Orange Book Blog

In Otsuka America Pharm., Inc. v. Hetero Labs Ltd., the Federal Circuit today affirmed the District of Delaware’s decision to enjoin an at-risk generic launch, but reversed the court’s decision to waive the bond requirement under FRCP 65(c). This note focuses on the bond requirement, which I have some personal history with and have always felt is a somewhat underdeveloped area of the law.

The Court’s opinion on the bond issue was relatively brief. That is unsurprising as the language of FRCP 65(c) is quite unambiguous: a court “may issue a preliminary injunction . . . 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.”

Despite that language, the district court honed in on the Third Circuit’s exceptions to that requirement, including when (1) “there is no risk of monetary loss to the defendant”; (2) “in non-commercial cases . . . upon considering the possible loss to the enjoined party together with the hardship that a bond requirement would impose on the applicant”; or (3) in “suits to enforce important federal rights or public interests, arising out of comprehensive federal health and welfare statutes.”

The district court waived the bond requirement under the second of those exceptions, finding “the risk to financial harm to Hetero ‘speculative at best’ and expressed concern regarding ‘a chilling effect on access to justice’ if a multi-million-dollar bond were required in this case.” The Federal Circuit quickly found this inconsistent with Third Circuit law, as it had “never excused a district court from requiring a bond where an injunction prevents commercial, money-making activities” and “Hetero’s attempt to enter the market with its generic pharmaceutical product is clearly a commercial, money-making activity.” The panel also noted that “With regard to the district court’s concern about imposing a large expense for a bond on the plaintiffs,” Delaware’s local rules allow for such expenses to be taxed as costs.

While not surprising, the Federal Circuit’s holding is an important reminder that a bond is required unless very narrow exceptions apply. And for good reason: the bond is typically the cap that an enjoined party may recover for a wrongful injunction absent exceptional circumstances. See, e.g., Par Pharm., Inc. v. TWI Pharms., Inc., No. CCB-11-2466, 2016 WL 5820211, at *1 (D. Md. Oct. 4, 2016) (“When a party is found to have been wrongfully enjoined, that party may recover proven damages, up to the full amount of the bond, that naturally and proximately resulted from the wrongful injunction.”).

There is surprisingly little caselaw in the pharmaceutical context on the setting and recovery of injunction bonds. What is clear, however, is that courts have been loathe to apply any exception to the bond-cap rule. For example, in AstraZeneca v. Breath, the Federal Circuit rejected Apotex’s arguments that “it would be unjust to limit its recovery to the bond because it will have suffered significantly more damages” because “AstraZeneca agreed to post the original bond amount, understanding that—absent ‘rare exceptions’—its liability during that time period would be limited to that amount.” Id. Apotex did not even argue that one of the “rare exceptions” recognized by the Third Circuit applies—likely because they are very difficult to prove. See, e.g., Takeda Pharms., U.S.A., Inc. v. W.-Ward Pharm. Corp., No. CV 14-1268-RGA, 2018 WL 6529289, at *3 (D. Del. Nov. 12, 2018) (“Wrongfully enjoined parties may only recover in excess of the bond where the party seeking the injunction engaged in bad faith or fraud.”); see also Miche Bag, LLC v. Thirty One Gifts LLC, No. 2:10-CV-781-TS, 2011 WL 13803, at *2 (D. Utah Jan. 4, 2011) (“In the Tenth Circuit, the general rule is that absent proof of malice in obtaining injunctive relief, a party cannot be liable in damages resulting from a wrongfully or erroneously granted injunction beyond the limits or maximum amount of the bond or bonds.”).

But this creates a bit of a conundrum: if the enjoined party is capped by the bond, then it understandably must request a large bond that cautiously exceeds the highest possible damages amount. Recognizing this, some courts have held that the bond should be set on the high side. For example, the 7th Circuit recognized “When setting the amount of security, district courts should err on the high side.” Mead Johnson & Co. v. Abbott Lab’ys, 201 F.3d 883, 888 (7th Cir. 2000). That is because the bond does not entitle the enjoined party to that amount, which still must be proven and thus “an error in setting the bond too high thus is not serious” while “an error in the other direction produces irreparable injury, because the damages for an erroneous preliminary injunction cannot exceed the amount of the bond.” Id. The 7th Circuit recognized this increases the fees of the bond, but noted they are typically small in comparison to the amount of money at issue. And as the Federal Circuit recognized, they may be recoverable.

Finally, I was curious why there was preliminary injunction briefing at all so early in the case. It took a little digging through the record, but while not mentioned in the Federal Circuit opinion, Otsuka alleges that it never received Hetero’s Notice Letter because of defective service and thus was deprived of the ability to timely file suit and obtain the 30-month stay.

It’s a reminder that the 30-month stay is in effect a free 30-month preliminary injunction with no protection of a bond under 65(c), and that absent the stay a party must post such bond. Which inevitably leads to the question: should brands have to compensate generics for lost sales during the 30-month stay? As far as I’m aware, the only available remedy for a “wrongful” 30-month stay lies in antitrust, which of course requires far more than simply prevailing in the underlying patent lawsuit. And while Attorney’s Fees should be theoretically possible, that too is a high bar which courts have been reluctant to award, and in any event would likely fail to fully compensate the wrongfully enjoined.

So I’ll end with a question, should Congress create a remedy for wrongfully stayed generics to encourage them to fight through paragraph IV litigation and enter the market? What do you think?