American Hosp. Supply Corp. v. Hospital Products Ltd.

• Decision Date: 02 January 1986
• Docket Number: No. 85-2203,85-2203
• Citation: 780 F.2d 589
• Parties: , 54 USLW 2493 AMERICAN HOSPITAL SUPPLY CORPORATION and American V. Mueller, a division of American Hospital Supply Corporation, Plaintiffs-Appellees, v. HOSPITAL PRODUCTS LIMITED and Surgeons Choice, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 589

780 F.2d 589

54 USLW 2395, 54 USLW 2493

AMERICAN HOSPITAL SUPPLY CORPORATION and American V Mueller, a division of American Hospital Supply Corporation, Plaintiffs-Appellees, v. HOSPITAL PRODUCTS LIMITED and Surgeons Choice, Inc. Defendants-Appellants.

No. 85-2203.

United States Court of Appeals Seventh Circuit.

Argued Sept. 23, 1985.

Decided Jan. 2, 1986.

John Powers Crowley, Cotsirilos & Crowley, Ltd., Chicago, Ill., for defendants-appellants.

Irving B. Levinson, Rivkin, Radler, Dunne & Bayh, Chicago, Ill., for plaintiffs-appellees.

Before POSNER, Circuit Judge, and SWYGERT and PELL, Senior Circuit Judges.

POSNER, Circuit Judge.

A supplier terminated a distributor, who sued for breach of contract and got a preliminary injunction. The supplier has appealed under 28 U.S.C. Sec. 1292(a)(1). The appeal raises issues of procedure and contract law.

The supplier, Hospital Products (as we shall call the affiliated corporations that are the defendants), a small firm now undergoing reorganization in bankruptcy, is one of the world's two principal manufacturers of "reusable surgical stapling systems for internal surgical procedures" ("surgical stapling systems," for short). The terminated distributor, American Hospital Supply Corporation, the world's largest distributor of medical and surgical supplies, in 1982 became the exclusive distributor in the United States of Hospital Products' surgical stapling systems. The contract of distribution was for three years initially, but provided that it would be renewed automatically for successive one-year periods (to a limit of ten years) unless American Hospital Supply notified Hospital Products at least 90 days before the three years were up (or any successive one-year period for which the contract had been renewed) that it wanted to terminate the contract; and this meant, by June 3, 1985.

On that day Hospital Products hand-delivered a letter to American Hospital Supply demanding to know whether it intended to renew the contract and reminding it that if it failed to respond by the end of the day this would mean that the contract had been renewed. American Hospital Supply responded the same day in a letter which pointed out that since it wasn't terminating, the contract was, indeed, renewed. But on the next day Hospital Products announced that it was going to treat the contract as having been terminated, and on June 7 it sent a telegram to American Hospital Supply's dealers informing them that effective June 3 American Hospital Supply was "no longer the authorized distributor of [Hospital Products'] stapling products."

American Hospital Supply forthwith brought this diversity breach of contract suit against Hospital Products and moved for a preliminary injunction, which was granted on July 8 after an evidentiary hearing. The injunction forbids Hospital Two months after the entry of the injunction, Hospital Products, which had been in parlous financial state even before this litigation began, filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Act (reorganization). The bankruptcy court suspended the automatic stay of litigation against a bankrupt, see 11 U.S.C. Secs. 362(a), (d); 2 Collier on Bankruptcy paragraphs 362.04, 362.07 (15th ed., King ed., 1985), to permit this appeal. Hospital Products moved the bankruptcy court to disaffirm (i.e., cancel) the renewed contract that went into effect on September 1, 1985, upon the expiration of the original contract. Its ground was that the renewed contract was still executory when Hospital Products declared bankruptcy, and hence was subject to disaffirmance under 11 U.S.C. Sec. 365. See In re Minges, 602 F.2d 38, 41 (2d Cir.1979). The bankruptcy court has not yet acted on the motion. Hospital Products has not asked the district court to dissolve the preliminary injunction on the basis of events, notably the bankruptcy, since the injunction was entered.

Products to take any action in derogation of American Hospital Supply's contract rights so long as the injunction is in force (i.e., pending the outcome of the trial). It also requires Hospital Products to notify American Hospital Supply's dealers that American Hospital Supply is still Hospital Products' authorized distributor, and this has been done. Hospital Products counterclaimed, alleging breach of contract, fraud, and unfair competition.

A district judge asked to decide whether to grant or deny a preliminary injunction must choose the course of action that will minimize the costs of being mistaken. Because he is forced to act on an incomplete record, the danger of a mistake is substantial. And a mistake can be costly. If the judge grants the preliminary injunction to a plaintiff who it later turns out is not entitled to any judicial relief--whose legal rights have not been violated--the judge commits a mistake whose gravity is measured by the irreparable harm, if any, that the injunction causes to the defendant while it is in effect. If the judge denies the preliminary injunction to a plaintiff who it later turns out is entitled to judicial relief, the judge commits a mistake whose gravity is measured by the irreparable harm, if any, that the denial of the preliminary injunction does to the plaintiff.

These mistakes can be compared, and the one likely to be less costly can be selected, with the help of a simple formula: grant the preliminary injunction if but only if P X Hp (143,,5)p (1 - P) X Hp(143,,5)d, or, in words, only if the harm to the plaintiff if the injunction is denied, multiplied by the probability that the denial would be an error (that the plaintiff, in other words, will win at trial), exceeds the harm to the defendant if the injunction is granted, multiplied by the probability that granting the injunction would be an error. That probability is simply one minus the probability that the plaintiff will win at trial; for if the plaintiff has, say, a 40 percent chance of winning, the defendant must have a 60 percent chance of winning (1.00 - .40 = .60). The left-hand side of the formula is simply the probability of an erroneous denial weighted by the cost of denial to the plaintiff, and the right-hand side simply the probability of an erroneous grant weighted by the cost of grant to the defendant.

This formula, a procedural counterpart to Judge Learned Hand's famous negligence formula, see United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir.1947); United States Fidelity & Guaranty Co. v. Jadranska Slobodna Plovidba, 683 F.2d 1022, 1026 (7th Cir.1982), is not offered as a new legal standard; it is intended not to force analysis into a quantitative straitjacket but to assist analysis by presenting succinctly the factors that the court must consider in making its decision and by articulating the relationship among the factors. It is actually just a distillation of the familiar four (sometimes five) factor test that courts use in deciding whether to grant a preliminary injunction. The court asks whether the plaintiff will be irreparably harmed if the preliminary injunction is denied (sometimes also whether the plaintiff The formula does not depend on the legal basis of the plaintiff's claim, whether it is antitrust law (Roland) or trademark law (Badonsky) or, as here, the common law of contract, although the nature of the right asserted by the plaintiff may affect the weighting of the harms, see, e.g., Shondel v. McDermott, 775 F.2d 859, 866-67 (7th Cir.1985). So may the nature of the permanent remedy to which the plaintiff would be entitled if he prevailed at trial. For example, prevailing parties in breach of contract cases normally are not awarded specific performance, that is, a mandatory injunction to perform. Since many breaches of contract are involuntary, implying that performance would be very costly, routinely ordering specific performance would create situations where the defendant was forced to bargain desperately to buy his way out of the injunction. The high bargaining costs that would result are a deadweight cost of equitable relief. To the extent that those costs attend a preliminary injunction, they are of course relevant to the decision whether to issue such an injunction. But the formula takes account of this; the case we have described would be one where the harm to the defendant from granting the injunction would be very great. Thus the fact that a plaintiff might have no hope of getting specific performance ordered at the conclusion of the trial need not prevent him from obtaining a preliminary injunction. Cf. Roland v. Dresser Industries, Inc., supra, 749 F.2d at 386. The premise of the preliminary injunction is that the remedy available at the end of trial will not make the plaintiff whole; and, in a sense, the more limited that remedy, the stronger the argument for a preliminary injunction--provided the remedy is not limited for reasons that would make a preliminary injunction equally inappropriate.

has an adequate remedy at law), whether the harm to the plaintiff if the preliminary injunction is denied will exceed the harm to the defendant if it is granted, whether the plaintiff is reasonably likely to prevail at trial, and whether the public interest will be affected by granting or denying the injunction (i.e., whether third parties will be harmed--and these harms can then be added to Hp or Hd as the case may be). See, e.g., Palmer v. City of Chicago, 755 F.2d 560, 576 (7th Cir.1985). The court undertakes these inquiries to help it figure out whether granting the injunction would be the error-minimizing course of action, which depends on the probability that the plaintiff is in the right and on the costs to the plaintiff, the defendant, or others of granting or denying the injunction. All this is explained at length in Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 382-88 (7th Cir.1984), where a panel of this court applied the verbal counterpart to our algebraic...