Remember Bonds on Preliminary Injunctions

Nossaman LLP

Intellectual property litigation, particularly litigation involving trade secrets and Lanham Act claims for trademark and false designation of origin, often if not usually involves seeking a preliminary injunction.  As a general rule, a court will not issue a preliminary injunction without the plaintiff posting a bond.  The bond, however, unfortunately is an afterthought.  But the requirement may prevent an injunction from going into effect if the plaintiff cannot post the bond or may leave a defendant without an adequate remedy for its damages if the bond proves to have been improperly issued.  California requires a bond in an amount sufficient to cover damages that a defendant “may sustain” if the final decision of the court is that an injunction is not proper.  (Cal. Civ. Proc. Code Sec. 529(a)).  Federal law requires a bond “in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.” (Fed. R. Civ. P. 65(c)).  Even if a bond is initially set, a party to the injunction may challenge the sufficiency of the bond.  Since the bond is designed to protect against future damages the evidence proffered may be somewhat speculative.  The damages only need to be “reasonably foreseeable” to justify a bond.  Damages that may support a bond include lost profits from forbidden sales or customer contacts.  A preliminary injunction may allow the prevailing defendant to “recover that portion of his attorney’s fees attributable to defending against those causes of action on which the issuance of the preliminary injunction had been based.”  (Abba Rubber Co. v. Seaquist (1991) 235 Cal. App. 3d 1, 16).

A high bond should cause a plaintiff to seriously consider whether or not to enforce the preliminary injunction at all.  Even if a plaintiff can easily finance the bond, the plaintiff is exposed to fee shifting and other liability the plaintiff might not otherwise face.  Intellectual property plaintiffs should consider whether posting a large bond to support an early injunction based on an undeveloped record may actually pose undue risk.  Intellectual property defendants should give more thought to either presenting detailed evidence and argument on what the amount of the bond should be in opposing a preliminary injunction motion or should at least request a hearing and an opportunity to present evidence on the amount of the bond.  California law requires that an enjoined party raise objections to a bond (including the insufficiency of the amount) within 10 days of service of the bond (Cal. Civ. Proc. Code Sec. 995.930).  After 10 days a party challenging a bond must show “good cause” for not having made a timely challenge.  While changed conditions or newly-discovered evidence may allow a late challenge, defendants should strive to present timely challenges to the amounts of bonds.

In sum, both plaintiffs and defendants should pay close attention to the amount of a bond set on a preliminary injunction.  The bonding requirement is often overlooked as a means of protecting an enjoined party that may well take much of the sting out of losing the preliminary injunction motion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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