Nintendo of America, Inc. v. Lewis Galoob Toys, Inc.
16 F.3d 1032 (1994)
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Rule of Law:
A party is 'wrongfully enjoined' under Federal Rule of Civil Procedure 65(c) when it is ultimately determined that the enjoined party had the legal right to perform the act that was prohibited by the injunction. There is a rebuttable presumption that a wrongfully enjoined party is entitled to recover provable damages up to the full amount of the injunction bond.
Facts:
- Nintendo of America, Inc. manufactured and sold the highly popular Nintendo Entertainment System (NES) home video game system, which reached its peak sales in the late 1980s and early 1990s.
- Lewis Galoob Toys, Inc. developed and, in May 1990, announced its intention to sell the 'Game Genie,' an electronic accessory that allowed NES owners to alter certain aspects of Nintendo's video games, such as giving a character immortality.
- Immediately following the announcement, Galoob received orders for over 550,000 Game Genie units and anticipated selling well over a million units in 1990.
- The underlying legal dispute centered on whether the Game Genie constituted a copyright infringement of Nintendo's video games.
Procedural Posture:
- Lewis Galoob Toys, Inc. initially filed suit in the U.S. District Court seeking a declaratory judgment that the Game Genie did not violate Nintendo's intellectual property rights.
- Nintendo countersued for copyright infringement and moved for a preliminary injunction to prevent Galoob from selling the Game Genie.
- The district court granted the preliminary injunction and required Nintendo to post a security bond, which was eventually increased to $15 million.
- After a full trial on the merits, the district court ruled in favor of Galoob, finding no copyright infringement, and dissolved the preliminary injunction.
- Galoob then filed a motion in the district court to execute the $15 million bond to recover damages for lost profits caused by the year-long injunction.
- Following hearings to determine damages, the district court found Galoob's losses exceeded the bond amount and ordered Nintendo to pay the full $15 million to Galoob.
- Nintendo (appellant) appealed the district court's order executing the bond to the U.S. Court of Appeals for the Ninth Circuit; Galoob is the appellee.
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Issue:
Is a party that was wrongfully enjoined by a preliminary injunction presumptively entitled to recover its provable damages, up to the full amount of the required injunction bond, from the party that obtained the injunction?
Opinions:
Majority - Thompson, Circuit Judge
Yes. A party that was wrongfully enjoined is presumptively entitled to recover its proven damages up to the amount of the injunction bond. First, the court defines a 'wrongfully enjoined' party as one who ultimately prevails on the merits, establishing they had the legal right to do what the injunction stopped them from doing. Because Galoob won the underlying copyright infringement lawsuit, it was wrongfully enjoined from selling the Game Genie. Second, the court adopts the majority rule that there is a rebuttable presumption that the wrongfully enjoined party is entitled to damages from the bond. This rule discourages parties from seeking injunctions on tenuous grounds and ensures compensation for the harmed party. Nintendo failed to rebut this presumption; its 'good faith' in bringing the suit is not a defense, as good faith is the expected standard for all litigants. Furthermore, Galoob's litigation strategy of not presenting all its defenses at the preliminary injunction hearing did not amount to bad faith or deceit. The court also rejected Nintendo's public policy arguments and found the district court's calculation of over $15 million in compensatory damages was not clearly erroneous.
Analysis:
This decision solidifies the law in the Ninth Circuit regarding the execution of injunction bonds under FRCP 65(c), aligning it with the majority of other circuits. It establishes a clear standard that creates significant financial risk for plaintiffs seeking preliminary injunctions, forcing them to weigh the strength of their case against potential liability if they ultimately lose. The ruling clarifies that 'wrongful' refers to the final outcome on the merits, not any error by the judge in granting the injunction initially. This precedent makes it more likely that defendants harmed by an ultimately unsuccessful injunction will be compensated for their losses.
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