|When Do Irreparable Benefits Matter? A Response to Douglas Lichtman on Irreparable Benefits|
|Ariel Porat, Sunday, 06 May 2007 [View as PDF]|
In Irreparable Benefits, Douglas Lichtman argues that when courts consider granting preliminary relief, they should account not only for irreparable harms but also for irreparable benefits. He reasons that gains accrued during trial to a litigating party who wins at the preliminary stage but eventually loses on the merits (the “Temporary Winner”) have undesirable distributional and incentive effects. Despite the appeal of Lichtman’s claim, I want to suggest some qualifications to it. First, the soundness of this argument depends on whether the law requires in principle that the Temporary Winner disgorge the benefits to the other party (the “Final Winner”) and on the reasons behind the law’s stance on this matter. Second, these benefits do not necessarily have undesirable distributional or incentive effects.
I. The Entitlement to Disgorgement of Benefits
Irreparable benefits arise when the Temporary Winner does not disgorge all or part of the gains she erroneously accrues from an incorrect decision at the preliminary stage. The question, thus, is whether preventing such benefits is a legitimate ex ante consideration when courts decide on preliminary relief. A positive response would bolster Lichtman’s claim.
To answer this question, we must ask why the law leaves the Temporary Winner with some or all of her benefits accrued during trial, even after losing the case. One reason could be that the law does not recognize in principle the Final Winner’s entitlement to the Temporary Winner’s benefits. When this is the case, it is essential to consider the rationale underlying the non-recognition of an entitlement and whether it is consistent with the goal of preventing such benefits. A second reason could be that the law, although recognizing an entitlement in principle, precludes its realization, all or partially, because of practical difficulties entailed in valuation, enforcement, or collection. In this case, too, it is vital to uncover the underlying rationale for recognizing an entitlement in principle and to examine its compatibility with preventing the creation of Temporary Winner benefits at the preliminary stage.
A. Non-Recognition of an Entitlement in Principle
The majority of courts would not allow a Final Winner to recover in tort for harm he suffered from an incorrect court decision to grant preliminary relief against him, unless that incorrect decision were to constitute wrongful civil litigation (which requires some degree of malice). However, in many cases, the decision to grant preliminary relief is conditioned on the posting of a bond or other security. If, after a full hearing, the recipient of the relief loses on the merits, the bond is used to compensate the other party for any harm he suffered, although he cannot recover in excess of the bond amount.
The case is different with disgorgement of benefits. In many instances, courts will allow the Final Winner to recover the Temporary Winner’s undeserved benefits, whereas in other instances, the Final Winner is denied recovery. A possible reason for court reluctance in the latter cases is that a court decision, and not any fault or bad faith on the part of the Temporary Winner, is the direct cause of the benefits. If this were the only reason, the Final Winner’s inability to recover the benefits ex post would not be inconsistent with courts’ seeking to prevent their creation ex ante. However, other considerations can also lie at the basis of court reluctance to recognize a recovery entitlement. The following example illustrates such cases. A homeowner seeks a permanent injunction against a polluter, on grounds of nuisance. The parties agree (or, alternatively, the court determines) that the polluter’s activity constitutes a nuisance, with the only unsettled issue whether an injunction or damages are the adequate remedy in the circumstances. The court issues a preliminary injunction against the polluter pending a decision on the remedy and removes it at the end of the trial when it rules to award damages. Should the homeowner be required to disgorge the benefits she gained in the interim period based on the theory that the preliminary injunction was wrongly issued? The answer is most decidedly no. A court’s refusal to issue a permanent injunction is typically grounded in the concern that some social or third-party interest will be adversely affected by the injunction. This rationale cannot tolerate obligating the homeowner to disgorge benefits to the polluter even if the preliminary injunction was wrongly issued, since the former has a substantive entitlement not to be exposed to a nuisance, regardless of the remedy decided on to protect that entitlement.
Should, then, courts seek to prevent the creation of those benefits from the outset? I don’t think so. If the real concern about preliminary relief is potential harm to society or third parties, that possibility as such should be taken into account by courts. There is no wrong per se with a homeowner benefiting from a preliminary injunction against a polluter, and this should not figure against her. Moreover, the benefit such a party typically accrues from a preliminary injunction is prevention of harms she would have suffered and not been able to recover had the court denied the preliminary injunction and instead waited to award damages at the end of the proceedings. Indeed, the very possibility of such a benefit is reason to grant an injunction, not vice versa!
The same argument can be applied to contractual disputes when the parties disagree on the remedy, but agree regarding (or the court determines) their substantive rights. For example, an aggrieved party who benefits from a specific performance preliminary decree that is subsequently revoked and replaced by a damages award should not be required to disgorge her benefits and the court should not take such possible benefits into account when deciding on preliminary relief. A court’s refusal to issue a permanent decree of specific performance could be in view of, for example, supervision difficulties or undue hardship that specific performance would cause to the party in breach, and these considerations alone should be taken into account by a court when deciding whether to grant a preliminary decree.
B. Recognition of an Entitlement in Principle
This Section presents three possible theories for justifying disgorgement of benefits in principle (even if not effected in fact, due to practical difficulties), and considers their consistency with Lichtman’s argument.
First Theory: Benefits obtained as a proxy for harms suffered. Suppose the defendant unlawfully uses the plaintiff’s trademark to falsely present her merchandise as that of the plaintiff. The harm suffered by the plaintiff amounts to the profits he would have realized from sales that were diverted to the defendant through her wrongdoing. Since harms are hard to measure in such cases—so the first theory goes—courts often look at gains to the defendant from the diverted sales, use them as a proxy for the harm to the plaintiff, and award disgorgement of those gains. Thus, under the first theory, disgorgement of gains is only instrumental to making the wrongdoer compensate the victim and has no independent goal. Some court decisions are best explained by this theory. Assuming this theory is applicable to our case, we should not expect the court to view future irreparable benefits to the defendant as an autonomous consideration in support of a preliminary relief. Instead, it should focus on the potential harm to the plaintiff and should consider the defendant’s potential profits as a proxy for that harm.
Second Theory: Disgorgement of benefits as a mean of preventing infliction of irreparable harm. In contrast to the first theory, the second theory is not based on the premise that the benefits to the wrongdoer are an appropriate measure of the harms to the victim. Still, under this second theory, too, the risk of harm—in fact irreparable harm—is the exclusive rationale for requiring disgorgement of benefits. To illustrate, let us consider a trademark case that is best explained by the second theory. In this case, based on Maier Brewing Co. v. Fleischmann Distilling Corp., the defendant brewed and distributed a cheap beer under the registered and well-established trademark of Black and White Scotch Whisky. The court ordered disgorgement of the defendant’s gains to the plaintiff, the distiller and distributor of Black and White Whisky. In contrast to the previous example, here there was no reason to assume that the defendant’s gains and the plaintiff’s losses were equivalent, since the latter were unrelated to diverted sales. There was no competition between the two products, and no one was misled to believe that he or she was buying whisky and not beer. Instead, the plaintiff suffered reputation loss, since unhappy consumers who bought the cheap beer might refuse to buy the plaintiff’s products in the future. These losses are speculative in nature and very hard to valuate and to prove. Removal of the defendant’s gains, even if not aimed at making the defendant compensate the plaintiff for his losses, reduces the incentive of future trademark infringers to exploit the reputations of trademark owners in a way that may cause irreparable harm to the latter. Moreover, some of the losses caused by the infringement are borne by members of the public—those who buy the cheap beer believing it to be of a certain quality—who will never recover their losses. Removing the infringer’s gains would protect this injured group as well from irreparable harm. Based on these reasons, the Maier court ordered the defendant infringer to disgorge its profits to the plaintiff.
Suppose, now, that at the preliminary stage of the case, the court had to decide whether to grant a preliminary injunction against the defendant. Not issuing the injunction would result in both irreparable benefit to the infringer and irreparable harm to the trademark owner and to the public. But if the only reason that the law requires disgorgement of the defendant’s benefit in such cases is to prevent irreparable harm, the court should focus exclusively on that harm, not the benefit, since the latter is significant solely insofar as it is instrumental to preventing the former.
To be sure, the infringer’s ability to retain the substantial benefits she obtains at the preliminary stage strengthens her ex ante incentives to inflict harm on the plaintiff or third parties, where some of that harm is irreparable. In this respect, irreparable benefits do matter. But under this second rationale for disgorgement of benefits, their relevance is instrumental to preventing irreparable harms. Irreparable harms are bad, because they leave victims under-compensated and wrongdoers under-deterred. If courts know the magnitude of the irreparable harm, they should be able to estimate the scope of the under-compensation and under-deterrence effects that are generated and should not care about irreparable benefits as such. To illustrate, if all harms inflicted by the defendant are borne by her—so that irreparable harms are nil—under this second theory, the defendant’s ill-gotten benefits should be irrelevant to the court when deciding on preliminary relief.
Recall that the fact that the defendant could gain irreparable benefits at the preliminary stage could strengthen her ex ante incentives to inflict harm upon the plaintiff or third parties not only during trial but even earlier, when she starts committing the wrong. Lichtman’s argument encourages courts to be aware of those incentives, as does the second justification for disgorgement of benefits under my reading. But whereas Lichtman points to ill-gotten benefits as an independent consideration for the court, under the second theory, the focus should be on the irreparable harms, both during and before trial, that could result from a court decision at the preliminary stage. Under this approach, when there is no risk of irreparable harm, irreparable benefits do not matter.
Third Theory: Disgorgement of benefits as an autonomous principle. The third theory considers ill-gotten benefits as wrongful, regardless of whether removing them would also serve as a means of compensation or preventing harm. There are many variations to this theory, distinguished from one another by their different rationales for disgorging benefits. In cases where a variation of this third theory applies, preventing ill-gotten benefits from the outset could be a legitimate goal, especially when there is a risk that such benefits will not be disgorged for some practical reason (such as difficulty in quantifying them). Thus, the third theory, under which taking the possibility of irreparable benefits into account at the preliminary stage makes a lot of sense, lends compelling support to Lichtman’s argument.
The Figure below summarizes the arguments made above in this Part of my Response.
II. The Temporary Winner’s Incentives
As the previous Part demonstrated, when the rationale for disgorging benefits is independent of the goals of compensation and preventing harm, there is justification for courts to take irreparable benefits into account in deciding on preliminary relief. Douglas Lichtman offers normative grounding for just such an autonomous principle: allowing the Temporary Winner to keep her benefits accrued during trial has undesirable distributional and incentive effects. There is an undesirable incentive not necessarily to inflict harm upon individuals, but, rather, to behave inefficiently in creating social benefits. For example, a rule that allows an inventor who infringes on a patent to keep the gains she acquired through preliminary relief will undermine inventors’ incentives to “invent around” existing patents. I agree with this claim. But in other contexts, the conclusion is more ambiguous. First, sometimes the risk of distorted incentives does not exist, or, if it does, their undesirable effects are offset by the ex post net benefits. Second, sometimes distributional effects are not even present. The following contractual case illustrates these two possibilities.
A court considers whether to issue a preliminary injunction against the defendant in a contractual dispute, with each party accusing the other of breach. If the court decides to issue the injunction, and if that decision is erroneous, then the plaintiff will accrue irreparable benefits. If the plaintiff is in fact the breaching party, the prospect of obtaining those benefits would distort her ex ante incentives to perform the contract. Arguably, therefore, the irreparable benefits should be a factor in the decision on preliminary relief.
But this is only part of the story. If the irreparable benefits that accrue to the plaintiff as the result of the erroneous preliminary injunction do not entail any harm to the defendant or, even if they do, if they exceed that harm, it could be in both parties’ ex ante interest that the plaintiff receive those benefits. This would be in their ex ante interest to the extent that the expected benefits (B) less the expected harm (H) is greater than the reduction in the contract value due to the plaintiff’s distorted incentives (D), or, in notation, when B-H>D. Note that, when this condition is met, the distributional effects do not matter, as long as we can safely assume that the ex post advantage of the plaintiff who obtained the benefits is priced into the contract. A similar argument can be raised in other contexts as well: even if incentives are distorted and undesirable distributional effects obtain, courts should balance those negative effects against the ex post net benefits and decide on the preliminary relief accordingly.
Douglas Lichtman makes the very important, simple, and brilliant argument that courts should consider irreparable benefits when deciding on preliminary relief. Lichtman is well aware that the weight of this consideration will fluctuate from one case to another. In this short Response, I have tried to make the first modest move towards exploring the possible variances. Future inquiry should focus on more applications of Lichtman’s argument.
Ariel Porat is Alain Poher Professor of Law, Tel Aviv University. He thanks Ofer Grosskopf, Mike Heidler, Dana Rothman-Meshulam, and Lior Strahilevitz for their helpful comments.
Preferred Citation: Ariel Porat, When Do Irreparable Benefits Matter? A Response to Douglas Lichtman on Irreparable Benefits, 116 Yale L.J. Pocket Part 385 (2007), http://yalelawjournal.org/2007/05/06/porat.html.