Uber Hit with Preliminary Injunction in Nevada

Uber is a ride-sharing company based in San Francisco that has been operating in major cities worldwide since its inception. Uber’s growing market presence has been met with much controversy. At the forefront of this resistance are livery companies along with the state and local regulatory bodies that govern them. While the opposition insists that Uber is a transportation company subject to all the same rules and regulations as a taxi or limousine company, Uber maintains that it is a “technology company that facilitates communication between a contracted driver and a person seeking a ride through a smartphone app.”

The State of Nevada is the first to respond favorably to Uber’s naysayers. On November 25, 2014, a district court judge in Washoe County issued a preliminary injunction requested by the Nevada Transportation Authority against Uber. Uber suspended all operations within the state of Nevada, referring to the injunction as a “temporary legal setback,” estimating that this would cost nearly 1,000 jobs. 

In general, there are four elements that must be met for a court to grant a preliminary injunction:  1) a likelihood of irreparable harm with no adequate remedy at law; 2) the balance of harm favors the movant; 3) the likelihood of success on the merits of the case; and 4) the public interest favors the granting of the injunction.

Notably, the Nevada Transportation Authority emphasized the public interest element in its request for the preliminary injunction, arguing that passenger safety was at risk since Uber was an unregulated transportation service. Uber does require its drivers to undergo a background check and hold up to $1 million in insurance. However, recent incidents—including the death of a 6-year old girl who was struck and killed by an Uber driver in San Francisco—have made public safety a potent question for Uber.

Despite the emphasis on public interest and safety concerns, Uber is still backed by many supporters. Shortly after the preliminary injunction was issued, Uber started an online petition in support of its continued service in Nevada. The petition has since gained over 18,000 signatures.

The preliminary injunction (or temporary restraining order) is a powerful tool in business litigation. A resourceful business litigation attorney will know how to effectively utilize a preliminary injunction or temporary restraining order to serve his or her client’s needs.

The Nevada Transportation Authority filed suit and sought its preliminary injunction against Uber just one month after Uber began operating in the state. Strategically intentional or not, the timing is favorable for the NTA’s case against Uber. The NTA’s position would much likely be weaker if Uber were allowed to continue expanding into the Nevada market, gaining an even more notable foothold than it currently holds (as evidenced by its online petition), as this case continues. Uber’s more established presence in other markets may be a large part of the reason why the legal battles in other states have not yet resulted in favorable outcomes for the livery companies/regulatory bodies. Among other things, the preliminary injunction will prevent Uber from bolstering its position as a safe and necessary market participant in Nevada, which may ultimately lead to a favorable outcome for the NTA in its suit. 

Garon Foods v. Montieth

The recent Garon Foods v. Montieth case shows how a preliminary injunction can be useful in protecting trade secrets. In this case, the plaintiff is a company whose primary source of business is the distribution of peppers from suppliers to cheese manufacturers for the creation of Pepper Jack cheese. The defendant had worked for the plaintiff for roughly two years before resigning in February 2013, and going to work as an independent contractor attempting to connect the supplier of the peppers directly with the cheese-makers, and therefore bypassing the plaintiff.

In March 2013, the plaintiff filed suit against the defendant, alleging that the defendant had breached her contract with the plaintiff, which had included a non-disclosure clause, as well as violation of the Illinois Trade Secrets Act (ITSA).  It also filed for a preliminary injunction to prevent the defendant from continuing to solicit cheese-makers while the litigation was ongoing.

The meat of the court’s ruling was primarily in dealing with the first element of the four-part test for the granting of a preliminary injunction, that is, whether or not there is a likelihood of success on the merits of the case. The court found that there was a likelihood of success on the merits of claims dealing with how the defendant used the information she had to solicit the plaintiff’s customers. What is interesting about this case is exactly what the court found to be a breach of the non-disclosure agreement.  The court rejected a number of the plaintiff’s arguments, finding it unlikely that the plaintiff would be able to show that the plaintiff had materially breached the contract by emailing confidential information to herself, taking paper documents from the plaintiff’s offices, or even that the defendant had been soliciting customers based on a proprietary list developed by the plaintiff. The court did find, however, the claims regarding the defendant leaking the identity of her new employer as the supplier of peppers to the plaintiff, and the defendant using her memory to recall the past purchases of cheese-makers did constitute likely breaches of the contract, as well as violations under ITSA.

Because of the particular nature of the business of the plaintiff, the court next ruled that without an injunction, there was a possibility of a irreparable harm to the company, as she can draw on the confidential information contained in her memory in order to tempt customers away from the plaintiff, which may, if defendant solicits enough customers, do enough harm to the plaintiff that money damages will not be able to compensate them entirely for their losses.

By entering this injunction, though, the court also recognized that the defendant would suffer significant harm, as the defendant’s ability to earn a living in her chosen career would be severely compromised if she were totally barred from soliciting cheese-makers on behalf of the supplier. To that end, the court decided to limit the score of the injunction, generally only enjoining the defendant from soliciting those cheese-makers she had personally serviced while working for the plaintiff, as well as identifying the supplier as the party responsible for supplying pepper to the plaintiff to potential customers, or any other sensitive information she might have learned while working for plaintiff.

One interesting note is that the amount of bond is not mentioned. While Illinois courts do not require a bond for the issuing of a preliminary injunction, in a case such as this one, where the court openly acknowledged that the injunction would limit the ability of the defendant to make a living, a bond could, and perhaps should, have been issued to reimburse the defendant if the plaintiff’s claims proved fruitless.

 

Part 4: Fiduciary Breach

The final argument that HRS proffered in an attempt to get the preliminary injunction overturned was that ORT’s claim that McChesney had breached his fiduciary duty lacked merit, and thus could not support a preliminary injunction.

This analysis turned on a pair of questions, both springing from ORT’s 2010 reorganization. First, there was the question of whether or not ORT was a member-managed or manager-managed LLC at the time of the alleged breach, because while the members of a member-managed LLC must act in good faith and deal fairly with their company, members of a manager-managed LLC only owe such duties if they are the manager of the corporation. As it appeared as though McChesney was not the manager of the LLC, whether he had an obligation to act in good faith would depend on what type of LLC ORT was at the moment of the alleged breach.

Given the facts of the case, it was not yet clear whether ORT was manager or member-managed at the time of the alleged breach. The court, however, ruled that it was ultimately immaterial: because it was still a question to be resolved, the circuit court properly used its discretion to preserve the status quo by a preliminary injunction while this question of corporate form was untangled.

HRS and McChesney next argued that McChesney was not a member of ORT at the time of the alleged breach, and therefore could not have committed a breach of fiduciary duty, as such duty was no longer owed.

Once again, there was a dispute over those facts. McChesney claimed that the other members of ORT had forced him out of the company, and that he no longer held any shares. ORT’s records, though not entirely clear on McChesney’s status themselves, nonetheless indicated that McChesney was still a member during the time of the alleged breach. The court ruled that what facts they did have indicated the presence of fair question that would have to be resolved through the litigation, and that was enough to justify a preliminary injunction.

Finally, McChesney argued that even if he had owed a fiduciary duty to ORT, he had not breached that duty. The court was unreceptive to such reasoning, noting briefly that given what McChesney was accused of doing -- intentionally attempting to scuttle the land deal because he did not care for it personally -- raised enough of a question to allow the court to issue a preliminary injunction.

Because ORT had raised a number of questions that were, on their face, sufficient to create some likelihood of success on the merits of these claims, the appellate court upheld the circuit court’s granting of a preliminary injunction to prevent HRS from foreclosing on the 8-acre parcel of land.

Part 3: Specific Performance

The question of whether or not ORT was likely to succeed on the merits of its claims against HRS and McChesney, the fourth and final element necessary for the granting of a preliminary injunction, proved to be the most difficult question for the court.

Was ORT likely to prevail on is claim of specific performance of the land contract? HRS, unsurprisingly, argued that ORT was not likely to succeed on the merits, and therefore the preliminary injunction should not have been granted by the circuit, and should be vacated by the appellate court.

Its first argument was that the mortgage taken by Agri-Source was superior to the right of ORT to purchase the land, and therefore ORT would not be able to exercise its right of specific performance because doing so would destroy the rights of a superior note-holder in the property. The Appellate Court was decidedly cool to this line of reasoning. In terms of establishing this element for a preliminary injunction, it is not necessary to show that a party would actually prevail on a claim, just that it had raised a fair question regarding its claim that it might be able to succeed.

The court then explained that, as an equitable remedy, specific performance is designed to enable courts to reach just and equitable outcomes, and issues such as breaches of fiduciary duty, and the doctrines of merger and unclean hands could affect such a ruling. Based on the facts in evidence,  McChesney’s attempts to hinder the deal to serve his own interests raised enough questions such that it was proper for the circuit court to issue the injunction, and thereby preserve the status quo until the process of litigation had shed more light on the matter.

The final HRs arguments will be discussed in the next part.

Part 2: Rights, Harms and Remedies

In its ruling on HRS’s appeal, the Third District Appellate Court first established that their standard of review was whether or not the circuit had abused its discretion in granting the preliminary injunction. As long as aprima facie case for a preliminary injunction had been properly laid out by the moving party, then the circuit court was within its discretion to grant the injunction.

Both sides conceded that ORT had made a contract with Agri-Sources for the acquisition of the 8-acre parcel, so the Court quickly concluded that there was an ascertainable right.

The second factor was whether or not ORT would suffer an irreparable harm absent the injunction. ORT’s argument to the circuit court had been that the particular parcel of land being fought over was essential to the continued sustainability of its business, because its proximity to both the Mississippi River and a railroad spur. Simultaneously, the court also discussed the third element, that there was no adequate remedy at law.

HRS argued that while the parcel of land was well-suited to be used by ORT’s fertilizer business, an award of money damages, should ORT prevail in its claims, would be adequate in this case to compensate ORT for any damages they might have occurred.

The Appellate court quickly swept aside those arguments. First, it noted, this was an action involving a piece of real property, and money damages, a legal remedy, are not adequate in those cases. Because each piece of real property is unique and distinct from all others, simply giving an owner money damages instead of the property itself is not an adequate remedy. A contract for a piece of real property is not a contract for land, it is a contract for a very specific piece of land and, as a result, there is no way to substitute for the uniqueness of that particular parcel.

HRS also challenged the assertion that ORT would be irreparably harmed if the preliminary injunction were not granted. This argument was substantially stronger than its challenge to the adequacy of the remedy at law, as it would turn on the facts presented by ORT, rather than well-established precedent, but the court once again rejected HRS’s main contentions. In moving for the preliminary injunction, ORT had shown that without the parcel of land, it would likely lose most of their business and, in fact, the process of litigation had already scared off one of its business partners, bringing before the court the cancelled contract that had represented over 10% of its business. The court also recognized that even if money damages were later given to ORT after the fact, it would not be able to repair the damage to ORT’s good will among the community nor its competitive position in the fertilizer market. As a result, the Appellate Court ruled that both the second and third elements for the issuing of a preliminary injunction had been met. The last issue - likelihood of success on the merits – will be considered in the next part.

Apple's Motion for Preliminary Injunction Attempts to stop Samsung

Apple’s motion for preliminary injunction sought to prohibit Samsung from “making, using, offering to sell, selling within the US, or importing into the US” the infringing products.   These are the rights that every patentee holds over a valid patent.  In order to protect these rights, which are exclusive to the patentee, the patent must be both infringed and valid.  For example, if the defendant can successfully argue that the patent is invalid with clear and convincing evidence, then the patentee plaintiff has no rights over his patented subject matter, and the defendant’s “infringement” doesn’t matter. 

If the plaintiff has won a preliminary injunction but eventually goes on to lose the case, then the defendant has suffered an inequitable wrong.   One way to attempt to prevent such a wrong from taking place is for the courts to require the movant to show a “reasonable likelihood of success” on the merits.  The “reasonable likelihood of success on the merits” is the first of four requirements for preliminary injunctions, all of which must be proved by the movant in order to win. Correspondingly, “to establish a reasonable likelihood of success” in a patent infringement case, the movant “‘must show that it will likely prove infringement, and that it will likely withstand challenges, if any, to the validity of the patent.’” 

About the author: The Patterson Law Firm is a Chicago Law Firm that handles Business Litigation cases about has over 100 years of combined experience practicing law.

Amylin Pharm. v. Eli Lilly Part II

 This is Part II of a post on the Amylin v. Eil Lilly Litigation.  For background on the case and to read about the original TRO see Part I of the post.

 

Denial of Preliminary Injunction

After granting the temporary restraining order, the parties further briefed the matter and a preliminary injunction hearing was held on June 2, 2011.  As a result, the Court vacated the TRO and denied the preliminary injunction.

The main thrust of the Court’s reversal comes from a more careful analysis of the irreparable harm factor. The Court did not address the remaining elements of the preliminary injunction after determining that Amylin failed to show irreparable harm: 

Under Winter, Amylin “must establish that irreparable harm is likely, not just possible, in order to obtain a preliminary injunction.” Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011). “‘Irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction. . . . Accordingly, the moving party must first demonstrate that such injury is likely before other requirements for the issuance of an injunction will be considered.’” Freedom Holdings, Inc. v. Spitzer, 408 F.3d 112, 114 (2d Cir. 2005) (alteration in original) (quoting Rodriguez ex rel. Rodriguez v. DeBuono, 175 F.3d 227, 233–34 (2d Cir. 1999)).

In footnote 2 of its order, the Court repudiated the presumption of irreparable harm from the original TRO.  Instead, the Court examined Amylin’s injury claims: (1) harm attributable to Defendant’s misuse of Amylin’s confidential information and (2) loss of prospective customer and goodwill. 

The Court found Amylin’s claim of harm—misuse of confidential information— was too speculative.  “Speculative injury does not constitute irreparable injury sufficient to warrant granting a preliminary injunction.” Carribean Marine Servs. Co. v. Baldrige, 844 F.2d 668, 674 (9th Cir. 1988).  The Court does not do a great job explaining this finding.  Instead, it passes the buck to the two points below.

Secondly, the Court points to Food and Drug Administration’s regulations that prohibit Lilly’s sales representatives from making any potentially misleading statement regarding Amylin’s product without adequate supporting data, including statements comparing the attributes of the other product.  Amylin’s argument that the Defendant’s sales representatives would intentionally mislead consumers to the detriment of Amylin is clearly specious.  The Court concluded that the sales representatives would not risk FDA sanctions to maximize sales of a competing product.

Finally, in order to prevail in a preliminary injunction, damages cannot be monetarily compensable: “[E]conomic injury alone does not support a finding of irreparable harm, because such injury can be remedied by a damage award.” Rent-A-Center, Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991).  The Court relied on Defendant’s economic expert who asserted money damages were sufficient to cover any harm arising from Defendant’s actions:

To the extent that Amylin would suffer from the alleged actions, the resulting loss would take the form of profits on lost exenatide sales. Losses of this nature are generally calculable through the use of standard economic analyses undertaken in the calculation of economic harm generally and, specifically, in antitrust actions.  Amylin Pharmaceuticals, Inc. v. Eli Lilly and Company, Case No. 11-CV-1061 JLS (NLS) (S.D. Cal. June 8, 2011)

The courts do not enjoin actions that would result in a calculable economic injury. Accordingly, misappropriation of a trade secret can be remedied with money damages.

Finding no irreparable harm, the Court ended its analysis.    

 

WORLDCARE Trademark Injunction Part I

 Worldcare Limited Corporation v. World Insurance Company, Case No. 8:11CV99 (D. Neb. May 9, 2011).

Written by Jay Lewis

On May 9, 2011, WorldCare Limited Corporation (“WorldCare”) was granted a preliminary injunction against World Insurance Corporation (“Defendant”) preventing further use of the “WORLDCARE” mark or name.

WorldCare is a provider of second-opinion telemedicine services.  The service allows individuals and insureds to request second opinions through WorldCare’s consortium of specialized physicians at highly regarded hospitals and universities.  WorldCare sells its services through insurance policies as an additional benefit.  WorldCare registered its trademark, “WORLDCARE,” in June of 1996.

Defendant provides health insurance products and services including basic medical, major medical, comprehensive major medical, short-term medical, and dental insurance.  Defendant began using WORLDCARE in February 2003 as a brand name on its insurance products.  Defendant applied for a registration of the WORLDCARE mark on March 28, 2005, but the application was rejected.  Defendant continued to use the mark creating customer confusion in violation of the Lanham Act, 15 U.S.C. §§ 1114(a), 1125(a). WorldCare filed for a preliminary injunction against Defendant on September 21, 2010.

Defendant argued that WorldCare failed to renew its ownership in the WORLDCARE mark under 15 U.S.C. § 1059(a). The Court stated: “Nevertheless, ownership of registration is not determinative of ownership of trademark rights, and ‘the absence of federal registration does not unleash the mark to public use.’" quoting, Gilbert/Robinson, Inc. v. Carrie Beverage-Missouri, Inc., 989 F.2d 985, 992 (8th Cir. 1993).

The Court cited Dataphase Sys., Inc. v. C.L. Systems Inc., 640 F.2d 109 (8th Cir. 1981) for the four factors of a preliminary injunction: “(1) The threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest.” Dataphase at 114.

Balance of Harms

The Court first reviewed the ‘balance of harms’ between the parties and found in favor of WorldCare.  Defendant’s executive testified that the company had already started to phase out the use of the WORLDCARE mark from its products.  The executive explained, however, the phase-out was only temporary.  Defendant was not willing to consent to a complete termination of the mark’s use.  The executive believed the company was not legally obligated to terminate the use and it could be harmed by a negative public perception if did so voluntarily.  The Court found that due to Defendant’s own actions in phasing out the use of the mark, the burden of an injunction had been significantly minimized.  An injunction reinforcing the phase-out would not cause significant additional harm.

Part II of this post will examine the Probability of Success on the Merits.

Verizon Litigation

Written by Jay Lewis

Cellco Partnership d/b/a Verizon Wireless v. Jason Hope, et al., CV11-0432-PHX-DGC (D. Ariz. 2011)

In the United Stated District Court for the District of Arizona, Verizon Wireless (“Verizon”) filed a complaint and motion for preliminary injunction against Jason Hope, Wayne Destefano, and Eye Level Holdings, LLC, d/b/a JAWA (“Defendants”) to prevent ongoing deceptive practices. The court granted Verizon’s motion.  The facts are as follows:

Verizon operates a wireless telephone network.  Defendants market and sell premium short message service (“PSMS”) on Verizon’s network.  PSMS sends content to the user’s wireless device such as ring tones, horoscopes, recipes, celebrity gossip and news alerts for a standard monthly fee.  The fee appears on the customer’s Verizon bill.

Verizon requires that companies who seek access to Verizon’s customers comply with guidelines for marketing practices developed by the Mobile Marketing Association (“MMA Best Practices”).  Under the guidelines, content providers like the Defendants, must submit details of their marketing and sales programs to Verizon through a third-party, known as an aggregator.  Once approved, the content provider can begin to provide services like PSMS on the Verizon network.  After the services begin, Verizon uses a third-party auditor, Aegis, to ensure that the provider is not violating the MMA Best Practices.

Previous to this lawsuit, the Defendants had been suspended from the Verizon network for violating the MMA Best Practices.  As a result of the suspension, Verizon required Defendants to identify themselves as Hope and Destefano when submitting a marketing and sales plan to the aggregator.  Instead, the Defendants set up separate limited liability companies in the names of other employees with principal places of business at various UPS stores throughout the country. This was a ploy to prevent Verizon from associating the LLCs and their applications for network access with the named Defendants.  The Defendants were successful in regaining access to the Verizon network and its customers.

Defendants sell their services through their websites.  A customer will visit one of Defendants’ websites and enter information to sign up for the premium services.  Verizon requires these websites to be MMA Best Practices compliant.  This includes details on price, terms, conditions, cancellation policy, as well as requirements for font size and font color.  The MMA Best Practices also requires that certain disclosures appear on the first page of the site.  The third-party auditor, Aegis, monitors the sites for compliance.

At first, the Defendants operated websites that were MMA Best Practices compliant. However, they soon began dropping prices from the site, reducing font size, failing to provide termination information, and removing terms and conditions from the first page.  In order to avoid detection, Defendants used either a firewall or cloaking software to prevent Aegis from viewing the non-compliant landing pages.  When an Aegis auditor attempted to review the Defendants non-compliant website, the software would detect the auditor’s Internet Protocol address and redirect that auditor to a compliant site.

Aegis and Verizon eventually caught on to Defendants’ actions and barred them from the Verizon network.  Verizon also took remedial steps in satisfying customer complaints by refunding subscription fees and increasing the costs of monitoring the Defendants’ actions.

PART II will discuss the legal aspects of this case.

Greater Protection for Shareholders in the New Year?

The Supreme Court’s begins hearing January arguments today. Of interest to shareholders, however, is not a case argued today but rather a case heard in November 2009. Before the end of the current term, the Court will issue an opinion in Merck v. Richard ReynoldsMerck focuses on whether the statute of limitations on a federal securities fraud action begins to run when an investor obtains evidence of scienter of fraud or when any evidence of fraud is uncovered.

The distinction is real and would impact many securities fraud cases. Federal law requires securities fraud cases to be brought within the earlier of two years of knowledge or five years of the violation. Generally speaking, the two year period relating to knowledge does not run until all elements of a violation are discovered. The issue is important in security fraud cases because there is often evidence of fraud before there is evidence of the requisite intent. The evidence of fraud, however, is only recognizable in hindsight based on newer evidence demonstrating the intent to defraud. For example, in Merck, an internal study reached a suspicious but supportable conclusion. It was not until an independent study was published two years later that Merck’s original position demonstrated its intent to defraud.

If the statute of limitations is applied to the first instance of possible fraud, shareholders are put in a position whereby they need to take aggressive action to protect their rights. Such action is expensive, such as instituting preliminary injunction and temporary restraining order actions to preserve possible evidence of intent, and may not uncover any fraud on the part of the corporation. Corporations would also incur an added expense as they are forced to defend preliminary litigation. Waiting until all of the evidence necessary to bring a case is available will not harm corporations that are engaged in ethical practices. 

Merck will be an important case to watch not only for its impact on the discovery rule in securities fraud cases. As the Wall Street Journal Law Blog points out today, it may also demonstrate whether the Obama Administration can affect a change in the Court’s pro-business stance under President Bush.

When Do You Need A Preliminary Injunction In An Illinois Corporate Shareholder Dispute?

Illinois is supposed to be more shareholder friendly than Delaware. Its Business Corporation Act provides minority shareholders protections if the majority shareholders are

  1. committing waste;
  2. practicing fraud;
  3. acting illegally; or
  4. oppressing minority shareholders. 

There was an article in Business Law Today a while ago that contended that minority shares of stock are worthless apart from whatever rights were provided in a shareholders’ agreement, but I disagree: minority shareholders in Illinois--without any shareholders’ agreement-- have the rights given them by the Illinois Business Corporation Act (and this Act influenced the drafting of the Model Business Corporation Act). If they sue to vindicate these rights, the majority shareholders can elect to buy them out, and their buy out price is the fair value (not the fair market value) of their shares. 

Listing the rights given by statute begins to answer the question posed. If you are a minority shareholder, you need a preliminary injunction if the majority shareholders are doing one or more of the above acts and you or the corporation is going to be immediately irreparably harmed as a result. Waste of corporate assets might not be recoverable absent immediate action; an illegal act may cause the corporation to be sanctioned by law enforcement officials. Oppression is an elastic concept, but the standard is the reasonable expectation of the shareholders.   Most of these defalcations will diminish the goodwill of the corporation, a harm that is difficult to quantify, justifying a preliminary injunction.

In the midst of the ill-will that accompanies actions that necessitate shareholder actions, actual or threatened improper withdrawals from the corporation may require a preliminary injunction or temporary restraining order. Minority shareholders need to be vigilant in guarding the corporate purse. A preliminary injunction can be justified on a constructive trust theory (corporate money is a res that is the subject of dispute over whether the payment is proper). The Illinois Business Corporation Act codifies the court’s power to issue injunctions as well. And the Act provides panoply of remedies available to the court: appointment of a receiver or director, for example, and, more broadly, any order necessary.