “goodwill” refers more broadly to a company’s reputation—friendly, helpful, or cooperative feelings of customers, suppliers, distributors, and others with whom a company interacts.
A positive reputation may translate, albeit indirectly, into increased sales or profits, just as a poor reputation may result in losses. In fact, in economic terms, harm to a company’s reputation can present itself only through a loss of sales or profitability. Customers, suppliers, and investors are alienated, and diminished profits or investments are the result. If the company’s reputation has been challenged by the actions of the defendant, but no loss of sales or profitability has or will ensue, no damage has occurred. There is no mysterious and remaining economic harm to be calculated, whether called goodwill or reputation or anything else.
Some will argue that reputational harm can present itself through a decline in the value of a business, particularly when a sale of the business is imminent (or when a company’s stock is publicly traded). But the value of a business at any given time is simply the expected value of its future cash flows; thus, a decline in the value of the business as a whole is simply another way of expressing a decline in profitability. Such harm can be remedied, assuming it can be measured, through an award of corrective advertising or monetary damages.
In short, if the plaintiff is able to establish some loss of sales or profitability, in many cases such losses are readily calculable. If so, the analysis of reputational harm may be routine. If the plaintiff has not established an actual or probable future loss of sales or profitability, whether or not a sale of the business is imminent, the question of harm to the plaintiff’s reputation, in economic terms, is moot.
The previous discussion is not intended to suggest that the harm that may befall the plaintiff during the pendency of trial is always easy to calculate.
In a new or rapidly evolving industry, for example, with rapidly evolving technology, with products in entirely new categories or without established market demand, or with complex interactions with other companies or industries (such as smartphones or other high-technology products), losses attributable to infringement may be difficult to quantify. And with little history to go on, the value of a given customer’s add-on or future purchases or a supplier’s responses to rapidly changing market conditions may be difficult to predict with reasonable certainty.
In some cases, the plaintiff may suffer irreparable harm even when no loss of sales or profitability can be measured during the pendency of trial. If, for example, during the course of the litigation (or prior to it) the defendant is able to launch its allegedly infringing product before the plaintiff can respond, the plaintiff may forever lose the opportunity to capture the positive reputational effects a successful launch might have engendered. A reputation for innovation or leadership can have positive effects on a company’s performance without necessarily providing an immediate boost in sales, such as the ability to attract and retain top talent or secure endorsements or partnerships with other leading firms. Such losses can indeed be difficult to measure, particularly when the company has yet to achieve a successful launch.
Lost sales and ecosystem effects can also be difficult to estimate for a business with a limited number of customers and large average purchases, due in part to the statistical limitations of small data sets. Price erosion can be difficult to quantify when prices or sales quantities are highly volatile, when the price of inputs or substitutes are highly volatile, or simply because sufficient data are unavailable. In such circumstances, losses may also be incalculable and thus irreparable.
But not all plaintiffs are startups, and not all products are new or unproven. Few industries involve rapidly evolving or fundamentally untested technology, volatile prices, or potentially disruptive innovation.
If the plaintiff has a reasonable history of sales from which to identify patterns and trends, the expert should have adequate data to anticipate market or customer responses and to calculate losses with a reasonable degree of certainty. With sufficient data, estimating the expected value of past or future purchases, including follow-on sales, is a familiar and achievable damages analysis. Likewise, if the plaintiff operates in an industry with predictable prices and stable demand (or even a clear record of such elements observed at the time of trial), damages from price erosion may be readily calculable. Reputational effects, if any, can be derived from these same considerations.
In such circumstances, it may be difficult for the plaintiff to establish that monetary damages would be insufficient to compensate for losses experienced during the pendency of trial. If so, damages would not be irreparable and the grant of a preliminary injunction may be unwarranted.
In considering whether to grant a preliminary injunction, the court is asked to weigh the possibility of irreparable harm to the plaintiff during the pendency of trial against the likelihood of harm to the defendant should an injunction be granted.
The potential harm to the plaintiff during the pendency of trial is the essential subject of the foregoing discussion—potential loss of sales, price erosion, harm to reputation, and so on. Should the plaintiff fail to establish evidence of actual harm at the preliminary injunction stage, or the reasonable expectation of imminent harm, any claim of damage to the plaintiff’s reputation lacks economic substance. In such circumstances, a denial of the plaintiff’s motion for a preliminary injunction, and deferral of such penalties to the close of trial, would appear to impose minimal hardship on the plaintiff. If the plaintiff is able to establish actual or imminent harm, the defendant’s expert may wish to test (and demonstrate to the court) whether the harm identified by the plaintiff is incalculable. As discussed above, if the plaintiff is an established company selling an established product in a relatively stable industry (and the defendant is deemed able to pay any future judgment), damages arising from the alleged infringement during the pendency of trial are more likely to be readily calculable and therefore not irreparable.
Should the injunction be granted, the defendant faces many of the same threats that purportedly imperil the plaintiff. The defendant would, of course, lose profits on the sale of its product during the injunction period. Related products and consumables (if any) may also be affected. Independently, the disappearance of the defendant’s product from the market may suggest to consumers that the product’s availability is uncertain, even if it later reappears. This can affect sales of the product at issue during the pendency of trial and in the future.
The expert may also wish to assess the defendant’s investment in efforts to market and distribute the products or services at issue. Such investments and the capital associated therewith would be idled if an injunction were granted, straining investor relations and potentially leading to capital flight. The court may weigh such investments in evaluating the balance of harm.
When granting an injunction, courts typically require the plaintiff to post a bond, ostensibly covering the defendant’s losses should the plaintiff not ultimately prevail on liability. Commonly, however, the injunction is sought before or soon after the start of the defendant’s allegedly infringing sales. In such cases, the defendant may have little or no record of sales on which to base an analysis of its expected losses. In short, it may be more difficult at the preliminary injunction stage to determine the potential harm to the defendant than it would be to estimate the actual harm to the plaintiff at the close of trial.
Finally, when considering whether to grant a preliminary injunction, the court must weigh the potential harm to the plaintiff against the public interest. On the one hand, courts often find that respecting intellectual property rights is in the public interest—and reasonably so. But there are countervailing considerations. The defendant may, for example, sell its products or services through separate distribution channels and thereby reach different segments of the market. The defendant may also offer products at substantially lower prices than its competitors, including the plaintiff. All else being equal, price competition among companies providing the same or similar products or services is beneficial to the public interest. An injunction would at least temporarily remove a competitive option for consumers, which may exclude some consumers from the market, without preserving any claim to exclusivity based on the features provided by the intellectual property at issue.
The TMA notwithstanding, the Supreme Court’s decision in eBay nearly two decades ago reasserted the need for individualized inquiry on the part of the district courts in granting injunctive relief. In subsequent decisions, most federal courts have concluded that the principles of equity called for under eBay are “the presumptive standard for injunctions in any context.” A review of recent cases in a variety of district courts confirms that conclusion.
In a preliminary injunction setting, a key question before the court is the likelihood of irreparable harm to the plaintiff during the pendency of trial. Some courts may grant such relief on a presumption of irreparable harm (particularly in light of the TMA) whenever the plaintiff can establish a likelihood of success on the merits. But such conclusions appear to derive from a belief that harm to “goodwill,” “reputation,” or business “ecosystems” necessarily results in harm that cannot be measured. This need not be the case.
Harm to goodwill, reputation, or a business ecosystem is not invariably incalculable; each must reveal itself in a loss of sales or profitability or it lacks economic substance. If the company’s profitability has not been affected, and if no future loss of profitability is expected, no harm has occurred, irreparable or otherwise. Further, even if some harm to the plaintiff may be expected during the pretrial period, any such assessment occurs at the time of trial, when reasonable conclusions are often more easily attained. This fact alone argues for careful consideration of the facts and circumstances surrounding the call for preliminary injunctive relief.
Finally, often overlooked is the fact that the harms that may befall the defendant during the pendency of trial are often more difficult to estimate than the harm, if any, to the plaintiff. This fact should be weighed by courts in considering the balance of harms.
©2024. Published in Landslide, Vol. 17, No. 1, September/October 2024, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
