The False Promise of Injunction Clauses

Home , Adequate remedy, Damages, Injunction

This article first appeared in Managing Intellectual Property, May 2009. by Frederick A. Brodie and Nathan R. Smith.

One-minute Read But do contracting parties really Although injunction clauses can be an have the authority to compel a court important tool in contracts governing to grant one of them an injunction IP rights, they are often misunder- upon request? Courts have fre- stood. Despite such a clause’s promise quently answered that question of injunctive relief in the case of a “no”. Thus, while an injunction breach of the agreement, US courts clause is of some use, it cannot guarantee injunctive relief. Frederick A. Brodie are not compelled to grant automatic Litigation injunctions based solely on contract No ticket to injunctive relief +1.212.858.1628 language. Thus, while an injunction Courts examining injunction clauses [email protected] clause can provide some evidence have made clear that these provi- of irreparable harm, estop the other sions cannot guarantee an automatic party from challenging the applica- injunction. tion for an injunction, and weigh in favour of relief when the balance of To begin with, the contracting hardships is considered, parties to parties have no right to decide agreements containing such clauses whether to grant injunctive relief. should be aware that injunctive relief Rather, that decision lies within the remains in the judge’s discretion. court’s discretion.

Nathan R. Smith Courts have also recognised that the Litigation Contracts containing injunction recitals in an injunction clause may +1.619.544.3210 clauses, in which the parties agree be inaccurate. At the time the [email protected] that a court must grant them an contract is signed, the parties lack injunction upon request, can often foreknowledge of the nature or give parties a false sense of security consequences of a particular breach. Frederick A. Brodie is a litigation partner in the regarding remedies for injunctive Even if the anticipated conse- New York office of Pillsbury Winthrop Shaw relief. In such clauses, the contract- quences occur, the parties might Pittman LLP, and Nathan Smith is a litigation ing parties stipulate that a breach of simply be wrong in characterising associate in the firm’s San Diego office. the agreement would meet the the harm as “irreparable”. For factual requirements for an award of example, in First Health Group Corp injunctive relief. After having laid a v Nat’l Prescription Adm’rs, Inc (MD factual groundwork, the parties Pa 2001), when a medical benefits declare that an innocent party will manager sought to enforce non- be legally entitled to an injunction in competition, non-solicitation and the event of a breach. confidentiality agreements against its former employee, the presence of

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an injunction clause did not avoid that does not mean such clauses are Further, an injunction clause may the required analysis of whether the worthless. In several ways, an effectively tie the hands of the company would suffer irreparable injunction clause may assist a party opposing party. Having agreed in the harm without a preliminary injunc- seeking an injunction. contract that an injunction is tion. The court denied injunctive appropriate, the opposing party relief because the threatened harm Variations on this type of injunction could be estopped from claiming was both speculative and compens- clause are appearing with increa- that an injunction would be able by monetary damages. ing frequency in IP contracts: improper or unwarranted. Still, this use of an injunction clause will likely Additionally, courts have rejected It is agreed that the rights and have limits. Considering a closely the notion that a contract clause, by benefits of each of the parties pursu- analogous situation, the court in itself, provides sufficient evidence to ant to this Agreement are uniques Roto Die Co v Lesser (WD Va 1995), support preliminary injunctive and that no adequate remedy exists refused to enforce a clause that relief. For instance, in Dominion at law if any of the parties shall fail purportedly estopped a former Video Satellite, Inc v Echostar to perform, or breaches, any of its employee from challenging his Satellite Corp (10th Cir 2004), a obligations hereunder, that it would non-compete agreement. Citing the federal appellate court reversed a be difficult to determine the amount law’s disfavour of restraints on trade, preliminary injunction enforcing the of damages resulting therefrom, and the court observed that employers plaintiffs exclusive right to transmit that such breach would cause ir- “may not circumvent this public Christian-themed programming reparable injury to the non-breaching policy merely by including boiler- through the defendant’s satellite. lparties. Therefore, the non-breaching plate language in their employment The district court had premised an party shall be entitled to injunc- agreements”. injunction on the fact that the tive relief to prevent or restrain any contract granted exclusive rights. breach of this Agreement. An injunction clause may also The US Court of Appeals for the provide evidence that the balance of Tenth Circuit wrote: “Were we to hardships favours an injunction. The affirm the district court’s finding on First, while an injunction clause injunction clause’s presence in the irreparable harm, we would in cannot alone support the entry of an contract shows that the parties were essence be ruling that whenever a injunction, the clause does not aware of the consequences of a party enters into a contract contain- constitute evidence of the parties’ breach, and that they expected a ing some form of exclusivity provi- intent. When an applicant has breach would probably be enjoined. sion, injunctive relief is automatic submitted other evidence to support Thus, an injunction clause may upon breach of the clause even when an injunction application, courts enable the party seeking an injunc- the breaching party has refuted have given weight to the parties’ tion to argue that the relief will not every assertion of specific irrepa- contractual statements regarding cause the opposing party undue rable harm put forth by the opposing harm and remedies. For example, in hardship: the parties’ contract shows party. We are not willing to go that North Atlantic Instruments, Inc v they expected and intended that an far.” Haber (2d Cir 1999), where the injunction would be granted. Second Circuit affirmed a prelimi- The net result: contract language nary injunction that protected a list The bottom line cannot create a right to injunctive of client contacts as a trade secret, Despite what business executives relief when an injunction would the defendant had acknowledged in may believe when they sign on the otherwise be inappropriate. his employment agreement that a dotted line, an injunction clause Injunction clauses still may be breach of his confidentiality obliga- does not entitle an aggrieved party useful tion would cause the employer to a court order. The decision to “irreparable injury”. grant injunctive relief remains in the Although an injunction clause judge’s discretion. Nevertheless, an cannot guarantee injunctive relief,

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injunction clause can provide some the moving party still must prove Injunctions issued by U.S. courts fall evidence of irreparable harm, estop its entitlement to injunctive relief within three procedural types: the other party from challenging the with evidence aside from the 1. A temporary restraining order application for an injunction, and contract provision. Evidence of (TRO) is usually sought at the be- weigh in favour of relief when the irreparable harm could include, ginning of a case, and holds existing balance of hardships is considered. for example, a company officer’s arrangements in place on an emer- affidavit describing the loss or dis- To maximise the effectiveness of an gency basis. TROs may be obtained ruption of the plaintiff’s customer injunction clause, parties seeking quickly and, in many cases, without relationships, or sworn statements extraordinary interim relief should: prior notice to the adverse party. A from consumers attesting to con- TRO has a short lifespan—generally • Focus the clause’s scope. In some fusion in the marketplace. no more than 10 days. agreements, the injunction clause • Request specific findings.In applies to all terms of the agree- 2. A preliminary injunction, typi- addition to citing the injunc- ment. In other I contracts, the cally granted after an adversarial tion clause, the party seeking an injunction clause applies only to hearing, preserves the status quo injunction should propose specific certain specified terms, such as until the litigation is concluded. findings of fact that establish the confidentiality, exclusivity, non- For example, a preliminary injunc- elements necessary to support competition, non-disparagement tion might prevent a defendant injunctive relief. Counsel will or non-solicitation. An injunc- from using the plaintiff’s trade- benefit from recalling the directive tion clause lacks credibility if it mark or from using information in Federal Rule of Civil Procedure purports to grant an injunction that the plaintiff claims is a trade 65(d)(l) that every injunction must when any term of the contract is secret, pending final resolution of a “state the reasons why it issued”. breached. The clause should apply litigation. While the standard may only to those provisions that, if An injunction clause can’t hurt the vary in different jurisdictions, a breached, could give rise to irrepa- applicant’s cause and might help it. preliminary injunction is tradition- rable harm. However, litigants miscalculate if ally granted when the court finds they expect the injunction clause (i) the movant will suffer irrepa- • Don’t overstate the parties’ alone to guarantee relief. Relying rable hard if the relief is denied; rights. Judges may bristle if a solely on an injunction clause to (ii) the movant is likely to prevail party argues that it has contracted justify a court order will yield only on the merits; and (iii) the balance for the court to grant injunctive disappointment. of hardships weighs in favour of relief. In addition to reflecting granting preliminary relief. more accurately the clause’s legal effect, less presumptuous phrasing Why seek an injunction? 3. A permanent injunction may be might garner a more favourable An injunction is a judicial stop sign. included in the judgment granted judicial reception. For instance, When issued prior to final judgment, at the conclusion of litigation. It rather than stating that an ag- an injunction can maintain the status continues in effect indefinitely, until grieved party “shall be entitled quo and prevent harm that would modified or dissolved by the court. to” injunctive relief, an injunction otherwise occur while litigation is clause could set forth the parties’ pending. Emergency injunctive relief understanding and acknowledge- often carries the benefits of speed and ment that “a grant of injunctive surprise, and can be critically useful relief would be appropriate”. in restoring and safeguarding the exclusive rights to use intellectual • Present independent evidence. property. Even with an injunction clause,