Broker Genius Inc. v. Seat Scouts LLC et al

Filing 449

OPINION & ORDER: For the foregoing reasons, plaintiff's application for an order releasing the Rule 65(c) security after a trial on the merits and the entry of a final judgment is granted. SO ORDERED. (Signed by Judge Sidney H. Stein on 7/11/2019) (kv) Transmission to Finance Unit (Cashiers) for processing.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
Broker Genius Inc.,
Plaintiff,
17-Cv-8627 (SHS)

-againstSeat Scouts LLC and Drew Gainor,

OPINION & ORDER

Defendants.

SIDNEY H. STEIN, U.S. District Judge.
Before the Court is Broker Genius's application for the return of the $2,000,000
security that it posted in connection with the preliminary injunction issued on May 11,
2018. For the reasons that follow, the Court grants that application.
I.

BACKGROUND

On November 7, 2017, plaintiff Broker Genius Inc. commenced this action against
defendants Seat Scouts LLC and Drew Gainor, among others, for monetary damages and
injunctive relief. The Court assumes familiarity with the facts underlying this litigation,
which are more fully set forth in Broker Genius v. Volpone, 313 F. Supp. 3d 484 (S.D.N.Y.
2018).
After extensive and actively contested discovery proceedings, motion practice,
and a five-day fact hearing, the Court granted a preliminary injunction on May 11, 2018
prohibiting defendants from, inter alia, making their Command Center product available
to any third party. 1 (Doc. 119.) The Court directed Broker Genius to post security in the
amount of $100,000 in connection with the injunction. Id. Defendants subsequently
moved to increase the amount of the bond to $9,000,000 to ensure that it would cover any
damages that defendants could incur if they were ultimately found to have been
wrongfully enjoined. (Doc. 123.) The Court granted that motion to the extent it ordered

At the time the preliminary injunction was issued, Guinio Volpone, Ray Volpone, Stuart Gainor, Volpone
Software LLC, and Event Ticket Sales LLC were also defendants in this action. They were all dismissed
from this case in the Court's subsequent partial grant of defendants' motion to dismiss plaintiff's Second
Amended Complaint on May 14, 2018. Broker Genius v . Seat Scouts, No. 17-cv-8627, 2018 WL 2214708
(S.D.N.Y. May 14, 2018).

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Broker Genius to post $2,000,000 security for the preliminary injunction. (Doc. 209.) That
same day, defendants filed a notice of interlocutory appeal from, inter alia, the Court's
order granting plaintiff's motion for a preliminary injunction and the Court's order
setting the amount of security at $2,000,000. (Doc. 210.)
A ten-day jury trial was held in January 2019, at the conclusion of which the jury
awarded $3,000,000 in damages against Gainor on plaintiff's breach of contract claim and
$1,500,000 against Seat Scouts and Gainor on plaintiff's unfair competition claim. A
judgment to that effect was entered on January 22, 2019 in favor of Broker Genius and the
Court issued a permanent injunction against Seat Scouts and Gainor on February 7, 2019
prohibiting them from, inter alia, distributing any web application or software product
derived from Broker Genius's AutoPricerV3 product, including Seat Scouts' Command
Center and Event Watcher products. (Docs. 353, 387.) Defendants filed an appeal from
the judgment and the permanent injunction on February 20, 2019. (Doc. 392.)
On March 1, 2019, the U.S. Court of Appeals for the Second Circuit dismissed as
moot "the portion of [defendants' interlocutory] appeal challenging the [preliminary
injunction]" because the Court had already entered a permanent injunction. Broker
Genius Inc. v. Gainor, 756 F. App'x 81, 81-82 (2d Cir. 2019) . That same day, Broker Genius
submitted a letter to this Court seeking the release of the $2,000,000 Rule 65(c) security.
(Doc. 393, Pl.'s Mar. 1, 2019 Letter.)

II.

LEGAL STANDARD

Fed. R. Civ. P. 65(c) provides that "[t]he court may issue a preliminary injunction
or a temporary restraining order only if the movant gives security 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." See also Blumenthal v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 910 F.2d 1049, 1055 (1990) ("The [preliminary] injunction bond is
designed to cover any damages that might result if it were later determined that [the
applicant] was not entitled to an injunction."). No security is required for a permanent
injunction. G.C. & K.B. Investments, Inc. v. Wilson, 326 F.3d 1096, 1108 n .8 (9th Cir. 2003);
Ty, Inc. v. Publications Int'l Ltd., 292 F.3d 512, 516 (7th Cir. 2002); see Fed. R. Civ. P. 65(c) .
A party has been "wrongfully enjoined" pursuant to Fed. R. Civ. P. 65(c) "if it is
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ultimately fou. d that the enjoined party had at all times the right to do the enjoined act."
Blumenthal, 910 F.2d at 1054 (internal quotations omitted). "The focus of the
wrongfulness inquiry is whether, in hindsight in light of the ultimate decision on the
merits after a full hearing, the injunction should not have been issued in the first
instance." Id .
The U.S. Supreme Court held in Grupo Mexicano de Desarrollo S.A . v. Alliance Bond
Fund, Inc.:

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In the case of the usual preliminary injunction, the plaintiff seeks to enjoin,
pending the outcome of the litigation, action that he claims is unlawful. If his
lawsuit turns out to be meritorious-if he is found to be entitled to the permanent
injunction that he seeks-even if the preliminary injunction was wrongly issued
(because at that stage of the litigation the plaintiff's prospects of winning were
not sufficiently clear, or the plaintiff was not suffering irreparable injury) its
issuance would in any event be harmless error. The final injunction establishes
that the defendant should not have been engaging in the conduct that was
enjoined. Hence, it is reasonable to regard the preliminary injunction as merging
into the final one: If the latter is valid, the former is, if not procedurally correct,
at least harmless.
527 U.S. 308, 314-15 (1999).
III. DISCUSSION
Plaintiff believes it is entitled to the return of the $2,000,000 security because the
jury verdict in its favor constitutes a "full and final adjudication on the merits" that has
foreclosed the possibility that defendants were wrongfully enjoined by the preliminary
injunction. (Pl.'s Mar. 1, 2019 Letter at 1.) Broker Genius cites cases that explain, "in the
usual case, the [permanent] injunction establishes the substantive validity of the
preliminary injunction." (Doc. 396, Pl.'s Mar. 6, 2019 Letter at 2 (citing U.S. D.I.D. Corp.
v. Windstream Communs., Inc., 775 F.3d 128, 137-38 (2d Cir. 2014))).
Defendants contest this characterization, arguing that the question of whether the
preliminary injunction was wrongfully issued will not be answered until their pending
appeal is decided. Defendants maintain that if they prevail before the Second Circuit,
they will be entitled to recovery from the security that Broker Genius posted.
Because no security is required for a permanent injunction and the Supreme Court
has held that a preliminary injunction "merges" into the permanent injunction once the
latter is entered, the Court grants plaintiff's application for an order releasing the
$2,000,000 security.
A. The Preliminary Injunction Merged into the Permanent Injunction, Thereby
Eliminating the Need for Security.
The permanent injunction entered by the Court on February 7, 2019 enjoined
defendants from engaging in the same acts that the preliminary injunction had
prohibited: specifically, providing or making available products derived from Broker
Genius's AutoPricerV3 product.
Unlike a preliminary injunction, a permanent injunction does not require a bond.
G.C. & K.B. Investments, 326 F.3d at 1108 n.8; Ty, Inc., 292 F.3d at 516; see Fed. R. Civ. P.

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65(c). This is because "a preliminary injunction may be granted on a mere probability of
success on the merits, [so] generally the moving party must demonstrate confidence in
his legal position by posting [security] in an amount sufficient to protect his adversary
from loss in the event that future proceedings prove that the injunction issued
wrongfully." Edgar v. MITE Corp., 457 U.S. 624, 649 (1982) (Stevens, J., concurring in part
and concurring in the judgment.) When a district court issues a permanent injunction
after assessing the complete record developed at trial on the merits, the same risk of error
does not exist. That is especially true here, where defendants' post-trial motion for
judgment in its favor as a matter of law, or alternatively, a new trial, has been denied.
Opinion & Order, Broker Genius v. Seat Scouts, No. 17-cv-8627 (S.D.N.Y. July 10, 2019),
Doc. 446.
The preliminary injunction issued on May 11, 2018 enjoined defendants from
engaging in conduct that the Court preliminarily found to be unlawful pending the
outcome of the litigation. After a full trial on the merits and a jury verdict for Broker
Genius, the Court determined that a permanent injunction was appropriate based on the
evidence presented at trial. This situation fits squarely within the scenario described by
the Supreme Court in Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., in
which the Court held that "even if the preliminary injunction was wrongly issued
(because at that stage of the litigation the plaintiff's prospects of winning were not
sufficiently clear, or the plaintiff was not suffering irreparable injury) its issuance would
in any event be harmless error [because] [t]he final injunction establishes that the
defendant should not have been engaging in the conduct that was enjoined." 527 U.S. at
314-15. The Supreme Court went on to note in that case that, in such a situation, "it is
reasonable to regard the preliminary injunction as merging into the final one: If the latter
is valid, the former is, if not procedurally correct, at least harmless." Id. at 315.
Pursuant to Grupo Mexicano, then, the preliminary injunction "merg[ ed]" into the
permanent injunction when it was issued by the Court on February 7, 2019. Id. at 315.
The security posted by Broker Genius in connection with the preliminary injunction is
therefore no longer necessary to protect defendants from the risk of wrongful restraint
addressed by Rule 65(c).

B. The Cases that Defendants Cite in Support of Their Position Are Inapposite.
Defendants cite two Second Circuit cases in support of their contention that the
determination of whether they were wrongfully enjoined by the preliminary injunction
rests on the ultimate determination on appeal of the merits. But neither case states
whether the ultimate determination is the determination of the appeal on the one hand,
or the conclusion of the proceedings below, on the other. Rather, they simply refer to the
"ultimate decision" or "the end" of the action. Blumenthal v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 910 F.2d 1049, 1054 (2d Cir. 1990) ("The focus of the 'wrongfulness' inquiry
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is whether, in hindsight in light of the ultimate decision on the merits after a full hearing,
the injunction should not have issued in the first instance."); H.E. Fletcher Co. v. Rock of
Ages Corp. , 326 F.2d 13, 16-17 (2d Cir. 1963) (commenting that the bond "left [plaintiff]
liable for damages if in the end it was determined that [defendant] was within its rights
in refusing [to take the action that the preliminary injunction required it to take]."). These
cases therefore do not change this Court's analysis pursuant to Grupo Mexicano.
The remaining authority that defendants cite is similarly unpersuasive. 2
Defendants argue that "this exact issue arose" in Northeast Airlines, Inc. v. Nationwide
Charters & Conventions, Inc., 413 F.2d 335 (1st Cir. 1969), where the First Circuit held that
"there was liability on a Rule 65 security even when a permanent injunction replaced the
preliminary injunction." (Doc. 397, Def.'s Mar. 8, 2019 Letter at 2.) But in Northeast
Airlines, the First Circuit found that the district court had erred by releasing the security
after the First Circuit ruled that the defendants had been wrongfully enjoined because the
preliminary injunction was too broad. Here, of course, there has been no indication that
the defendants were wrongfully enjoined by the preliminary injunction; to the contrary,
a permanent injunction has been issued. Div. No . 1, Detroit, Bhd. of Locomotive Engineers
v. Consol. Rail Corp., 844 F.2d 1218 (6th Cir. 1988) is also inapposite as it addressed the
reversal on appeal of a preliminary injunction, not a permanent injunction.
For the foregoing reasons, plaintiff's application for an order releasing the Rule
65(c) security after a trial on the merits and the entry of a final judgment is granted.
Dated: New York, New York
July 11, 2019
SO ORDERED:

Defendants also cite two d istrict court cases from outside the Second Circuit in which the courts declined
definitively to rule on motions to enforce liability on Rule 65(c) bonds while appeals from judgments in the
enjoined parties' favor w ere pending. See M omenta Pharm ., Inc. v . A mphastar Pharm ., Inc., 323 F. Supp. 3d
142 (D. Mass. 2018); Pabst Brewing Co., In c. v . Corrao, 999 F. Supp. 1242 (E.D. Wisc. 1998). These cases are
also inapposite in that they address the enforcement of liability on Rule 65(c) security rather than the release
of that security. Additionally, each suggests that the decision to defer judgment on the enforcement motion
until the appeal had been decided was discretionary rather than mandatory.

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