Court Opinion

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Opinions of the United
2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

7-11-2003

Sprint Comm Co v. Cat Comm Intl Inc
Precedential or Non-Precedential: Precedential

Docket No. 02-2209

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Recommended Citation
"Sprint Comm Co v. Cat Comm Intl Inc" (2003). 2003 Decisions. Paper 328.
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                                  PRECEDENTIAL

                                             Filed July 11, 2003

           UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT

                           No. 02-2209

        SPRINT COMMUNICATIONS COMPANY L.P.,
                           Appellant
                                 v.
      CAT COMMUNICATIONS INTERNATIONAL, INC.

     On Appeal from the United States District Court
             for the District of New Jersey
              Civil Action No. 00-cv-01491
           (Honorable Katharine S. Hayden)

                     Argued April 22, 2003
    Before: SCIRICA, Chief Judge,* AMBRO and WEIS,
                      Circuit Judges

                     (Filed: July 11, 2003)

* Judge Scirica began his term as Chief Judge on May 4, 2003.
                             2

                      BRANT M. LAUE, ESQUIRE
                       (ARGUED)
                      Armstrong Teasdale
                      2345 Grand Boulevard, Suite 2000
                      Kansas City, Missouri 64108
                      Attorney for Appellant
                      HUGH P. FRANCIS, ESQUIRE
                       (ARGUED)
                      Francis & O’Farrell
                      310 South Street
                      Morristown, New Jersey 07960
                      Attorney for Appellee

                OPINION OF THE COURT

SCIRICA, Chief Judge.
  The principal issue on appeal is whether the District
Court erred by retroactively increasing the amount of an
injunction bond upon dissolution of a preliminary
injunction.

                             I.

                             A.
  Sprint Communications Company L.P. is a provider of
long distance telephone service. CAT Communications
International, Inc. is a reseller of local telephone service.
The underlying dispute here arises from the allegedly
improper use of Sprint’s services by CAT Communications’s
customers.
  Telephone users typically receive their local telephone
service from a Local Exchange Carrier, which operates in a
geographically      defined     exchange      area.      CAT
Communications is a Competitive Local Exchange Carrier
that leases lines from other Local Exchange Carriers and
sells local telephone service available on these lines to the
                             3

public on a prepaid basis. CAT Communications has no
telephone facilities of its own.
   As a long distance carrier, Sprint carries long distance
calls forwarded to it by Local Exchange Carriers. In order to
bill the long distance callers using its services, Sprint
usually receives billing name and address information from
the Local Exchange Carriers. As an alternative, the Local
Exchange Carriers may provide billing and collecting
services on behalf of Sprint.
  Sprint contends that its network received unauthorized
long distance telephone calls from CAT Communications’s
local service customers. The calls originated from several
states, the largest number coming from New Jersey. None
of these calls were paid for.

                             B.
   Sprint asked CAT Communications to prevent its
customers from gaining access to Sprint’s network and also
to provide a billing mechanism or billing information to
facilitate  Sprint’s    collection efforts.  When     CAT
Communications did not respond, Sprint filed suit in
federal court alleging trespass, conversion, nuisance,
unjust enrichment, civil conspiracy, common law fraud,
and violation of the Federal Communications Act, 47 U.S.C.
§ 151 et seq. Sprint also requested preliminary injunctive
relief.
  In May 2000, the District Court heard arguments on
Sprint’s request for a preliminary injunction to prevent the
unauthorized and unpaid use of its network. Sprint wanted
CAT Communications to restrict its customers’ access to
Sprint’s long distance network. CAT Communications
argued that the expense of instituting the restriction should
foreclose issuing a preliminary injunction. Because CAT
Communications provided “[n]o affidavits or similar proofs”
supporting its argument, the District Court found that the
cost to CAT Communications of such restriction was at that
point “mere conjecture.” Sprint Communications Co. L.P. v.
CAT Communications Int’l, Inc., No. 00-1491, 2000 U.S.
Dist. LEXIS 22404, at *13 (D.N.J. May 15, 2000). Moreover,
the District Court held the possible cost of the restriction
                                   4

would not be “significant when compared to the harm
sustained by Sprint.” Id. At the time, Sprint had shown “a
total of $178,000 in unpaid long distance phone bills”
attributed to the unauthorized use of its network by CAT
Communications’s customers. Id. at *11.
   The District Court issued an order preliminarily
restraining CAT Communications “from permitting [its]
customers to access or place calls on . . . Sprint’s . . . long
distance network” and directing it to “take such measures
as are necessary to block all [its] customers’ ” access. Sprint
Communications Co. L.P. v. CAT Communications Int’l, Inc.,
No. 00-1491, at 1-2 (D.N.J. May 15, 2000) (order). The
injunction order required Sprint to post a $250,000 bond
“for payment of such costs and damages as may be
incurred or suffered by . . . CAT Communications if found
to have been wrongfully enjoined.” Id. at 2.
  Soon after the order was issued, CAT Communications
moved to modify the preliminary injunction. But it
withdrew the motion after the District Court amended the
injunction order.1 CAT Communications appealed the
preliminary injunction but then withdrew its appeal.

                                  C.
  CAT Communications complied with the preliminary
injunction by ordering blocks on its customers’ access to
Sprint’s network. The blocks were actually instituted by the
Local Exchange Carriers that own the local lines, not by
CAT Communications, a reseller of local service that does
not have its own telephone facilities. In some areas, the
Local    Exchange      Carriers  charged    fees   to   CAT
Communications in order to institute and maintain the
blocks. Particularly, in New Jersey, Verizon charged a non-
recurring $10.55 fee to impose a block on each CAT

1. The original order required CAT Communications to prevent all its
customers’ access to Sprint’s network. The order was amended to require
CAT Communications to prevent access by “persons who become CAT
Communications’ customers after May 15, 2000,” the date the
preliminary injunction was granted. Sprint Communications Co. L.P. v.
CAT Communications Int’l, Inc., No. 00-1491, at 2 (D.N.J. June 16, 2000)
(order).
                                      5

Communications customer and a $12.41 per line monthly
charge to maintain the block. With these charges, CAT
Communications began to accrue significant costs under
the preliminary injunction.2
  But CAT Communications took no action until November
2001, when it sought to terminate the preliminary
injunction and increase the amount of the injunction bond.
At that time, CAT Communications asserted that the
blocking charges stood at over $2.7 million and were
projected to rise. In January 2002, Sprint and CAT
Communications filed motions for summary judgment. The
original District Judge had by then retired and a hearing on
these motions was set for April 2002 before a new District
Judge.
   The District Court granted summary judgment to CAT
Communications on Sprint’s nuisance, unjust enrichment,
civil conspiracy, common law fraud, and Federal
Communications Act claims, but denied summary
judgment on the trespass and conversion claims. The
District Court denied Sprint’s motion for summary
judgment on its trespass and conversion claims. It also
dissolved the preliminary injunction and, at the same time,
increased the injunction bond to $4.95 million. The
increase in the bond amount was based on the “accrued”
blocking fees charged to CAT Communications.
   Sprint appeals the dissolution of the preliminary
injunction and the simultaneous increase in the amount of
the injunction bond.3 Because our focus is on the latter
issue, we address the bond increase first.

2. CAT Communications filed a       verified petition with the New Jersey
Board of Public Utilities seeking   relief from Verizon’s blocking charges.
Although charges continued          to accrue after the filing, CAT
Communications apparently has       not yet paid anything to Verizon.
3. We have jurisdiction under 28 U.S.C. § 1292(a)(1), which provides “the
courts of appeals shall have jurisdiction of appeals from . . .
[i]nterlocutory orders of the district courts . . . modifying . . . or
dissolving injunctions, . . . except where a direct review may be had in
the Supreme Court.”
                                   6

                                  II.
   We normally review district court judgments fixing the
amount of an injunction bond for abuse of discretion. See,
e.g., United Healthcare Ins. Co. v. AdvancePCS, 316 F.3d
737, 745 (8th Cir. 2002) (“We review the amount of the
[injunction] bond for an abuse of discretion.”). But here it
is a question of law whether a district court may
retroactively increase a bond amount, after the bond has
been posted, in order to cover the asserted costs and
damages incurred by the enjoined party. On this matter, we
exercise plenary review. See, e.g., S. Camden Citizens in
Action v. N.J. Dep’t of Envtl. Prot., 274 F.3d 771, 777 (3d
Cir. 2001) (stating that, in appeals from preliminary
injunctions, questions of law are reviewed de novo).
  Generally, a bond is a condition of preliminary injunctive
relief. Fed. R. Civ. P. 65(c) requires a successful applicant
for a preliminary injunction to post a bond, “in such sum
as the [district] court deems proper, for the payment of
such costs and damages as may be incurred or suffered by
any party who is found to have been wrongfully enjoined.”4
Thus, the injunction bond “provides a fund to use to
compensate incorrectly enjoined defendants.” Instant Air
Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 804 (3d
Cir. 1989) (quotations omitted).
  The injunction bond also serves other functions. “It is
generally settled that, with rare exceptions, a [party]
wrongfully enjoined has recourse only against the bond.”
Id.; see also Hoxworth v. Blinder, Robinson & Co., Inc., 903
F.2d 186, 210 n.31 (3d Cir. 1990) (Applicants “derive some
protection from the bond requirement, for [enjoined parties]
injured by wrongfully issued preliminary injunctions can
recover only against the bond itself.”). Thus, the bond
generally limits the liability of the applicant and informs the
applicant of “the price [it] can expect to pay if the

4. We have held that, under limited circumstances, a district court need
not require a bond as a condition of preliminary injunctive relief. See
Temple Univ. v. White, 941 F.2d 201 (3d Cir. 1991). Cf. Frank’s GMC
Truck Ctr., Inc. v. Gen. Motors Corp., 847 F.2d 100, 103 (3d Cir. 1988)
(“While there are exceptions, the instances in which a bond may not be
required are so rare that the requirement is almost mandatory.”).
                                    7

injunction was wrongfully issued.” Instant Air Freight, 882
F.2d at 805; see also id. at 805 n.9 (“The bond can thus be
seen as a contract in which the court and [the applicant]
‘agree’ to the bond amount as the ‘price’ of a wrongful
injunction.”) (quotations omitted).5
   The functions of the bond are illustrated in the course of
litigation involving preliminary injunctive relief. When a
court grants an applicant’s request for a preliminary
injunction, it will generally condition this grant on the
applicant’s posting a bond. The applicant then decides
whether to accept the preliminary relief by posting the bond
or to withdraw its request. The applicant may base its
decision on whether it wants to expose itself to liability up

5. The United States Court of Appeals for the Fifth Circuit has provided
a succinct and informative explanation of the functions of the injunction
bond:
    (1) it assures the enjoined party that it may readily collect damages
    from the funds posted or the surety provided in the event that it was
    wrongfully enjoined, without further litigation and without regard to
    the possible insolvency of the assured, and (2) it provides the
    plaintiff with notice of the maximum extent of its potential liability,
    since the amount of the bond “is the limit of the damages the
    defendant can obtain for a wrongful injunction, . . . provided the
    plaintiff was acting in good faith.” The bond can thus be viewed as
    a contract in which the court and plaintiff “agree” to the bond
    amount as the “price” of a wrongful injunction.
The Continuum Co., Inc. v. Incepts, Inc., 873 F.2d 801, 803 (5th Cir.
1989) (footnotes omitted).
  Other courts and commentators have also explained that the
injunction bond serves not only to compensate a wrongfully enjoined
party, but generally to limit the applicant’s liability and inform the
applicant of the price of a wrongful injunction. See, e.g., Blumenthal v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 910 F.2d 1049, 1054 (2d Cir.
1990) (The applicant “consents to liability up to the amount of the bond,
as the price” of a wrongful injunction.) (quotations omitted); Buddy Sys.,
Inc. v. Exer-Genie, Inc., 545 F.2d 1164, 1168 (9th Cir. 1976) (“If [an
injunction] bond is posted, liability is limited by the terms of the bond
or the order of the court that required the posting.”); 13 James Wm.
Moore et al., Moore’s Federal Practice § 65.50[2] (3d ed. 2003) (“The sum
posted in [an injunction] bond is [generally] determinative of the limit
that may be recovered by a wrongfully restrained party . . . .”).
                               8

to the bond amount. If the preliminary injunction takes
effect and it is later determined a party was wrongfully
enjoined, that party may then seek recovery against the
posted bond. The recovery generally cannot exceed the
amount posted.
  If a retroactive increase is permissible, the injunction
bond is no longer cabined; the bond no longer fixes
exposure nor caps liability. A retroactive increase subjects
the successful applicant to an unexpected and
unanticipated liability.
  Here, Sprint went forward with the preliminary injunction
believing its liability was capped at $250,000 if CAT
Communications were wrongfully enjoined. But the
retroactive bond increase subjects Sprint to the possibility
that CAT Communications may recover $4.95 million in
costs and damages. Because the bond limits liability at the
amount posted when the applicant accepted the
preliminary injunction, the District Court erred in ordering
a retroactive increase.
   Rejecting a retroactive increase in the bond amount upon
dissolution of a preliminary injunction accords with a
recent decision by the United States Court of Appeals for
the Seventh Circuit. See Mead Johnson & Co. v. Abbott
Labs., 209 F.3d 1032 (7th Cir. 2000). After appellate
reversal of a preliminary injunction, the defendant on a
petition for rehearing asked for a remand so that the
district court might increase the amount of the injunction
bond. In addressing the petition for rehearing, the court of
appeals held that “there is neither logical nor legal room for
a[n] . . . increase in an injunction bond” after the
preliminary injunction has been reversed. Id. at 1034. The
court explained that, if post-reversal increases were
allowed, applicants would not know their exposure when
deciding whether to accept preliminary relief. The bond’s
role in limiting the applicant’s liability “would be vitiated if
the district judge could increase the bond after the
injunction had been set aside, for then the bond would not
cabin the damages.” Id. at 1033; see also id. (“A prevailing
party may recover up to the amount of the [injunction]
bond . . . .”).
                                    9

  A retroactive increase in the amount of an injunction
bond on dissolution or reversal is generally improper. The
injunction bond should maintain the limit on the
applicant’s liability and allow the applicant to “know[ ] just
what [its] exposure is when the bond is set by the district
court.” Id. (quotations omitted).6

                                   III.
  “[T]he law has entrusted the power to . . . dissolve [a
preliminary] injunction to the discretion of the trial court in
the first instance, and not to the appellate court . . . .”
Glasco v. Hills, 558 F.2d 179, 180 (3d Cir. 1977). This
deference to the district court reflects the need for flexibility
by the trial court in making determinations “almost always
based on an abbreviated set of facts, requiring a delicate
balancing of the probabilities of ultimate success at final
hearing with the consequences of immediate irreparable
injury which could possibly flow from the denial of
preliminary relief.” United States Steel Corp. v. Fraternal
Ass’n of Steelhaulers, 431 F.2d 1046, 1048 (3d Cir. 1970).
Thus, we review the decision to dissolve the preliminary
injunction for abuse of discretion. See, e.g., qad. inc. v. ALN
Assocs., Inc., 974 F.2d 834, 837 (7th Cir. 1992).7
  At the same time, a district court must adhere to certain
standards. In particular, “[t]he standard that the district

6. In rejecting the bond increase and maintaining the limit on Sprint’s
potential liability, our holding caps the amount of CAT Communications’
possible recovery at a level which may be below the costs it has incurred.
But CAT Communications had ample opportunity to address its potential
damages from a wrongful injunction before the preliminary injunction
was issued. Furthermore, while CAT Communications moved for
modification and filed an appeal soon after the order was issued, it
voluntarily withdrew these challenges to the preliminary injunction. It
was not until almost eighteen months after the preliminary injunction
was granted, after it had allegedly accrued over $2.7 million in blocking
fees, that CAT Communications initiated a sustained challenge to the
amount of the injunction bond.
7. We note that while a district court’s ultimate decision to dissolve a
preliminary injunction is reviewed for abuse of discretion, the underlying
findings of fact are reviewed for clear error and legal conclusions are
reviewed de novo. E.g., qad. inc., 974 F.2d at 837.
                                   10

court must apply when considering a motion to dissolve an
injunction is whether the movant has made a showing that
changed circumstances warrant the discontinuation of the
order.” Township of Franklin Sewerage Auth. v. Middlesex
County Utils. Auth., 787 F.2d 117, 121 (3d Cir. 1986). The
need for changed circumstances prevents an enjoined party
from constantly challenging the imposition of a preliminary
injunction and relitigating arguments on motions to
dissolve that have already been considered by the district
court in its initial decision.8 In addressing the District
Court’s judgment here, we take into account the need both
to allow flexibility in preliminary injunction orders and to
forestall unwarranted attempts to alter these orders.
   Sprint contends there are no changed circumstances to
justify the dissolution of the preliminary injunction.
Although not entirely clear, it appears from its oral opinion
that, almost two years after the preliminary injunction was
issued, the District Court came to a different conclusion
from the original judge on the likelihood of success on the
merits and the proper weighing of competing interests and
harms. On this record, it appears that the “changed
circumstances” here consisted mainly of the increase in
costs of compliance asserted by CAT Communications. See
Sprint Communications Co. L.P. v. CAT Communications Int’l,
Inc., No. 00-1491, at 102 (D.N.J. Apr. 1, 2002) (transcript
of oral opinion) (“More powerful than anything else in terms
of considering the continuation of injunctive relief is the
[original judge’s] conclusion correct when made but now

8. Similarly, changed circumstances are also required to modify a
preliminary injunction. As we explained:
    Certainly, absent some change in circumstances, a movant ought
    not to be able to file a motion . . . pertaining to the modification of
    an injunction . . . and relitigate the “original issue” simply because
    the case involves preliminary injunctive relief. Modification of an
    injunction is proper only when there has been a change of
    circumstances between entry of the injunction and the filing of the
    motion that would render the continuance of the injunction in its
    original form inequitable.
Favia v. Indiana Univ. of Pa., 7 F.3d 332, 337 (3d Cir. 1993) (quotations
and citation omitted).
                                     11

proven wrong that ‘CAT will suffer minimal harm if it is
required to block its customers’ unauthorized access to
Sprint’s   fiber  optic   network.’ ”) (quoting   Sprint
Communications, 2000 U.S. Dist. LEXIS 22404, at *13).
   Nonetheless, two years is a long time for a preliminary
injunction. Given our deferential standard of review and the
flexible nature of injunctive relief, we must affirm the
District Court’s judgment of dissolution. The District Court
apparently found that over the course of time the
circumstances were such that the preliminary injunction
proved unwarranted. In so doing, the District Court did not
abuse its discretion.9
  We recognize that matters addressed by preliminary
injunctive relief change over time. If at the present time
Sprint believes it needs a preliminary injunction, it may
seek such equitable relief before the District Court, subject
to its willingness to post a bond in the appropriate amount.
The District Court can decide whether a preliminary
injunction should issue and, if so, the proper amount of an
injunction bond to cover the costs and damages of such an
injunction going forward.

9. In affirming the dissolution of the preliminary injunction, we do not
mean to suggest that the injunction was improvidently granted by the
original judge. As even CAT Communications concedes in its brief,
“[w]here, as here, a preliminary injunction is set aside by the district
court, that decision does not constitute a determination that” the court
erred in making the initial order. In fact, it appears that, given the record
before him, the original judge did not abuse his discretion in granting
the preliminary relief.

  But the ultimate determination whether a party was wrongfully
enjoined and can recover on the injunction bond generally must wait
until “after a trial and final judgment on the merits.” Clark v. K-Mart
Corp., 979 F.2d 965, 969 (3d Cir. 1992) (en banc). As explained by the
United States Court of Appeals for the Second Circuit, “The conclusion
that [a preliminary] injunction later dissolved was ‘wrongful,’ in the
sense that the party had the right to do the enjoined act, does not
necessarily [mean] that the district court abused its discretion in
granting the relief in the first place.” Blumenthal, 910 F.2d at 1054.
                             12

                             IV.
   For these reasons, we will reverse the increase in the
amount of the injunction bond and order that the amount
of the bond be maintained at $250,000. We will also affirm
the dissolution of the preliminary injunction.

A True Copy:
        Teste:
                  Clerk of the United States Court of Appeals
                              for the Third Circuit