The MacHlett Laboratories, Inc. v. Techny Industries, Inc., C. William Vatz, Leonard Bezark, Jr., and James R. Craig

665 F.2d 795, 1981 U.S. App. LEXIS 15403

• Court: Court of Appeals for the Seventh Circuit
• Decided: December 8, 1981
• Docket: 81-1759
• Status: Published

Opinions

CUMMINGS, Chief Judge.

This is an appeal by Techny Industries, Inc. and its three founders, Messrs. Vatz, Bezark, and Craig, from a preliminary injunction issued by the district court to prevent their manufacture and sale of “any x-ray equipment” pending trial (Order at 2; Tr. at 808-809, 816). We reverse the order of the district court granting the preliminary injunction and remand for trial pursuant to Circuit Rule 18.

I

In early 1978, Vatz, Bezark, and Craig sold the business they had formed, Amrad, Inc., to The Machlett Laboratories, Inc. (“Machlett”). Prior to the time of sale, Amrad manufactured and sold stationary x-ray units and related components. In late 1979, Vatz, Bezark, and Craig formed a new company, Techny Industries, Inc. (“Techny”), which now manufactures mobile x-ray units. Machlett brought this lawsuit against Techny and its founders based in part upon the alleged breach of a covenant not to compete included in the sale agreement.¹ Machlett then requested the preliminary injunction at issue here, alleging that irreparable damage would result from the defendants’ further competition with Machlett in the form of injury to the Amrad goodwill Machlett had purchased and injury to relationships with dealers of Amrad’s x-ray equipment. Part of the Amrad business sold to Machlett was an established dealer network, and Techny had begun to solicit sales of its mobile x-ray unit from some of the same dealers.² The district court granted the requested preliminary injunction but allowed Techny to complete sales of approximately 150 mobile x-ray units already contracted for.

II

The standard for granting a preliminary injunction is well known. The plaintiff must show that: (1) it has at least a reasonable likelihood of success on the merits, (2) it has no adequate remedy at law and will otherwise be irreparably harmed, (3) the threatened injury to it outweighs the threatened harm the preliminary injunction may cause the defendants, and (4) the granting of the preliminary injunction will not disserve the public interest. O’Connor v. Board of Education of School District No. 23, 645 F.2d 578, 580 (7th Cir. 1981); Fox Valley Harvestore, Inc. v. A. O. Smith Harvestore Products, Inc., 545 F.2d 1096, 1097 (7th Cir. 1976). We need not consider whether Machlett has shown a reasonable likelihood of success on the merits because it failed to prove the other three requirements.³ Of course, this Court “can reverse the grant of a preliminary injunction only if ‘the issuance of the injunction, in the light of the applicable standard, constituted an abuse of discretion.’ ” O’Connor, 645 F.2d at 580 (quoting Doran v. Salem Inn, Inc., 422 U.S. 922, 931-932, 95 S.Ct. 2561, 2567, 45 L.Ed.2d 648). However, when as in this case the district court merely adopts verbatim the findings and conclusions of the prevailing party “they may therefore be more critically examined.” Garcia v. Rush-Presbyterian-St. Luke’s Medical Center, 660 F.2d 1217 at 1220 (7th Cir. 1981); see also Photovest Corp. v. Fotomat Corp., 606 F.2d 704, 731 (7th Cir. 1979), certiorari denied, 445 U.S. 917, 100 S.Ct. 1278, 63 L.Ed.2d 601.⁴ For the following reasons, we con-elude that the district court abused its discretion by granting this preliminary injunction.

Machlett has not shown that it cannot be compensated with monetary damages if Techny’s continued manufacture and sale of mobile x-ray equipment is not enjoined and is found to violate the covenant not to compete. To the contrary, the district court found “that the plaintiff can accurately arrive at money damages that it has sustained and will sustain from the manufacture and sale” of the approximately 150 units exempted from the preliminary injunction (Tr. at 797). Although such exceptions to a preliminary injunction may not always evidence an abuse of discretion by the district court, there has been an abuse of discretion here absent some further showing of why the injury caused by 150 units is compensable while the injury caused by some larger volume is not. There was no proof of any qualitative difference between the alleged injury due to a sale of 150 units and the injury that would be due to a sale of a greater number of units. There was no proof, for example, that the quantitatively larger injury would so deplete Machlett’s resources or diminish its standing in the x-ray market that it would be unable or without profit to prosecute the lawsuit through to trial. See Fox Valley Harvestore, 545 F.2d at 1098. Machlett cites Reinders Bros. v. Rain Bird Eastern Sales Corp., 627 F.2d 44, 53 n.7 (7th Cir. 1980) for the proposition that even a' small injury to goodwill may not be compensable in monetary damages. But the alleged injury to' goodwill, if any, has already occurred — Techny has already designed a mobile x-ray unit, already contacted members of Machlett’s dealer network, etc. — and the argument that this injury is continuing or aggravated and therefore irreparable is inconsistent with the district court’s finding of no irreparable injury from a sale of the first 150 units. In short, there has been no showing that Machlett cannot be compensated through monetary damages for any of its alleged injuries suffered prior to trial.

The balance of hardships also does not favor Machlett. Counsel for Machlett conceded at oral argument that the preliminary injunction will put Techny out of business when Techny completes delivery of the 150 units in February 1982. On the other hand, if the preliminary injunction is vacated and Machlett’s theory of the case is correct, Machlett at worst will be forced to compete with Techny pending trial. The latter injury, which is uncertain because it rests on whether mobile and stationary x-ray machines in fact compete, is plainly outweighed by the certain injury to Techny of going out of business, and therefore it must be deemed an abuse of discretion to find the opposite. Compare Menominee Rubber Co. v. Gould, Inc., 657 F.2d 164, 167 (7th Cir. 1981) (under balance of harms test certain dealership termination would be more destructive than possible competitive injuries).

Finally, the preliminary injunction will disserve the public interest in health care and in low-cost health care. Machlett-’s brief (at 5) states that Vatz, Bezark, and Craig “each * * * had developed outstanding reputations as ‘pioneers’ during their many years in the [x-ray diagnostic] industry.” Craig, in particular, “had a world-wide reputation as an x-ray engineer and inventor.” The preliminary injunction would prevent the trio from working in any x-ray business and thus inhibit their further contributions to x-ray medicine. By preventing Techny from further sales of its mobile x-ray unit, the preliminary injunction does not block new medical research but does reduce competition in mobile x-ray equipment, the import of which can be explored at trial. Consequently, the public interest in the low cost of health care is also disserved insofar as reduced competition would probably increase the price of mobile x-ray machines.

in

The preliminary injunction is vacated as improvidently granted, and the cause is remanded for trial pursuant to Circuit Rule 18. Techny is ordered to continue to segregate and separately retain its profits from the sale of mobile x-ray equipment until final judgment is entered by the district court on remand or until the dispute is settled.

1 . The ten-year covenant not to compete provided that the individual defendants would not “engage * * * in any business directly or indirectly competing with any of the business activities being carried on by The Machlett Laboratories, Inc. as successor to Amrad, Inc.”

2 . Machlett has also alleged other forms of competitive injury, for example, that Techny hired away several of its key employees. Since those injuries, if suffered, have already occurred and the only purpose of a preliminary injunction is to preserve the status quo, we do not consider these other alleged injuries relevant to the issues involved in this appeal.

3 . Although reasonable likelihood of success on the merits is a crucial prerequisite to a preliminary injunction, it cannot be used to elevate the preliminary injunction hearing into a trial. The district court must also consider whether some legal remedy will compensate for any extra injury occurring between the preliminary injunction and trial, what harm the preliminary injunction may cause the defendants, and any disservice to the public interest that may be caused by the preliminary injunction. To the same effect, the factual predicate of a preliminary injunction and any reviewing court dicta concerning the facts “do not bind [the district] court in the subsequent trial on the merits.” Menominee Rubber Co. v. Gould, Inc., 657 F.2d 164, 167 (7th Cir. 1981).

Without deciding reasonable likelihood of success on the merits, it may be noted that the covenant forbids only competing with activities “being carried on” by Machlett “as successor” to Amrad. Therefore arguably no permanent injunction resulting in complete distruction of the new business should be granted until after clear proof that the new business is one that Machlett and Amrad were both carrying on at the time of the covenant. But as stated in note 1 of the dissent, the resolution of this matter is left for the district court.

4 . Judge Pell’s dissent relies on facts derived from the proposed findings of fact prepared by counsel for Machlett and submitted to Judge Perry after he had decided to grant the preliminary injunction. Subsequently he entered those findings of fact (plus Machlett’s counsel’s modifications in one finding and one conclusion of law and the addition of two findings) as his own without reading them (Tr. 843). In sum, the adopted findings of fact and conclusions of law were verbatim Machlett’s.