Since 2010, I have been posting on the development of a new course I have been developing for our first year law school students, "Elements of Law." The course originally had a quite modest objective--to introduce law students to legal research and reasoning through case law, statutory interpretation, and legal history, processes, and institutions. I chose to broaden its objectives within these specific parameters and development a framing and concepts course that would provide a deep foundation to law students on the legal system they were undertaking to study.
This post produces some of the materials I will be presenting to the class. I offer these materials in hopes that they may prove of use and that you might share comments, perspectives and suggestions as I develop those materials on this site. Thanks.
This post includes a draft of Chapter 4 (Law Articulated by the Courts--Equity).
Law Articulated by Courts: Equity
I. Introduction
We have been considering law articulated by courts. Our focus has been on common law. But common law does not define the entire universe of “judge administered” law in the United States.This chapter, provides a brief introduction to the other manifestation of judge administered law--equity. Like common law, it has both a procedural and a substantive element. We begin with a short description of equity in its application n the United States. The chapter starts with a brief review of the history of equity and its role in the administration of law in the United States. The bulk of the chapter is taken up with a consideration of the most important features of equity that affect the legal system of the United States. We start with an example of the substantive norms of equity (fiduciary duty). We then consider equitable remedies (injunction). We end with a consideration of some important equitable process rules that represent the embedding of social values in resolving private disputes (dirty hands doctrine) and that articulate policy choices about social peace (laches).
II. Chapter Readings
· Hon. Mr. Justice P.W. Young, “Equity,” The New South Wales Bar Association (August 2007). · Kristin A. Collins, “A Considerable Surgical Operation”: Article III, Equity, and Judge-Made Law in the Federal Courts, Duke Law Journal 60(2):249-343 (2010). Read pages 249-71.
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Questions.
1. In comparing the two readings what differences in approaches can one discern between that of equity as practiced outside the United States (in Australia) and in the United States.
2. If the United States has effectively blended common law and equity into one amalgamated system of judge administered law, to what extent are the differences still important? Consider this question further as you read the materials that follow.
3. In dissent in Petrella v. Metro-Goldwyn Mayer, No. 12-1315 (slip op., May 19, 2014), Justice Breyer declared: “Legal systems contain doctrines that help courts avoid the unfairness that might arise were legal rules to apply strictly to every case no matter how unusual the circumstances. “[T]he nature of the equitable,” Aristotle long ago observed, is “a correction of law where it is defective owing to its universality.” Nicomachean Ethics 99 (D. Ross transl. L. Brown ed. 2009).” (Slip op. at 1 Breyer, J., dissenting). To what extent do the doctrines of equity serve the same ends as jury nullification, discussed in Chapter 2? Does equity serve the role of bringing the formal structures of law closer to notions of justice? Petrellais considered in more detail below.
III. Law Articulated by Courts: Equity
We have been considering the origins and structures of the Common Law in the United States. We have come to understand common law as a construct with three distinct meanings—the writ system overseen by courts, the practices of law development through judicial precedent (and the culture of that practice), and the socio-cultural legal system grounded in custom and courts that distinguishes that system from those of other states. We have considered how it grew as a complex interplay between the institution of the royal courts, the chancery, and customary norms transformed into a basis for a legal system applied by the courts. But we have also seen that the common law, incarnated as a legal system through the writs that served as a basis for judicial jurisdiction over specific disputes defined therein, stopped its development before the end of the 13thcentury. We have also seen how the remedial universe of common law was also restricted to damages as compensation for harm done.
We have also come to understand that the closure of the common law was not merely a product of natural evolution, but was a political one as well. The common law system of writs, developed through the chancery, taken to its limit, would have been used to construct a system of law that would have been wholly extrinsic to the machinery of state. It would also have suggested the supremacy of popular expectation in ways that might make legislative authority irrelevant. That was not to be. Balanced against and ultimately constraining common law (popular custom as a source of law) was both the administrative apparatus of the state (the Crown) and the legislative apparatus of the government (Parliament). The incarnation of the people of England (represented as was customary for the time by its classes―king, lords temporal and spiritual, and commons) would have viewed an unconstrained common law as constraining its ability to “make” law, that is to use the power of commanding behavior instrumentally. That was a legitimate power (recall the Institute’s notion of direct and representational consent to governance power in senate and imperial authority). Efforts from the 13th century Provisions of Oxford were meant to restrict the rise of novel writs without the consent of a Crown Council and thereafter Parliament. That practice, of course, set a pattern that is much followed in contemporary times. Common law has been “frozen” and the power to recognize new rights and obligations increasingly transferred to the apparatus of government, usually but not always its legislature. The move, then, is from popular lawmaking reflecting the customs and traditions of the people, as they might evolve, but with respect to which government played no active role, to an more instrumental premise of law grounded in the centrality of the state apparatus to the construction of law (not merely to its recognition and application through its courts). That profound change starting in the 14th century marks the character and premises of modern “law” in the United States.
But where one door closes, another appears ready to open. This was certainly the case with common law. Just as the writ system and the power to recognize from custom and practice novel actions was closing, the Crown chancery found another way to assert law making power―through the power to do “equity”, that is to assert the administrative authority of the Crown to ensure that “right” was done―from which sprang both administrative law and the equitable power of the Crown chancery to intervene where a subject could otherwise not receive “justice”. (There is that word again. . . . think Institutes). Bracton suggests the connection between common law, equity and the foundational notions of the legitimacy of law in justice. He tell us that
Equity is the bringing together of things, that which desires like right in like cases and puts all like things on an equality. Equity is, so to speak, uniformity, and turns upon matters of fact, that is, the words and acts of men. Justice, [on the other hand], lies in the minds of the just. Hence it is that if we wish to speak properly we will call a judgment equitable, not just, and a man just, not equitable. But using these terms improperly, we call the man equitable and the judgment just. Jurisprudence therefore differs in many ways from justice. For jurisprudence discerns, justice awards to each his due. Justice is a virtue, jurisprudence a science. Justice is a certain summum bonum; jurisprudence a medium.
Through the 14th century, law was equitable (in the modern sense) as the chancery developed and issued writs and applied new remedies as needed. After the 14th century equity began to develop autonomously, as another product of the English chancery. It was a response to the closure of the common law that produced an additional means of rendering justice. But like common law, it was quite tightly tied to the institutions through which it was exercised. Those institutions—the courts of equity, paralleled the common law courts, but adopted distinctive procedural rules, embraced a broader palette of remedies, and provided remedies for rights not recognized through the common law. In the United States, “Both historically and today, the term “equity” refers to a set of rights, remedies, and procedures available ostensibly to ameliorate defects of the common law (such as in the cases of fraud, mistake, and forgery) and to enforce equitable instruments that required the ongoing supervision of a court (such as trusts and guardianships).”
Equity was originally administered by the Chancellor and eventually through the equity courts, which operated in parallel to the common law courts. This dual system of courts was brought to the colonies and thereafter preserved after the establishment of the United States. Not all states, though, preserved the dual system of courts. Pennsylvania rejected equity, while Delaware and New York embraced the practice. Though law and equity courts have been merged at the federal level since the 1930s, and also in many states, there are still some states where the law and equity jurisdictions are kept separated, though most states have blended the procedural rules of law and equity.
Common law, then, does not explain the full extent of customary law in the United States. The colonies also received, though with varying degrees of enthusiasm, the practice of equity and understood in England through Independence. The problem with equity, of course, was its connection with the Crown and the administrative apparatus of the state. For colonial society, chafing under what it saw as the impositions of an unaccountable administrative apparatus in Westminster, there was sometimes a sense of the tyrannical (arbitrary power arbitrarily applied) to the whole business of equity. That, in part, was the result of the conflicts between king and Parliament in England in the 17th century, in which the customary traditions enshrined in common law protected by a class of jurists and lawyers was seen in opposition to the structures of equity controlled by the Crown and administered with little reference to standards. English rules seeking to place equity over law were seen as efforts to overturn the rule of law and advance executive power without restraint. The irony, of course, is that by the 21st century, the structures of cultures of equity has overwhelmed customary law in the United States, central to its procedure (the Federal Rules of Civil Procedure and related rules) and to the approaches to interpreting both customary and statutory substantive law. That result, however, was as much a product of the development of rules under which equity became administered (predictability).
The first of the readings for this class, Hon. Mr. Justice P.W. Young,“Equity,” The New South Wales Bar Association (August 2007) is intended to bring some of this out. This article was chosen in part because, unlike the United States where law and equity have been merged, the distinctions between the two remain much more visible in Australia. This short reading introduces you to the origins of Equity as an alternative to law, beginning in earnest under the Tudor monarchs (at the commencement of the great colonization of North America) and its importance both as a source of substantive rules in some sorts of cases and as the basis for a particular set of remedies otherwise unavailable under the common law (injunction, constructive trust, specific performance, etc.). The critical insight of equity is its flexibility based on its conscious reliance on extrinsic sources for the determination of equity (which eventually was also codified in equity practice). Thus, equity was grounded in notions of providing relief where remedies at Common Law were unavailable if the action complained of went against “good conscience.” What that meant, of course could either be a matter of arbitrary determination (the individual taste of the equity judge, something altogether too common in early equity practice in the U.K.: and the U.S.) or it could “receive” extrinsic standards of good conscience from out of which rules of equity practice could be derived (and enforced, holding courts and equity chancellors accountable to standards other than their own predilections). These have found expression, for example, in the process rules of the Federal Rules of Civil Procedure, Rule 8(c) affirmative defenses (unclean hands, in pari delicto, laches, fraud, etc.) and Rule 65 (restraining orders) and Rule 66 (receivers). Critically important, here, is the rise, through equity, of a judicial power to compel a person subject to the court’s jurisdiction to do or not do something―the court’s injunction power. In the United States this power has significantly expanded the authority of the courts. And so, by the 14th century in England, the expansion of common law stopped but the development of equity flourished. Both eventually would be constrained by the logic of statutes and regulations―the legislative authority of the legislature and the executive. But that is a story for the next class.
These ideas are introduced in the U.S. context in the second of the readings, Kristin A. Collins, “A Considerable Surgical Operation”: Article III, Equity, and Judge-Made Law in the Federal Courts. Collins suggests the systemic qualities of equity. She illustrates the close connection between the substance of its normative development and the facilities within which it was elaborated—the chancery courts of England and the U.S. If the common law provides the formal structures of the forms of action permitted to be implemented by the courts, then equity might be understood as the effort to soften the incoherence of formalism by opening a space where functionally appropriate results might be more likely available.
Until about a century ago, equity looked to fairness and the conduct of parties, making context more important to the application of the context blind rules of law exercised through its forms of action. But even that normative baseline was sometimes obscured by the formalism that kept into actions in equity/actions that tended to mimic, in some respects, the formal systems of the law courts. With the substantial union of law and equity in the 20th century both law and equity have come more consciously to affect each other to produce a formally structured system with a sensitivity to the fairness of the results it might impose. As the cases that follow make clear, these lofty objectives are sometimes harder to discern in practice than in theory. But their theoretical power has substantially affected the culture and practice of judge administered law in the United States in important respect.
But the collisions between law and equity, and the efforts to provide systemic coherence through the courts, in multi jurisdictional systems like that of the United States does not tell the entire story of equity. Equity’s importance to procedure, especially defenses against liability, would also collide with the increasingly complex and far reaching legislative programs of the U.S. federal government. Those collisions are instructive both as to the permeable quality of equity and of the way in which courts have played a decisive role in fashioning accommodations between systems of law that exist simultaneously within a single jurisdiction bit whose application may be contradictory.
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Equity and Fairness—Laches and Statutory Law
Though we begin our consideration of the role of statutes in the U.S. legal system with the next chapter, it is important to understand that there are many points of convergence between these distinct sources of law. Convergence points sometimes produce conflict. And it has fallen to courts to attempt to determine how to apply these distinct sources of legal rights and obligations in a coherent manner. The example that follows focuses on one such effort to reconcile the equitable principle of laches with statutory rules that appear to function like.
Laches touches on issues of social harmony and avoidance of gaming the system to the disadvantage of an opponent. It permits a defendant to avoid liability where she can convince a court that the plaintiff unreasonably delayed pursuing a right or claim that results in prejudice to the opposing party. One definition that has been often used is that of the Supreme Court in Costello v. U.S., 365 U.S. 265 (1961): “Laches requires proof of (1) lack of diligence by the party against whom the defense is asserted, and (2) prejudice to the party asserting the defense.” On the one hand it incorporates the policy premise that at some point social peace requires a ceasing of the potential for litigation of a dispute. On the other it suggests that control over the initiation of a lawsuit might be used strategically to disadvantage a potential defendant (evidence lost, witnesses forget, or die, etc.). The Supreme Court noted: “The law of laches, like the principle of the limitation of actions, was dictated by experience, and is founded in a salutary policy. The lapse of time carries with it the memory and life of witnesses, the muniments of evidence, and other means of proof.”
Consider the policy and principles that underlie the consideration of laches in the case that follows:
HERMÈS INTERNATIONAL, et al.,
v.
LEDERER DE PARIS FIFTH AVENUE, INC. et al.
55 U.S.P.Q.2d 1360; 219 F.3d 104
United States Court of Appeals, Second Circuit.
Decided: July 10, 2000
Opinion
TELESCA, Senior United States District Judge:
Appellants Hermès International, Hermès Sellier, Hermès Gestion, Inc., and Hermès of Paris, Inc., (collectively referred to as “Hermès”), appeal an Order of final judgment entered by the United States District Court for the Southern District of New York (Scheindlin, J.) granting summary judgment in favor of appellees Lederer de Paris Fifth Avenue, Inc. (“Lederer”), and Artbag Creations, Inc. (“Artbag”). See Hermès Int'l v. Lederer De Paris Fifth Ave., Inc., 50 F.Supp.2d 212 (S.D.N.Y.1999). . . . .
For the reasons set forth below, we . . . find . . .that the district court erred in applying the doctrine of laches to appellants' claim for injunctive relief, and applied the doctrine too broadly with respect to appellants' claim for damages. Accordingly, we remand this case for further proceedings consistent with this opinion.
BACKGROUND
Appellant Hermès is a manufacturer and retailer of high-quality handbags and other fashion accessories. According to Hermès, its products incorporate a number of distinctive design characteristics that constitute its “famous mark and trade dress.” Hermès, 50 F.Supp.2d at 215. Detailed descriptions of these items are found in the district court's opinion. See id. at 215–16.
Appellees Lederer and Artbag sell replicas of various Hermès products such as the “Kelly Bag,” a handcrafted purse with an average selling price of over $5,000, with some models selling for over $30,000. Id. at 215 n. 4. Some of the knockoff bags sold by Lederer sell for as much as $27,000.00. Id. at 218.
According to the record, Hermès knew that Lederer and Artbag had been selling copies of Kelly bags since at least 1979 and 1989 respectively. Id. at 223. Hermès claimed, however, that it did not become fully aware of the scope of the appellees' alleged infringement until 1996, when it began investigating Lederer and Artbag's sales of knockoff Hermès products. According to Hermès, its investigation revealed that Lederer and Artbag were selling entire lines of knockoff Hermès products. In 1998, upon completion of its investigation, Hermès brought suit against the appellees pursuant to Section 32 of the Lanham Act of 1946, 15 U.S.C. § 1114; Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a); Section 43(c) of the Lanham Act, 15 U.S.C. § 1125(c); New York General Business Law § 360–1; and New York common law seeking monetary and injunctive relief for the alleged violation of its trademarks and trade dress.
Appellees moved for summary judgment against Hermès on grounds that Hermès had abandoned its trademark and trade dress rights, or, in the alternative, that Hermès was estopped from obtaining relief under the doctrine of laches. The district court held that appellees had not met their burden of proving that Hermès had abandoned its trademarks or trade dress, and accordingly denied in part appellees' motions. Id. at 222. The district court found, however, that Hermès had unreasonably delayed bringing an infringement suit against Lederer and Artbag, and thus was barred by the doctrine of laches from obtaining monetary or injunctive relief against those companies. The district court determined that the delay of between 9 and 19 years in bringing suit against Lederer and Artbag was unreasonable and prejudiced the appellees. Accordingly, the district court granted appellees' motions for summary judgment with respect to Hermès' claims for monetary damages and injunctive relief.
DISCUSSION
I. Summary Judgment Standard
A district court's grant of summary judgment is reviewed de novo. . . . Summary judgment is appropriate when there is no genuine issue as to a material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). . . . All inferences are drawn in favor of the non-moving party. . . . Although the district court did not address whether or not Hermès' designs are protectable as trademarks or trade dress, in viewing the record in the light most favorable to the non-movant below, Hermès, this court presumes that the designs are protected.
II. Laches
A. Injunctive Relief
In evaluating whether laches should bar Hermès request for injunctive relief, the district court began by noting that “the balance of the equities must be weighed, including an analysis of defendants' intent and the public interest.” 50 F.Supp.2d at 225.The court then determined that because appellees Lederer and Artbag did not use the name “Hermès” on their products and because they openly acknowledged to customers that their products were Hermès copies, the appellees had not deceptively attempted to “pass off” or “palm off” their products as genuine Hermès. Id. However, the court also found that by explicitly informing their customers that the style and workmanship of the knock-offs were such that no third party observer would be able to tell they were not genuine Hermès bags, the appellees had “attempt[ed] to encourage consumer confusion in the post-sale context.” Id. The court went on to consider the public interest and concluded that, although the behavior of appellees Artbag and Lederer might have increased their companies' sales at the expense of Hermès, it did not harm the public in the post-sale context and therefore did not compel rejection of the laches defense. Id. at 225–26.
In so holding, the district court misapplied the law governing the doctrine of laches. It is well established that “laches is not a defense against injunctive relief when the defendant intended the infringement.” Harlequin Enters. Ltd. v. Gulf & W. Corp., 644 F.2d 946, 950 (2d Cir.1981) . . . . This good-faith component of the laches doctrine is part of the fundamental principle that “he who comes into equity must come with clean hands.” Precision Instrument Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806, 814, 65 S.Ct. 993, 89 L.Ed. 1381 (1945). Thus, the appellees' intentional infringement is a dispositive, threshold inquiry that bars further consideration of the laches defense, not a mere factor to be weighed in balancing the equities, as the district court did in this case.
Viewing the record in a light most favorable to Hermès, it is clear that appellees Lederer and Artbag intentionally copied Hermès' designs and sought to sell knockoffs of Hermès originals. Appellees thus intentionally traded off the Hermès name and protected products and should not have been entitled to invoke the doctrine of laches as a defense against Hermès' claims for injunctive relief.
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B. Monetary Relief
In holding that the doctrine of laches prevented Hermès from obtaining monetary relief against Artbag, the district court found that laches precluded recovery for seven different allegedly infringing products sold by Artbag. On appeal, Hermès claims that, with respect to Artbag, the laches defense should have applied to only one product, the Kelly bag, and should not have been applied to six other products. In support of this claim, Hermès argues that there is no evidence in the record to suggest that it knew that Artbag was selling knockoff copies of those six products, and thus as a matter of law Artbag could not meet its burden of proving that Hermès unreasonably delayed taking action against Artbag for selling allegedly infringing products.
It is clear from the record and the district court's opinion that Hermès knew of Lederer's sales of seven knockoff products for at least nine years prior to commencing suit, but that Hermès was aware of only one knockoff product being sold by Artbag—the Kelly bag.See 50 F.Supp.2d at 223 (chart). The district court, however, failed to distinguish between Lederer and Artbag in holding that laches prevented recovery against both companies for all seven products. Because there is no evidence that Hermès knew of Artbag's sales of knockoffs other than the Kelly bag prior to 1996, we find that the district court's grant of summary judgment with regard to monetary relief against Artbag should have applied only to the Kelly bag.
* * * * * *
CONCLUSION
The district court's grant of summary judgment for injunctive relief in favor of appellees, and for monetary relief for products other than the Kelly bag in favor of Artbag is REVERSED. The district court's denial of appellees' motions for attorneys' fees is AFFIRMED, and the case is REMANDED for further proceedings consistent with this opinion.
Questions:
1. What principle of equity is represented by the notion of “clean” hands? How does that affect the availability of laches? Did the court correctly apply the notion of equity in determining that knowledge of wrongdoing bars resort to equity? Should Hermès knowledge of the knock offs had a greater effect on the weighing?
2. If the court had not treated intent to infringe as a bar to laches, but only as a factor to be weighed in determining whether laches was appropriate, would the court have come to the same conclusion? Should it have come to the same conclusion?
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Laches has tended to become less important as states have moved to impose statutes of limitations on causes of action. These statutes of limitations serve to cut off all claims for specified causes of action as set by the terms of the statute. They can apply to claims under common law, statute, and regulation. They can apply to civil and criminal actions. A typical statute of limitations is written like this: “A person must bring suit not later than two years after the day the cause of action accrues in an action for injury resulting in death. The cause of action accrues on the death of the injured person.” Notice statutes of limitations focus on three elements. The first is the identification of cause of action or claim subject to a specific limitations period. Second, the specification of the limitations period itself. And third, the date from when one starts counting the time to claim extinguishment (the time when a claim accrues).
These statutes of limitation have the effect of hard wiring social notions about how long a wait is too long to commence a suit. But it also can be used instrumentally to indicate legislative favor or disfavor of particular causes of action. Thus a disfavored cause of action might be limited by imposing a very short statute of limitations. Yet such statutory schemes do not require any balancing of conduct nor a determination of justice—instead they merely provide a certain and predictable method for cutting off claims, without regard to the facts or circumstances that might have produced delay. It is for that reason that it was sometimes though that equity defenses, like laches, might still be asserted even with respect to claims for which the legislature had enacted statutes of limitations.
These issues have continued to be debated in the courts. Consider the effect of statutes of limitations on laches in the following case. Platy close attention toi the role played by the principles of equity and their relevance to the decision in the case, as well as to the arguments raised by the dissent.
Paula Petrella, Petitioner
v.
Metro-Goldwyn-Mayer, Inc., et al.
572 U.S. _ (May 19, 2014)
JUSTICE GINSBURG delivered the opinion of the Court.
The Copyright Act provides that “[n]o civil action shall be maintained under the [Act] unless it is commenced within three years after the claim accrued.” 17 U. S. C. §507(b). This case presents the question whether the equitable defense of laches (unreasonable, prejudicial delay in commencing suit) may bar relief on a copyright infringement claim brought within §507(b)’s three-year limitations period. Section 507(b), it is undisputed, bars relief of any kind for conduct occurring prior to the three-year limitations period. To the extent that an infringement suit seeks relief solely for conduct occurring within the limitations period, however, courts are not at liberty to jettison Congress’ judgment on the timeliness of suit. Laches, we hold, cannot be invoked to preclude adjudication of a claim for damages brought within the three-year window. As to equitable relief, in extraordinary circumstances, laches may bar at the very threshold the particular relief requested by the plaintiff. And a plaintiff ’s delay can always be brought to bear at the remedial stage, in determining appropriate injunctive relief, and in assessing the “profits of the infringer . . . attributable to the infringement.” §504(b). Petitioner Paula Petrella, in her suit for copyright infringement, sought no relief for conduct occurring outside §507(b)’s three-year limitations period. Nevertheless, the courts below held that laches barred her suit in its entirety, without regard to the currency of the conduct of which Petrella complains. That position, we hold, is contrary to §507(b) and this Court’s precedent on the province of laches.
I
The Copyright Act (Act), 17 U. S. C. §101 et seq., grants copyright protection to original works of authorship. §102(a). Four aspects of copyright law bear explanation at the outset. First, the length of a copyright term. Under the Act, a copyright “vests initially in the author or authors of the work,” who may transfer ownership to a third party. §201. The Act confers on a copyright owner certain exclusive rights, including the rights to reproduce and distribute the work and to develop and market derivative works. §106. Copyrighted works published before 1978—as was the work at issue—are protected for an initial period of 28 years, which may be—and in this case was—extended for a renewal period of up to 67 years. §304(a). From and after January 1, 1978, works are generally protected from the date of creation until 70 years after the author’s death. §302(a).
Second, copyright inheritance. For works copyrighted under the pre-1978 regime in which an initial period of protection may be followed by a renewal period, Congress provided that the author’s heirs inherit the renewal rights. See §304(a)(1)(C)(ii)–(iv). We held in Stewart v. Abend, 495 U. S. 207 (1990), that if an author who has assigned her rights away “dies before the renewal period, then the assignee may continue to use the original work [to produce a derivative work] only if the author’s successor transfers the renewal rights to the assignee.” Id., at 221.
Third, remedies. The Act provides a variety of civil remedies for infringement, both equitable and legal. See §§502–505, described supra, at 2, n. 1. A court may issue an injunction “on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.” §502(a). At the election of the copyright owner, a court may also award either (1) “the copyright owner’s actual damages and any additional profits of the infringer,” §504(a)(1), which petitioner seeks in the instant case, or (2) statutory damages within a defined range, §504(c).
Fourth, and most significant here, the statute of limitations. Until 1957, federal copyright law did not include a statute of limitations for civil suits. Federal courts therefore used analogous state statutes of limitations to determine the timeliness of infringement claims. See S. Rep. No. 1014, 85th Cong., 1st Sess., 2 (1957) (hereinafter Senate Report). And they sometimes invoked laches to abridge the state-law prescription. As explained in Teamsters & Employers Welfare Trust of Ill. v. Gorman Bros. Ready Mix, 283 F. 3d 877, 881 CA7 2002): “When Congress fails to enact a statute of limitations, a [federal court that borrows a state statute of limitations but permits it to be abridged by the doctrine of laches is not invading congressional prerogatives. It is merely filling a legislative hole.” (internal citation omitted). In 1957, Congress addressed the matter and filled the hole; it prescribed a three-year look-back limitations period for all civil claims arising under the Copyright Act. See Act of Sept. 7, 1957, Pub. L. 85–313, 71 Stat. 633, 17 U. S. C. §115(b) (1958 ed.). The provision, as already noted, reads: “No civil action shall be maintained under the provisions of this title unless it is commenced within three years after the claim accrued.” §507(b).
The federal limitations prescription governing copyright suits serves two purposes: (1) to render uniform and certain the time within which copyright claims could be pursued; and (2) to prevent the forum shopping invited by disparate state limitations periods, which ranged from one to eight years. Senate Report 2; see H. R. Rep. No. 2419, 84th Cong., 2d Sess., 2 (1956). To comprehend how the Copyright Act’s limitations period works, one must understand when a copyright infringement claim accrues. A claim ordinarily accrues “when [a] plaintiff has a complete and present cause of action.” Bay Area Laundry and Dry Cleaning Pension Trust Fund v. Ferbar Corp. of Cal., 522 U. S. 192, 201 (1997) (internal quotation marks omitted). In other words, the limitations period generally begins to run at the point when “the plaintiff can file suit and obtain relief.” Ibid. A copyright claim thus arises or “accrue[s]” when an infringing act occurs.
It is widely recognized that the separate-accrual rule attends the copyright statute of limitations. Under that rule, when a defendant commits successive violations, the statute of limitations runs separately from each violation. Each time an infringing work is reproduced or distributed, the infringer commits a new wrong. Each wrong gives rise to a discrete “claim” that “accrue[s]” at the time the wrong occurs. In short, each infringing act starts a new limitations period. See Stone v. Williams, 970 F. 2d 1043, 1049 (CA2 1992) (“Each act of infringement is a distinct harm giving rise to an independent claim for relief.”).
Under the Act’s three-year provision, an infringement is actionable within three years, and only three years, of its occurrence. And the infringer is insulated from liability for earlier infringements of the same work. . . . Thus, when a defendant has engaged (or is
alleged to have engaged) in a series of discrete infringing acts, the copyright holder’s suit ordinarily will be timely under §507(b) with respect to more recent acts of infringement (i.e., acts within the three-year window), but untimely with respect to prior acts of the same or similar kind.
In sum, Congress provided two controlling time prescriptions: the copyright term, which endures for decades, and may pass from one generation to another; and §507(b)’s limitations period, which allows plaintiffs during that lengthy term to gain retrospective relief running only three years back from the date the complaint was filed.
II
A
The allegedly infringing work in this case is the critically acclaimed motion picture Raging Bull, based on the life of boxing champion Jake LaMotta. After retiring from the
ring, LaMotta worked with his longtime friend, Frank Petrella, to tell the story of the boxer’s career. Their venture resulted in three copyrighted works: two screen-plays, one registered in 1963, the other in 1973, and a book, registered in 1970. This case centers on the screen-play registered in 1963. The registration identified Frank Petrella as sole author, but also stated that the screenplay was written “in collaboration with” LaMotta. App. 164.
In 1976, Frank Petrella and LaMotta assigned their rights in the three works, including renewal rights, to Chartoff-Winkler Productions, Inc. Two years later, respondent United Artists Corporation, a subsidiary of respondent Metro-Goldwyn-Mayer, Inc. (collectively, MGM), acquired the motion picture rights to the book and both screenplays, rights stated by the parties to be “exclusiv[e] and forever, including all periods of copyright and renewals and extensions thereof.” Id., at 49. In 1980, MGM released, and registered a copyright in, the film Raging Bull, directed by Martin Scorsese and starring Robert De Niro, who won a Best Actor Academy Award for his portrayal of LaMotta. MGM continues to market the film, and has converted it into formats unimagined in 1980, including DVD and Blu-ray.
Frank Petrella died in 1981, during the initial terms of the copyrights in the screenplays and book. As this Court’s decision in Stewart confirmed, Frank Petrella’s renewal rights reverted to his heirs, who could renew the copyrights unburdened by any assignment previously made by the author. See 495 U. S., at 220–221 (relying on Court’s earlier decision in Miller Music Corp. v. Charles N. Daniels, Inc., 362 U. S. 373 (1960)).
Plaintiff below, petitioner here, Paula Petrella (Petrella) is Frank Petrella’s daughter. Learning of this Court’s decision in Stewart, Petrella engaged an attorney who, in 1991, renewed the copyright in the 1963 screenplay. Because the copyrights in the 1973 screenplay and the 1970 book were not timely renewed, the infringement claims in this case rest exclusively on the screenplay registered in 1963. Petrella is now sole owner of the copy-right in that work.
In 1998, seven years after filing for renewal of the copy-right in the 1963 screenplay, Petrella’s attorney informed MGM that Petrella had obtained the copyright to that screenplay. Exploitation of any derivative work, including Raging Bull, the attorney asserted, infringed on the copy-right now vested in Petrella. During the next two years,
counsel for Petrella and MGM exchanged letters in which MGM denied the validity of the infringement claims, and Petrella repeatedly threatened to take legal action.
B
Some nine years later, on January 6, 2009, Petrella filed a copyright infringement suit in the United States District Court for the Central District of California. She alleged that MGM violated and continued to violate her copyright in the 1963 screenplay by using, producing, and distributing Raging Bull, a work she described as derivative of the 1963 screenplay. Petrella’s complaint sought monetary and injunctive relief. Because the statute of limitations for copyright claims requires commencement of suit “within three years after the claim accrued,” §507(b), Petrella sought relief only for acts of infringement occurring on or after January 6, 2006. No relief, she recognizes, can be awarded for infringing acts prior to that date.
MGM moved for summary judgment on several grounds, among them, the equitable doctrine of laches. Petrella’s 18-year delay, from the 1991 renewal of the copyright on which she relied, until 2009, when she commenced suit, MGM maintained, was unreasonable and prejudicial to MGM. See Memorandum of Points and Authorities in Support of Defendants’ Motion for Summary Judgment in No. CV 09–0072 (CD Cal.).
The District Court granted MGM’s motion. See App. To Pet. for Cert. 28a–48a. As to the merits of the infringement claims, the court found, disputed issues of material fact precluded summary adjudication. See id., at 34a–42a. Even so, the court held, laches barred Petrella’s complaint. Id., at 42a–48a. Petrella had unreasonably delayed suit by not filing until 2009, the court concluded, and further determined that MGM was prejudiced by the delay. Id., at 42a–46a. In particular, the court stated, MGM had shown “expectations-based prejudice,” because the company had “made significant investments in exploiting the film”; in addition, the court accepted that MGM would encounter “evidentiary prejudice,” because Frank Petrella had died and LaMotta, then aged 88, appeared to have sustained a loss of memory. Id., at 44a–46a.
The U. S. Court of Appeals for the Ninth Circuit affirmed the laches-based dismissal. 695 F. 3d 946 (2012). Under Ninth Circuit precedent, the Court of Appeals first observed, “[i]f any part of the alleged wrongful conduct occurred outside of the limitations period, courts presume that the plaintiff ’s claims are barred by laches.” Id., at 951 (internal quotation marks omitted). . . . . We granted certiorari to resolve a conflict among the Circuits on the application of the equitable defense of laches to copyright infringement claims brought within the three-year look-back period prescribed by Congress. 570 U. S. ___ (2013).
III
We consider first whether, as the Ninth Circuit held, laches may be invoked as a bar to Petrella’s pursuit of legal remedies under 17 U. S. C. §504(b). The Ninth Circuit erred, we hold, in failing to recognize that the copyright statute of limitations, §507(b), itself takes account of delay. As earlier observed, see supra, at 5–6, a successful plaintiff can gain retrospective relief only three years back from the time of suit. No recovery may be had for infringement in earlier years. Profits made in those years remain the defendant’s to keep. Brought to bear here, §507(b) directs that MGM’s returns on its investment in Raging Bull in years outside the three-year window (years before 2006) cannot be reached by Petrella. Only by disregarding that feature of the statute, and the separate-accrual rule attending §507(b), see supra, at 4–5, could the Court of Appeals presume that infringing acts occurring before January 6, 2006 bar all relief, monetary and injunctive, for infringement occurring on and after that date. See 695 F. 3d, at 951; supra, at 9–10.
Moreover, if infringement within the three-year look-back period is shown, the Act allows the defendant to prove and offset against profits made in that period “deductible expenses” incurred in generating those profits. §504(b). In addition, the defendant may prove and offset “elements of profit attributable to factors other than the copyrighted work.” §504(b). The defendant thus may retain the return on investment shown to be attributable to its own enterprise, as distinct from the value created by the infringed work. See Sheldon v. Metro-Goldwyn Pictures Corp., 309 U. S. 390, 402, 407 (1940) (equitably
apportioning profits to account for independent contributions of infringing defendant). See also infra, at 19–22 (delay in commencing suit as a factor in determining contours of relief appropriately awarded).
Last, but hardly least, laches is a defense developed by courts of equity; its principal application was, and remains, to claims of an equitable cast for which the Legislature has provided no fixed time limitation. See 1 D. Dobbs, Law of Remedies §2.4(4), p. 104 (2d ed. 1993) (hereinafter Dobbs) (“laches . . . may have originated in equity because no statute of limitations applied, . . . suggest[ing] that laches should be limited to cases in which no statute of limitations applies”). Both before and after the merger of law and equity in 1938, this Court has cautioned against invoking laches to bar legal relief. See Holmberg v. Armbrecht, 327 U. S. 392, 395, 396 (1946) (in actions at law, “[i]f Congress explicitly puts a limit upon the time for enforcing a right which it created, there is an end of the matter,” but “[t]raditionally . . . , statutes of limitation are not controlling measures of equitable relief ”); Merck & Co. v. Reynolds , 559 U. S. 633, 652 (2010) (quoting, for its current relevance, statement in United States v. Mack, 295 U. S. 480, 489 (1935), that “[l]aches within the term of the statute of limitations is no defense [to an action] at law”);
County of Oneida v. Oneida Indian Nation of N. Y., 470 U. S. 226, 244, n. 16 (1985) (“[A]pplication of the equitable defense of laches in an action at law would be novel indeed.”).
Because we adhere to the position that, in face of a statute of limitations enacted by Congress, laches cannot be invoked to bar legal relief, the dissent thinks we “plac[e] insufficient weight upon the rules and practice of modern litigation.” Post, at 12. True, there has been, since 1938, only “one form of action—the civil action.” Fed. Rule Civ. Proc. 2. But “the substantive and remedial principles [applicable] prior to the advent of the federal rules [have] not changed.” 4 C. Wright & A. Miller, Federal Practice and Procedure §1043, p. 177 (3d ed. 2002). Holmberg, Merck, and Oneida so illustrate. The dissent presents multiple citations, see post, at 1, 3–4, 7–8, 10–11, many of them far afield from the issue at hand, others obscuring what the cited decisions in fact ruled. Compare, e.g., post, at 1, 11, with infra , at 20–21 (describing Chirco v. Crosswinds Communities, Inc., 474 F. 3d 227 (CA6 2007)); post, at 1, 10–11, with infra, at 15, n. 16 (describing National Railroad Passenger Corporation v. Morgan, 536 U. S. 101 (2002)); post, at 8, with infra, at 15, n. 16 (describing Patterson v. Hewitt , 195 U. S. 309 (1904)). Yet tellingly, the dissent has come up with no case in which this Court has approved the application of laches to bar a claim for damages brought with in the time allowed by a federal statute of limitations. There is nothing at all “differen[t],” see post, at 12, about copyright cases in this regard.
IV
We turn now to MGM’s principal arguments regarding the contemporary scope of the laches defense, all of them embraced by the dissent.
A
Laches is listed among affirmative defenses, along with, but discrete from, the statute of limitations, in Federal Rule of Civil Procedure 8(c). Accordingly, MGM maintains, the plea is “available . . . in every civil action” to bar all forms of relief. Tr. of Oral Arg. 43; see Brief for Respondents 40. To the Court’s question, could laches apply where there is an ordinary six-year statute of limitations, MGM’s counsel responded yes, case-specific circumstances might warrant a ruling that a suit brought in year five came too late. Tr. of Oral Arg. 52; see id., at 41.
The expansive role for laches MGM envisions careens away from understandings, past and present, of the essentially gap-filling, not legislation-overriding, office of laches. Nothing in this Court’s precedent suggests a doctrine of such sweep. Quite the contrary, we have never applied laches to bar in their entirety claims for discrete wrongs occurring within a federally prescribed limitations period. Inviting individual judges to set a time limit other than the one Congress prescribed, we note, would tug against the uniformity Congress sought to achieve when it enacted §507(b). See supra, at 3–4.
B
MGM observes that equitable tolling “is read into every federal statute of limitation,” Holmberg, 327 U. S., at 397, and asks why laches should not be treated similarly. See Brief for Respondents 23–26; post, at 7–8. Tolling, which lengthens the time for commencing a civil action in appropriate circumstances, applies when there is a statute of limitations; it is, in effect, a rule of interpretation tied to that limit. See Young v. United States, 535 U. S. 43, 49–50 (2002); Johnson v. Railway Express Agency, Inc., 421 U.S. 454, 464 (1975). Laches, in contrast, originally served as a guide when no statute of limitations controlled the claim; it can scarcely be described as a rule for interpreting a statutory prescription. That is so here, because the statute, §507(b), makes the starting trigger an infringing act committed three years back from the commencement of suit, while laches, as conceived by the Ninth Circuit and advanced by MGM, makes the presumptive trigger the defendant’s initial infringing act. See 695 F. 3d, at 951; Brief for United States 16.
C
MGM insists that the defense of laches must be available to prevent a copyright owner from sitting still, doing nothing, waiting to see what the outcome of an alleged infringer’s investment will be. See Brief for Respondents 48. In this case, MGM stresses, “[Petrella] Conceded that she waited to file because ‘the film was deeply in debt and in the red and would probably never recoup.’” Id., at 47 (quoting from App. 110). The Ninth Circuit similarly faulted Petrella for waiting to sue until the film Raging Bull “made money.” 695 F. 3d, at 953 (internal quotation marks omitted). See also post, at 3–6 (deploring plaintiffs who wait to see whether the allegedly infringing work makes money).
It is hardly incumbent on copyright owners, however, to challenge each and every actionable infringement. And there is nothing untoward about waiting to see whether an
infringer’s exploitation undercuts the value of the copy-righted work, has no effect on the original work, or even complements it. Fan sites prompted by a book or film, for example, may benefit the copyright owner. . . . . Even if an infringement is harmful, the harm may be too small to justify the cost of litigation.
If the rule were, as MGM urges, “sue soon, or forever hold your peace,” copyright owners would have to mount a federal case fast to stop seemingly innocuous infringements, lest those infringements eventually grow in magnitude. Section 507(b)’s three-year limitations period, however, coupled to the separate-accrual rule, see supra, at 3–6, avoids such litigation profusion. It allows a copyright owner to defer suit until she can estimate whether litigation is worth the candle. She will miss out on damages for periods prior to the three-year look-back, but her right to prospective injunctive relief should, in most cases, remain unaltered.
D
MGM points to the danger that evidence needed or useful to defend against liability will be lost during a copyright owner’s inaction. Brief for Respondents 37–38; see post, at 2–4. Recall, however, that Congress provided for reversionary renewal rights exercisable by an author’s heirs, rights that can be exercised, at the earliest for pre1978 copyrights, 28 years after a work was written and copyrighted. See, supra, at 2–3. At that time, the author, and perhaps other witnesses to the creation of the work, will be dead. See supra, at 7. Congress must have been aware that the passage of time and the author’s death could cause a loss or dilution of evidence. Congress chose, nonetheless, to give the author’s family “a second chance to obtain fair remuneration.” Stewart, 495 U. S., at 220.
Moreover, a copyright plaintiff bears the burden of proving infringement. See 3 W. Patry, Copyright §9.4, p.9–18 (2013) (hereinafter Patry) (“As in other civil litigation, a copyright owner bears the burden of establishing a prima facie case.”). But cf. post, at 4 (overlooking plaintiff ’s burden to show infringement and the absence of any burden upon the defendant “to prove that it did not infringe”). Any hindrance caused by the unavailability of evidence, therefore, is at least as likely to affect plaintiffs as it is to disadvantage defendants. That is so in cases of the kind Petrella is pursuing, for a deceased author most probably would have supported his heir’s claim.
The registration mechanism, we further note, reduces the need for extrinsic evidence. Although registration is “permissive,” both the certificate and the original work must be on file with the Copyright Office before a copy-right owner can sue for infringement. §§408(b), 411(a). Key evidence in the litigation, then, will be the certificate, the original work, and the allegedly infringing work. And the adjudication will often turn on the factfinder’s direct comparison of the original and the infringing works, i.e., on the factfinder’s “good eyes and common sense” in comparing the two works’ “total concept and overall feel.” Peter F. Gaito Architecture, LLC v. Simone Development Corp., 602 F. 3d 57, 66 (CA2 2010) (internal quotation marks omitted).
E
Finally, when a copyright owner engages in intentionally misleading representations concerning his abstention from suit, and the alleged infringer detrimentally relies on the copyright owner’s deception, the doctrine of estoppel may bar the copyright owner’s claims completely, eliminating all potential remedies. See 6 Patry §20:58, at 20–110 to 20–112. The test for estoppel is more exacting than the test for laches, and the two defenses are differently oriented. The gravamen of estoppel, a defense long recognized as available in actions at law, see Wehrman v. Conklin, 155 U. S. 314, 327 (1894), is misleading and consequent loss, see 6 Patry §20:58, at 20–110 to 20–112. Delay may be involved, but is not an element of the defense. For laches, timeliness is the essential element. In contrast to laches, urged by MGM entirely to override the statute of limitations Congress prescribed, estoppel does not undermine Congress’ prescription, for it rests on misleading, whether engaged in early on, or later in time.
Stating that the Ninth Circuit “ha[d] taken a wrong turn in its formulation and application of laches in copy-right cases,” Judge Fletcher called for fresh consideration of the issue. 695 F. 3d, at 959. “A recognition of the distinction between . . . estoppel and laches,” he suggested, “would be a good place to start.” Ibid. We agree.
V
The courts below summarily disposed of Petrella’s case based on laches, preventing adjudication of any of her claims on the merits and foreclosing the possibility of any form of relief. That disposition, we have explained, was erroneous. Congress’ time provisions secured to authors a copyright term of long duration, and a right to sue for infringement occurring no more than three years back from the time of suit. That regime leaves “little place” for a doctrine that would further limit the timeliness of a copyright owner’s suit. See 1 Dobbs §2.6(1), at 152. In extraordinary circumstances, however, the consequences of a delay in commencing suit may be of sufficient magnitude to warrant, at the very outset of the litigation, curtailment of the relief equitably awardable.
Chirco v. Crosswinds Communities, Inc., 474 F. 3d 227 (CA6 2007), is illustrative. In that case, the defendants were alleged to have used without permission, in planning and building a housing development, the plaintiffs’ copy-righted architectural design. Long aware of the defendants’ project, the plaintiffs took no steps to halt the housing development until more than 168 units were built, 109 of which were occupied. Id., at 230. Although the action was filed within §507(b)’s three-year statute of limitations, the District Court granted summary judgment to the defendants, dismissing the entire case on grounds of laches. The trial court’s rejection of the entire suit could not stand, the Court of Appeals explained, for it was not within the Judiciary’s ken to debate the wisdom of §507(b)’s three-year look-back prescription. Id., at 235. Nevertheless, the Court of Appeals affirmed the District Court’s judgment to this extent: The plaintiffs, even if they might succeed in proving infringement of their copyrighted design, would not be entitled
to an order mandating destruction of the housing project. That relief would be inequitable, the Sixth Circuit held, for two reasons: the plaintiffs knew of the defendants’ construction plans before the defendants broke ground, yet failed to take readily available
measures to stop the project; and the requested relief would “work an unjust hardship” upon the defendants and innocent third parties. Id., at 236. See also New Era Publications Int’l v. Henry Holt & Co., 873 F. 2d 576, 584–585 (CA2 1989) (despite awareness since 1986 that book containing allegedly infringing material would be published in the United States, copyright owner did not seek a restraining order until 1988, after the book had been printed, packed, and shipped; as injunctive relief “would [have] result[ed] in the total destruction of the work,” the court “relegat[ed plaintiff] to its damages remedy”). In sum, the courts below erred in treating laches as a complete bar to Petrella’s copyright infringement suit. The action was commenced within the bounds of §507(b), the Act’s time-to-sue prescript ion, and does not present extraordinary circumstances of the kind involved in Chirco and New Era . Petrella notified MGM of her copyright claims before MGM invested millions of dollars in creating a new edition of Raging Bull. And the equitable relief Petrella seeks—e.g., disgorgement of unjust gains and an injunction against future infringement—would not result in “total destruction” of the film, or anything close to it. See New Era, 873 F. 2d, at 584. MGM released Raging Bull more than three decades ago and has marketed it continuously since then. Allowing Petrella’s suit to go forward will put at risk only a fraction of the income MGM has earned during that period and will work no unjust hardship on innocent third parties, such as consumers
who have purchased copies of Raging Bull. Cf. Chirco, 474 F. 3d, at 235–236 (destruction remedy would have ousted families from recently purchased homes). The circumstances here may or may not (we need not decide) warrant limiting relief at the remedial stage, but they are not sufficiently extraordinary to justify threshold dismissal. Should Petrella ultimately prevail on the merits, the District Court, in determining appropriate injunctive relief and assessing profits, may take account of her delay in commencing suit. See supra, at 1–2, 11–12. In doing so, however, that court should closely examine MGM’s alleged 585 (CA2 1989) (despite awareness since 1986 that book containing allegedly infringing material would be published in the United States, copyright owner did not seek a restraining order until 1988, after the book had been printed, packed, and shipped; as injunctive relief “would [have] result[ed] in the total destruction of the work,” the court “relegat[ed plaintiff] to its damages remedy”).
In sum, the courts below erred in treating laches as a complete bar to Petrella’s copyright infringement suit. The action was commenced within the bounds of §507(b), the Act’s time-to-sue prescription, and does not present extraordinary circumstances of the kind involved in Chirco and New Era . Petrella notified MGM of her copyright claims before MGM invested millions of dollars in creating a new edition of Raging Bull. And the equitable relief Petrella seeks—e.g., disgorgement of unjust gains and an injunction against future infringement—would not result in “total destruction” of the film, or anything close to it. See New Era , 873 F. 2d, at 584. MGM released Raging Bull more than three decades ago and has marketed it continuously since then. Allowing Petrella’s suit to go forward will put at risk only a fraction of the income MGM has earned during that period and will work no unjust hardship on innocent third parties, such as consumers
who have purchased copies of Raging Bull. Cf. Chirco, 474 F.3d, at 235–236 (destruction remedy would have ousted families from recently purchased homes). The circumstances here may or may not (we need not decide) warrant limiting relief at the remedial stage, but they are not sufficiently extraordinary to justify threshold dismissal.
Should Petrella ultimately prevail on the merits, the District Court, in determining appropriate injunctive relief and assessing profits, may take account of her delay in commencing suit. See supra, at 1–2, 11–12. In doing so, however, that court should closely examine MGM’s alleged reliance on Petrella’s delay. This examination should take account of MGM’s early knowledge of Petrella’s claims, the protection MGM might have achieved through pursuit of a declaratory judgment action, the extent to which MGM’s investment was protected by the separate-accrual rule, the court’s authority to order injunctive relief “on such terms as it may deem reasonable,” §502(a), and any other considerations that would justify adjusting injunctive relief or profits. See Haas v. Leo Feist, Inc., 234 F. 105, 107–108 (SDNY 1916) (adjudicating copyright infringement suit on the merits and decreeing injunctive relief, but observing that, in awarding profits, account may be taken of copyright owner’s inaction until infringer had spent large sums exploiting the work at issue). See also Tr. of Oral Arg. 23 (Government observation that, in fashioning equitable remedies, court has considerable leeway; it could, for example, allow MGM to continue using Raging Bull as a derivative work upon payment of a reasonable royalty to Petrella). Whatever adjustments may be in order in awarding injunctive relief, and in accounting for MGM’s gains and profits, on the facts thus far presented, there is no evident basis for immunizing MGM’s present and future uses of the copyrighted work, free from any obligation to pay royalties.
* * *
For the reasons stated, the judgment of the United States Court of Appeals for the Ninth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered
JUSTICE BREYER, with whom THE CHIEF JUSTICE, and JUSTICE KENNEDY join, dissenting.
* * * * * *
The Court holds that insofar as a copyright claim seeks damages, a court cannot ever apply laches, irrespective of the length of the plaintiff ’s delay, the amount of the harm that it caused, or the inequity of permitting the action to go forward.
II
Why should laches not be available in an appropriate case? Consider the reasons the majority offers. First, the majority says that the 3-year “copyright statute of limitations . . . itself takes account of delay,” and so additional safeguards like laches are not needed. Ante, at 11. I agree that sometimes that is so. But I also fear that sometimes it is not. The majority correctly points out that the limitations period limits the retrospective relief a plaintiff can recover. It imposes a cap equal to the profits earned during the prior three years, in addition to any actual damages sustained during this time. Ibid.; §504(b). Thus, if the plaintiff waits from, say, 1980 until 2001 to bring suit, she cannot recover profits for the 1980 to 1998 period. But she can recover the defendant’s profits from 1998 through 2001, which might be precisely when net revenues turned positive. And she can sue every three years thereafter until the copyright expires, perhaps in the year 2060. If the plaintiff ’s suit involves the type of inequitable circumstances I have described, her ability to recover profits from 1998 to 2001 and until the copyright expires could be just the kind of unfairness that laches is designed to prevent.
Second, the majority points out that the plaintiff can recover only the defendant’s profits less “‘deductible expenses’ incurred in generating those profits.” Ante, at 12 (quoting §504(b)). In other words, the majority takes assurance from the fact that the Act enables the defendant to recoup his outlays in developing or selling the allegedly infringing work. Again, some times that fact will prevent inequitable results. But sometimes it will not. A plaintiff ’s delay may mean that the defendant has already recovered the majority of his expenses, and what is left is primarily profit. It may mean that the defendant has dedicated decades of his life to producing the work, such that the loss of a future profit stream (even if he can recover past expenses) is tantamount to the loss of any income in later years. And in circumstances such as those described, it could prove inequitable to give the profit to a plaintiff who has unnecessarily delayed in filing an action. Simply put, the “deductible expenses” provision does not protect the defendant from the potential inequity high-lighted by Judge Hand nearly 100 years ago in his influential copyright opinion. That is, it does not stop a copyright-holder (or his heirs) from “stand[ing] inactive while the proposed infringer spends large sums of money” in a risky venture; appearing on the scene only when the venture has proved a success; and thereby collecting substantially more money than he could have obtained at the outset, had he bargained with the investor over a license and royalty fee. Haas, 234 F., at 108. But cf. id., at 108–109 (plaintiff to receive injunctive relief since one of the defendants was a “deliberate pirate,” but profit award to be potentially reduced in light of laches).
Third, the majority says that “[i]nviting individual judges to set a time limit other than the one Congress prescribed” in the Copyright Act would “tug against the uniformity Congress sought to achieve when it enacted §507(b).” Ante, at 15. But why does the majority believe that part of what Congress intended to “achieve” was the elimination of the equitable defense of laches? As the majority recognizes, Congress enacted a uniform statute of limitations for copyright claims in 1957 so that federal courts, in determining timeliness, no longer had to borrow from state law which varied from place to place. See ante, at 3–4. Nothing in the 1957 Act—or anywhere else in the text of the copyright statute—indicates that Congress also sought to bar the operation of laches. The Copyright Act is silent on the subject. And silence is consistent, not inconsistent, with the application of equitable doctrines.
For one thing, the legislative history for §507 shows that Congress chose not to “specifically enumerat[e] certain equitable considerations which might be advanced in connection with civil copyright actions” because it understood that “‘[f]ederal district courts, generally, recognize these equitable defenses anyway.’ ” S. Rep. No. 1014, 85th Cong., 1st Sess., 2–3 (1957) (quoting the House Judiciary Committee). Courts prior to 1957 had often applied laches in federal copyright cases. See, e.g., Callaghan v. Myers, 128 U. S. 617, 658–659 (1888) (assuming laches was an available defense in a copyright suit); . . . .). Congress expected they would continue to do so.
Furthermore, this Court has held that federal courts may “appl[y] equitable doctrines that may toll or limit the time period” for suit when applying a statute of limitations, because a statutory “filing period” is a “requirement” subject to adjustment “‘when equity so requires.’” Morgan, 536 U. S., at 121–122 (quoting Zipes v. Trans World Airlines, Inc., 455 U. S. 385, 398 (1982); emphasis added). This Court has read laches into statutes of limitations otherwise silent on the topic of equitable doctrines in a multitude of contexts, as have lower courts. See, e.g., Morgan, supra, at 121 (“an employer may raise a laches
defense” under Title VII); Bay Area Laundry and Dry Cleaning Pension Trust Fund v. Ferbar Corp. of Cal., 522 U.S. 192, 205 (1997). . . . Unless Congress indicates otherwise, courts normally assume that equitable rules continue to operate alongside limitations periods, and that equity applies both to plaintiffs and to defendants. . . . .
The Court today comes to a different conclusion. It reads §507(b)’s silence as preserving doctrines that lengthen the period for suit when equitable considerations favor the plaintiff (e.g., equitable tolling), but as foreclosing a doctrine that would shorten the period when equity favors the defendant (i.e., laches). See ante, at 15–16, 19–20. I do not understand the logic of reading a silent statute in this manner.
Fourth, the majority defends its rule by observing that laches was “developed by courts of equity,” and that this Court has “cautioned against invoking laches to bar legal relief ” even following the merger of law and equity in 1938. Ante, at 12–13. . . . This statement, however, constituted part of the Court’s explanation as to why a federal statute, silent about limitations, should be applied consistently with “historic principles of equity in the enforcement of federally-created equitable rights” rather than with New York’s statute of
limitations.
In sum, there is no reason to believe that the Court meant any of its statements in Holmberg, Merck, or Oneida to announce a general rule about the availability of laches in actions for legal relief, whenever Congress provides a statute of limitations. To the contrary, the Court has said more than once that a defendant could invoke laches in an action for damages (even though no assertion of the defense had actually been made in the case), despite a fixed statute of limitations. See Morgan , 536 U. S., at 116–119, 121–122 (laches available in hostile work environment claims. . . ).
* * * * *
Perhaps more importantly, in permitting laches to apply to copyright claims seeking equitable relief but not to those seeking legal relief, the majority places insufficient weight upon the rules and practice of modern litigation. Since 1938, Congress and the Federal Rules have replaced what would once have been actions “at law” and actions “in equity” with the “civil action.” Fed. Rule Civ. Proc. 2 (“There is one form of action—the civil action”). A federal civil action is subject to both equitable and legal defenses. Fed. Rule Civ. Proc. 8(c)(1) (“In responding to a pleading, a party must affirmatively state any avoidance or affirmative defense, including: . . . estoppel . . . laches . . . [and] statute of limitations”). Accordingly, since 1938, federal courts have frequently allowed defendants to assert what were formerly equitable defenses—including laches—in what were formerly legal actions. See supra, at 10–11 (citing cases). Why should copyright be treated differently? Indeed, the majority concedes that “restitutional remedies” like “profits” (which are often claimed in copy-right cases) defy clear classification as “equitable” or “legal.” Ante, at 2, n. 1 (internal quotation marks omitted). Why should lower courts have to make these uneasy and unnatural distinctions?
Fifth, the majority believes it can prevent the inequities that laches seeks to avoid through the use of a different doctrine, namely equitable estoppel. Ante, at 19. I doubt that is so. As the majority recognizes, “the two defenses are differently oriented.” Ibid. The “gravamen” of estoppel is a misleading representation by the plaintiff that the defendant relies on to his detriment. 6 Patry, Copyright §20:58, at 20–110 to 20–112. The gravamen of laches is the plaintiff ’s unreasonable delay, and the consequent prejudice to the defendant. Id., §20:54, at 20–96. Where due to the passage of time, evidence favorable to the defense has disappeared or the defendant has continued to invest in a derivative work, what misleading representation by the plaintiff is there to estop?
In sum, as the majority says, the doctrine of laches may occupy only a “‘little place’” in a regime based upon statutes of limitations. Ante, at 20 (quoting 1 D. Dobbs, Law of Remedies §2.6(1), p. 152 (2d ed. 1993)). But that place is an important one. In those few and unusual cases where a plaintiff unreasonably delays in bringing suit and consequently causes inequitable harm to the defendant, the doctrine permits a court to bring about a fair result. I see no reason to erase the doctrine from copyright’s lexicon, not even in respect to limitations periods applicable to damages actions.
Consequently, with respect, I dissent.
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Questions:
1. What is the relationship between statutes of limitations and laches? Why should one, a statutory rule grounded in policy considerations, affect the applicability of another, a judicial rule grounded on fairness? Both laches and the statute of limitations have the same effect, but they accomplish this objective in very different ways. Should that distinction make a difference.
2. What is the relationship between laches and estoppel?
3. What does the majority opinion suggest is the relationship between equity (laches) and legislative rules (statutes of limitations). There appears to be a strong suggestion of a hierarchy of authority in which common law and equity appear to be less authoritative than statutory law. Why would such a hierarchy of laws make sense?
4. Does the majority or dissent make the better case from the perspective of justice? Should the legislative will be determined to be just by operation of its role as a representative of the people? We consider the relationship of law to government in later chapters. A dissenting opinion is an opinion written by a judge or justice who disagrees with the reasoning and holding of the majority. Why do judges write dissenting opinions?
5. On what basis is the decision made or the arguments of the dissent based? What authority is used and how compelling is each source of authority invoked? What does that tell us about the organization of law in the United States? Would the Supreme Court have been able to arrive at its decision in the absence of these sources on which it relies for its decision? Why or why not?
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IV: Problem
The readings were put forward to provide the student with context. Equity is important as intimately connected with the project of judge administered law in the United States. It fills out common law in two important ways that have a direct impact on the way that the United States law system is structured. First, equity is the source of a number of substantive rights and obligations. Second, equity adds a number of procedural rights and techniques to the framework of dispute resolution in the United States. Third, equity is an important source of remedial mechanisms. We will examine examples of each in the materials that follow. The contribution of equity to substantive legal rights and obligations is illustrated by the doctrines (and law) of fiduciary duty—a modern cornerstone of the regulation of corporations and other economic enterprises in the United States. Equity’s contribution to civil process is examined through an introduction to several of the modern defenses that may be asserted against civil claims—the principle of laches, and the defense of dirty hands. The remedial contributions of equity will be examined through an introduction to injunction and specific performance.
The cases that follow present distinct and specific application of equity. The first explores the notion of equity as a basis for the development of concepts of fiduciary duty in corporations. The second looks to the development of procedural rules, usually defenses to liability, derived from equity. And the third considers the contribution of equity to remedies, with a focus on injunction and specific performance.
For each of the cases areas covered below: (1) summarize the rule and its application; (2) describe the characteristics of the rule that make it equitable, and specifically what about the rule touches on issues of fairness; and (3) describe a set of facts that would clearly permit application of the rule.
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1. Equity and Substantive Rights-Obligations—Fiduciary Duty and the Corporation.
As we have seen from the readings, equity has been quite important for extending the reach of the courts beyond the limits of the writs and the forms of action recognized thereunder. There are a number of important substantive fields of law made possible through equity, and subject to equities sensibilities grounded in fairness. Among the more important is the principle of fiduciary duty. This has become the foundational principal for the operation of U.S. corporations. The case below is a classic and nicely introduces the idea of corporate fiduciary duty.
BAYER et al.
v.
BERAN et al.
49 N.Y.S.2d 2 (Supreme Court, New York County, New York, Special Term)
April 18, 1944
Opinion
SHIENTAG, Justice.
There derivative stockholders’ suits present for review two transactions upon which plaintiffs seek to charge the individual defendants, who are directors, with liability in favor of the corporate defendant, the Celanese Corporation of America. There are two causes of action alleging breach of fiduciary duty by the directors, one in connection with a program of radio advertising embarked upon by the corporation towards the end of 1941, and the other relating to certain payments of $30,000 a year made to Henri Dreyfus, one of its vice-presidents and a director, pursuant to a contract of employment entered into with him by the corporation. Before taking up the specific transactions complained of, I shall consider generally certain pertinent rules to be applied in determining the liability of directors of a business corporation such as is here involved.
Despite abuses that have developed in connection with the derivative stockholders’ suit, abuses which should be dealt with promptly and effectively, it must be remembered that such an action is, at present, the only civil remedy that stockholders have for breach of fiduciary duty on the part of those entrusted with the management and direction of their corporations. We cannot therefore allow the prevailing mood of justifiable dissatisfaction with some of the temporary incidents of such suits to cause us to lose sight of certain deep-rooted, traditional concepts of the obligations of directors to their corporation and its stockholders.
Directors of a business corporation are not trustees and are not held to strict accountability as such. Nevertheless, their obligations are analogous to those of trustees. Directors are agents; they are fiduciaries. The fiduciary has two paramount obligations: responsibility and loyalty. Those obligations apply with equal force to the humblest agent or broker and to the director of a great and powerful corporation. They lie at the very foundation of our whole system of free private enterprise and are as fresh and significant today as when they were formulated decades ago. The responsibility—that is, the care and the diligence—required of an agent or of a fiduciary, is proportioned to the occasion. It is a concept that has, and necessarily so, a wide penumbra of meaning—a concept, however, which becomes sharpened in its practical application to the given facts of a situation.
The concept of loyalty, of constant, unqualified fidelity, has a definite and precise meaning. The fiduciary must subordinate his individual and private interests to his duty to the corporation whenever the two conflict. Winter v. Anderson, 242 App.Div. 430, 275 N.Y.S. 373. In an address delivered in 1934, Mr. Justice, now Chief Justice, Stone declared that the fiduciary principle of undivided loyalty was, in effect, ‘the precept as old as Holy Writ, that ‘a man cannot serve two masters’. More than a century ago equity gave a hospitable reception to that principle and the common law was not slow to follow in giving it recognition. No thinking man can believe that an economy built upon a business foundation can long endure without loyalty to that principle’. He went on to say that ‘The separation of ownership from management, the development of the corporate structure so as to vest in small groups control of resources of great numbers of small and uninformed investors, make imperative a fresh and active devotion to that principle if the modern world of business is to perform its proper function’. Stone, The Public Influence of the Bar, 48 Harvard Law Review 1, 8.
A director is not an insurer. On the one hand, he is not called upon to use an extraordinary degree of care and prudence; and on the other hand it is established by the cases that it is not enough for a director to be honest, that fraud is not the orbit of his liability. The director may not act as a dummy or a figurehead. He is called upon to use care, to exercise judgment, the decree of care, the kind of judgment that one would give in similar situations to the conduct of his own affairs. . . .
The director of a business corporation is given a wide latitude of action. The law does not seek to deprive him of initiative and daring and vision. Business has its adventures, its bold adventures; and those who in good faith, and in the interests of the corporation they serve, embark upon them, are not to be penalized if failure, rather than success, results from their efforts. The law will not permit a course of conduct by directors, which would be applauded if it succeeded, to be condemned with a riot of adjectives simply because it failed. Directors of a commercial corporation may take chances, the same kind of chances that a man would take in his own business. Because they are given this wide latitude, the law will not hold directors liable for honest errors, for mistakes of judgment. The law will not interfere with the internal affairs of a corporation so long as it is managed by its directors pursuant to a free, honest exercise of judgment uninfluenced by personal, or by any considerations other than the welfare of the corporation.
To encourage freedom of action on the part of directors, or to put it another way, to discourage interference with the exercise of their free and independent judgment, there has grown up what is known as the ‘business judgment rule’. Gamble v. Queens County Water Co., 123 N.Y. 91, 99, 25 N.E. 201, 202, 9 L.R.A. 527; . . . . ‘Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.’ Pollitz v. Wabash R. Co., 207 N.Y. 113, 124, 100 N.E. 721, 724. Indeed, although the concept of ‘responsibility’ is firmly fixed in the law, it is only in a most unusual and extraordinary case that directors are held liable for negligence in the absence of fraud, or improper motive, or personal interest.
The ‘business judgment rule’, however, yields to the rule of undivided loyalty. This great rule of law is designed ‘to avoid the possibility of fraud and to avoid the temptation of self-interest.’ Conway, J., in Matter of Ryan’s Will, 291 N.Y. 376, 406, 52 N.E.2d 909, 923. It is ‘designed to obliterate all divided loyalties which may creep into a fiduciary relation * * *.’ Thacher, J., in City Bank Farmers Trust Co. v. Cannon, 291 N.Y. 125, 132, 51 N.E.2d 674, 676. ‘Included within its scope is every situation in which a trustee chooses to deal with another in such close relation with the trustee that possible advantage to such other person might influence, consciously or unconsciously, the judgment of the trustee * * *.’ Lehman, Ch. J., in Albright v. Jefferson County National Bank, 292 N.Y. 31, 39, 53 N.E.2d 753, 756. The dealings of a director with the corporation for which he is the fiduciary are therefore viewed ‘with jealousy by the courts.’ Globe Woolen Co. v. Utica Gas & Electric Co., 224 N.Y. 483, 121 N.E. 378, 380. Such personal transactions of directors with their corporations, such transactions as may tend to produce a conflict between self-interest *7 and fiduciary obligation, are, when challenged, examined with the most scrupulous care, and if there is any evidence of improvidence or oppression, any indication of unfairness or undue advantage, the transactions will be voided. Sage v. Culver, 147 N.Y. 241, 247, 41 N.E. 513, 514. See also Everett v. Phillips, 288 N.Y. 227, 43 N.E.2d 18; Gerdes v. Reynolds, 281 N.Y. 180, 22 N.E.2d 331. ‘Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation are challenged the burden is on the director not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.’ Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 245, 84 L.Ed. 281.
While there is a high moral purpose implicit in this transcendent fiduciary principle of undivided loyalty, it has back of it a profound understanding of human nature and of its frailties. It actually accomplishes a practical, beneficent purpose. It tends to prevent a clouded conception of fidelity that blurs the vision. It preserves the free exercise of judgment uncontaminated by the dross of divided allegiance or self-interest. It prevents the operation of an influence that may be indirect but that is all the more potent for that reason. The law has set its face firmly against undermining ‘the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions.’ Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546, 62 A.L.R. 1.
The first, or ‘advertising’, cause of action charges the directors with negligence, waste and improvidence in embarking the corporation upon a radio advertising program beginning in 1942 and costing about $1,000,000 a year. It is further charged that they were negligent in selecting the type of program and in renewing the radio contract for 1943. More serious than these allegations is the charge that the directors were motivated by a noncorporate purpose in causing the radio program to be undertaken and in expending large sums of money therefor. It is claimed that this radio advertising was for the benefit of Miss Jean Tennyson, one of the singers on the program, who in private life is Mrs. Camille Dreyfus, the wife of the president of the company and one of its directors; that it was undertaken to ‘further, foster and subsidize her career’; to ‘furnish a vehicle’ for her talents.
Eliminating for the moment the part played by Miss Tennyson in the radio advertising campaign, it is clear that the character of the advertising, the amount to be expended therefor, and the manner in which it should be used, are all matters of business judgment and rest peculiarly within the discretion of the board of directors. Under the authorities previously cited, it is not, generally speaking, the function of a court of equity to review these matters or even to consider them. Had the wife of the president of the company not been involved, the advertising cause of action could have been disposed of summarily. Her connection with the program, however, makes it necessary to go into the facts in some detail.
Before 1942 the company had not resorted to radio advertising. While it had never maintained a fixed advertising budget, the company had, through its advertising department, spent substantial sums of money for advertising purposes. In 1941, for example, the advertising expense was $683,000, as against net sales for that year of $62,277,000 and net profits (before taxes) of $13,972,000. The advertising was at all times directed towards the creation of a consumer preference which would compel or induce the various trade elements linking the corporation to the consumer to label the corporation’s products so that the consumer would know he was buying the material he wanted. The company had always claimed that its products, which it had called or labeled ‘Celanese’, were different from rayon, chemically and physically; that its products had qualities, special and unique, which made them superior to rayon. The company had never called or designated its products as rayon.
As far back as ten years ago, a radio program was considered, but it did not seem attractive. In 1937, the Federal Trade Commission promulgated a rule, the effect of which was to require all celanese products to be designated and labeled rayon. The name ‘Celanese’ could no longer be used alone. The products had to be called or labeled ‘rayon’ or ‘celanese rayon’. This gave the directors much concern. As one of them expressed it, ‘When we were compelled to put our product under the same umbrella with rayon rather than being left outside as a separate product, a thermo-plastic such as nylon is, we believed we were being treated in an unfair manner and that it was up to us, however, to do the best we could to circumvent the situation in which we found ourselves. * * * All manner of things were considered but there seemed only one thing we could do. We could either multiply our current advertising and our method of advertising in the same mediums we had been using, or we could go into radio’.
The directors, in considering the matter informally, but not collectively as a board, decided towards the end of 1941 to resort to the radio and to have the company go on the air with a dignified program of fine music, the kind of program which they felt would be in keeping with what they believed to be the beauty and superior quality of their products. The radio program was not adopted on the spur of the moment or at the whim of the directors. They acted after studies reported to them, made by the advertising department, beginning in 1939. A radio consultant was employed to advise as to time and station. An advertising agency of national repute was engaged to take charge of the formulation and production of the program. It was decided to expend about $1,000,000 a year, but the commitments were to be subject to cancellation every thirteen weeks, so that the maximum obligation of the company would be not more than $250,000.
So far, there is nothing on which to base any claim of breach of fiduciary duty. Some care, diligence and prudence were exercised by these directors before they committed the company to the radio program. It was for the directors to determine whether they would resort to radio advertising; it was for them to conclude how much to spend; it was for them to decide the kind of program they would use. It would be an unwarranted act of interference for any court to attempt to substitute its judgment on these points for that of the directors, honestly arrived at. The expenditure was not reckless or unconscionable. Indeed, it bore a fair relationship to the total amount of net sales and to the earnings of the company. The fact that the company had offers of more business than it could handle did not, in law, preclude advertising. Many corporations not now doing any business in their products because of emergency conditions advertise those products extensively in order to preserve the good will, the public interest, during the war period. The fact that the company’s product may not now be identifiable did not bar advertising calculated to induce consumer demand for such identification. That a program of classical and semiclassical music was selected, rather than a variety program, or a news commentator program, furnishes no ground for legal complaint. True, variety programs have a wider popular appeal than do musicals, but it would be a very sad thing if the former were the only kind of radio programs to be used. Some of the largest industrial concerns in the country have recognized this and have maintained fine musical programs on the radio for many years.
Now we have to take up an unfortunate incident, one which cannot be viewed with the complacency displayed by some of the directors of the company. This is not a closely held family corporation. The Doctors Dreyfus and their families own about 135,000 shares of common stock, the other directors about 10,000 shares out of a total outstanding issue of 1,376,500 shares. Some of these other directors were originally employed by Dr. Camille Dreyfus, the president of the company. His wife, to whom he has been married for about twelve years, is known professionally as Miss Jean Tennyson and is a singer of wide experience.
Dr. Dreyfus, as was natural, consulted his wife about the proposed radio program; he also asked the advertising agency, that had been retained, to confer with her about it. She suggested the names of the artists, all stars of the Metropolitan Opera Company, and the name of the conductor, prominent in his field. She also offered her own services as a paid artist. All of her suggestions as to personnel were adopted by the advertising agency. While the record shows Miss Tennyson to be a competent singer, there is nothing to indicate that she was indispensable or essential to the success of the program. She received $500 an evening. It would be far-fetched to suggest that the directors caused the company to incur large expenditures for radio advertising to enable the president’s wife to make $24,000 in 1942 and $20,500 in 1943.
Of course it is not improper to appoint relatives of officers or directors to responsible positions in a company. But where a close relative of the chief executive officer of a corporation, and one of its dominant directors, takes a position closely associated with a new and expensive field of activity, the motives of the directors are likely to be questioned. The board would be placed in a position where selfish, personal interests might be in conflict with the duty it owed to the corporation. That being so, the entire transaction, if challenged in the courts, must be subjected to the most rigorous scrutiny to determine whether the action of the directors was intended or calculated ‘to subserve some outside purpose, regardless of the consequences to the company, and in a manner inconsistent with its interests.’ Gamble v. Queens County Water Co., 123 N.Y. 91, 99, 25 N.E. 201, 202, 9 L.R.A. 527; Pollitz v. Wabash R. Co., 207 N.Y. 113, 124, 100 N.E. 721, 723.
After such careful scrutiny I have concluded that, up to the present, there has been no breach of fiduciary duty on the part of the directors. The president undoubtedly knew that his wife might be one of the paid artists on the program. The other directors did not know this until they had approved the campaign of radio advertising and the general type of radio program. The evidence fails to show that the program was designed to foster or subsidize ‘the career of Miss Tennyson as an artist’ or to ‘furnish a vehicle for her talents’. That her participation in the program may have enhanced her prestige as a singer is no ground for subjecting the directors to liability, as long as the advertising served a legitimate and a useful corporate purpose and the company received the full benefit thereof.
The musical quality of ‘Celanese Hour’ has not been challenged, nor does the record contain anything reflecting on Miss Tennyson’s competence as an artist. There is nothing in the testimony to show that some other soprano would have enhanced the artistic quality of the program or its advertising appeal. There is no suggestion that the present program is inefficient or that its cost is disproportionate to what a program of that character reasonably entails. Miss Tennyson’s contract with the advertising agency retained by the directors was on a standard form, negotiated through her professional agent. Her compensation, as well as that of the other artists, was in conformity with that paid for comparable work. She received less than any of the other artists on the program. Although she appeared with a greater regularity than any other singer, she received no undue prominence, no special build-up. Indeed, all of the artists were subordinated to the advertisement of the company and of its products. The company was featured. It appears also that the popularity of the program has increased since it was inaugurated.
It is clear, therefore, that the directors have not been guilty of any breach of fiduciary duty, in embarking upon the program of radio advertising and in renewing it. It is unfortunate that they have allowed themselves to be placed in a position where their motives concerning future decisions on radio advertising may be impugned. The free mind should be ever jealous of its freedom. ‘Power of control carries with it a trust or duty to exercise that power faithfully to promote the corporate interests, and the courts of this State will insist upon scrupulous performance of that duty.’ Lehman, Ch. J., in Everett v. Phillips, 288 N.Y. 227, 232, 43 N.E.2d 18, 19. Thus far, that duty has been performed and with noteworthy success. The corporation has not, up to the present time, been wronged by the radio advertising attacked in the complaints.
It is urged that the expenditures were illegal because the radio advertising program was not taken up at any formal meeting of the board of directors, and no resolution approving it was adopted by the board or by the executive committee. The general rule is that directors acting separately and not collectively as a board cannot bind the corporation. There are two reasons for this: first, that collective procedure is necessary in order that action may be deliberately taken after an opportunity for discussion and an interchange of views; and second, that directors are the agents of the stockholders and are given by law no power to act except as a board. Gerard v. Empire Square Realty Co., 195 App.Div. 244, 187 N.Y.S. 306; Knapp v. Rochester Dog Protective Ass’n, 235 App.Div. 436, 257 N.Y.S. 356. Liability may not, however, be imposed on directors because they failed to approve the radio program by resolution at a board meeting.
It is desirable to follow the regular procedure, prescribed by law, which is something more than what has, at times, thoughtlessly been termed red tape. Long experience has demonstrated the necessity for doing this in order to safeguard the interests of all concerned, particularly where, as here, the company has over 1,375,000 shares outstanding in the hands of the public, of which about 10% are held by the officers and directors.
But the failure to observe the formal requirements is by no means fatal. . . . The directorate of this company is composed largely of its executive officers. It is a close, working directorate. Its members are in daily association with one another and their full time is devoted to the business of the company with which they have been connected for many years. In this respect it differs from the boards of many corporations of comparable size, where the directorate is made up of men of varied interests who meet only at stated, and somewhat infrequent, intervals.
The same informal practice followed in this transaction had been the customary procedure of the directors in acting on corporate projects of equal and greater magnitude. All of the members of the executive committee were available for daily consultation and they discussed and approved the plan for radio advertising. While a greater degree of formality should undoubtedly be exercised in the future, it is only just and proper to point out that these directors, with all their loose procedure, have done very well for the corporation. . . .
The expenditures for radio advertising, although made without resolution at a formal meeting of the board, were approved and authorized by the members individually, and may in no sense be considered to have been ultra vires. The resolution adopted by the board on July 6, 1943, with all of the directors present, except two who were resident in England, while expressly ratifying only the renewal of the broadcasting contract, may be deemed a ratification of all prior action taken in connection with the radio advertising. When this resolution was adopted, the Celanese Hour had been on the air to the knowledge of all the directors for eighteen months. Moreover, acceptance and retention of the benefits of the radio advertising, with full knowledge thereof, was as complete a ratification as would have resulted from any formal all-inclusive resolution. Young v. United States Mortgage & Trust Co., 214 N.Y. 279, 285, 108 N.E. 418, 420; Bussing v. Lowell Film Prod., Inc., 233 App.Div. 493, 494, 253 N.Y.S. 719, 720, 721, affirmed 259 N.Y. 593, 182 N.E. 194.
* * * * * *
On the entire case, the directors acted in the free exercise of their honest business judgment and their conduct in the transactions challenged did not constitute negligence, waste or improvidence. The complaint is accordingly dismissed on the merits. The plaintiffs are granted appropriate exceptions. Settle judgment in accordance with the foregoing decision.
Questions:
1. Can you describe the concept of fiduciary duty at issue in the case? What is the legal standard the court announces? To whom does it apply? Under what circumstances? Does it apply to all actors in a corporation—managers, employees, borad of directors? How would you justify its application?
2. The court suggests that fiduciary duty is an absolute principle but its application is strongly subject to the facts and circumstances of the case. What was the conduct that gave rise to the claim that the directors violated their duty to the company?
3. How does the concept of fiduciary duty relate to the notion of justice in the Institutes? What are the sources of the duty? What does the concept of fiduciary duty tell you about the character of equity?
4. Consider again the Apparel Mart problem of Chapter 1. To what extent do the values inherent in fiduciary duty play a role in determining the liability of any of the entities involved in the problem?
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2. Equity and Defenses in Civil Actions—Unclean or Dirty Hands
The essence of an equity defense requires a balancing of the conduct of the respective litigants. A fundamental principle applied by courts considering the assertion of an equitable defense to a claim is that “he who comes into equity must come with clean hands.” Precision Instrument Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806, 814, 65 S.Ct. 993, 89 L.Ed. 1381 (1945). The principle is connected to basic notions of fairness that are central to equity.
We have treated the equitable defense of laches earlier in the chapter. Sometimes connected to laches defenses is the defense of unclean hands, another equitable defense, also requires a court to weigh the effects of the conduct of the parties and determine the extent to which that conduct might make the prosecution of the case unfair. What policies might be involved in the argument over the applicability of laches in the case that follows? To what extent is the case about laches or unclean hands? Are the facts required to be raised to support such claims related and if so in what ways? Unclean hands, like laches, require a court to consider the conduct of the parties, and to determine the effect of bad conduct on the assertion of claims. The doctrine has found broad application, not merely in the context of traditional civil cases between private individuals, but also with respect to new statutory causes of action. Consider the importance of unclean hands in the case that follows:
James DUNLOP–McCULLEN,
v.
LOCAL 1–S, AFL–CIO–CLC; et al.
149 F.3d 85 (2nd Cir, 1998)
Opinion
PARKER, Circuit Judge.
James Dunlop–McCullen, pro se, appeals from a judgment of the United States District Court for the Southern District of New York (Peter K. Leisure, Judge ) denying him leave to file a verified complaint pursuant to 29 U.S.C. § 501(b). We vacate the judgment and remand to the district court for proceedings consistent with this opinion.
I. BACKGROUND
On January 13, 1997, Dunlop–McCullen sought leave to file verified complaint pursuant to § 501(b) of the Labor–Management Reporting and Disclosure Act (“LMRDA”) of 1959, 29 U.S.C. § 501(b), against Local 1–S, AFL–CIO–CLC (the “Union” or the “Local”) and seven union officials: . . . (collectively “Defendants”). In his application to the district court, Dunlop–McCullen, chairperson of the Union's Executive Board, contended that defendants had breached their fiduciary duties by wastefully and improperly spending the Union's money, and that his formal complaint within the Union about these breaches had remained unresolved after four months. Plaintiff sought an accounting, compensatory damages and various other equitable relief.
On March 7, 1997, Magistrate Judge Douglas F. Eaton, to whom the case had been referred, issued a Report and Recommendation (“Report”) advising that Dunlop–McCullen be denied leave to file the verified complaint because “the plaintiff himself has wasted union funds, and therefore lacks the clean hands necessary for a plaintiff to pursue an equitable action” of an accounting. Report at 1. Judge Eaton pointed to the fact that Dunlop–McCullen had brought a prior pro se action against the union and two of the same officials sued in the instant action (Pascarella and Samuels), which the district court dismissed by summary judgment in favor of the defendants. Judge Eaton stated that in the prior case “the union mailed [Dunlop–McCullen's] campaign literature at a cost of $1,601.50” and after his unsuccessful campaign for union officer he “avoided paying this [campaign] debt [to the Union] by filing [for] personal bankruptcy.” Report at 2. Furthermore, Judge Eaton noted that this Court had affirmed the grant of summary judgment in the previous case and taxed appellate costs in favor of the union in the amount of $1,037.76, which “[a]s far as [he could] tell, plaintiff ha[d] not paid.” Report at 2. As a result, Judge Eaton found:
[P]laintiff has not shown a reasonable likelihood of success, because he lacks the clean hands which a court of equity requires for a plaintiff to pursue an action for an accounting. As noted above, he has cost the union $1,601.50, plus $1,037.76, plus thousands of dollars in legal fees. If his allegations had any merit, there should be a plaintiff who could come to the court of equity with clean hands, and whose past conduct would give some assurance that he or she truly represented the interests of the union members.
Report at 3. . . .
On March 28, 1997, Dunlop–McCullen filed a verified objection to the Report. . . .
In a memorandum order, Judge Leisure made a de novo determination, as required by 28 U.S.C. § 636(b)(1). He determined that the Report was “legally correct and proper.” Dunlop–McCullen v. Local 1–S, AFL–CIO–CLC, No. 97 Civ. 0195, 1997 WL 272396, at (S.D.N.Y. May 21, 1997). The district court held that Dunlop–McCullen's objections to the Report were “not relevant to the question whether leave should be granted to file the instant action.” Id. The court found that the Report permissibly relied upon the decision in Dunlop–McCullen's previous case “only to the extent of its finding that plaintiff had filed for personal bankruptcy in order to avoid paying a debt to the Union and that plaintiff had caused the Union to incur legal fees (including the costs of an appeal ... which he apparently never paid).” Id. Further, the district court found that the defendants' unclean hands were “not relevant to the question whether plaintiff lacks unclean hands.” Id. The district court quoted the Report in calling for a plaintiff in this case (as opposed to Dunlop–McCullen) whose “past conduct would give some assurance that he or she truly represented the interests of the union members.” Id. (quoting Report at 3). Moreover, the district court found that the Report did not unfairly “prejudge” plaintiff's case because the district court was “statutorily required to render an evaluation of the case” and “in light of the equitable doctrine of unclean hands and its effect on plaintiff's likelihood of success'—plaintiff's objections [were] not persuasive.” Id. at *2. Finally, the district court refused to reach the issue of the Union attorney's conflict of interest finding that the issue was moot because Dunlop–McCullen was denied leave to serve his complaint. Id. On June 24, 1997, judgment was entered pursuant to the district court's order. Dunlop–McCullen filed a timely notice of appeal.
II. DISCUSSION
On appeal, Dunlop–McCullen contends that the district court erred in determining that he had unclean hands barring him from suing under § 501(b). . . .
Defendants counter that the district court was correct in finding that Dunlop–McCullen has unclean hands precluding his suit under § 501(b). . . .
A. Unclean Hands and Section 501(b) of the LMRDA
We review de novo the district court's denial of leave to file a complaint under section 501(b) as a matter of law. See Lopresti v. Terwilliger, 126 F.3d 34, 39 (2d Cir.1997) (finding, generally, that questions of law are reviewed de novo ). Section 501(b) provides in relevant part:
When any officer, agent, shop steward, or representative of any labor organization is alleged to have violated the duties declared in subsection (a) of this section and the labor organization or its governing board or officers refuse or fail to sue or recover damages or secure an accounting or other appropriate relief within a reasonable time after being requested to do so by any member of the labor organization, such member may sue such officer, agent, shop steward, or representative in any district court of the United States or in any State court of competent jurisdiction to recover damages or secure an accounting or other appropriate relief for the benefit of the labor organization. No such proceeding shall be brought except upon leave of the court obtained upon verified application and for good cause shown, which application may be made ex parte.
29 U.S.C. 501(b). Subsection (a) provides that union officials have a general fiduciary duty to the union.1
This Court has found that the “good cause” required for leave to sue under § 501(b) serves two policies: “[1] supervision of union officials in the exercise of their fiduciary obligations and [2] protection, through a preliminary screening mechanism, of the internal operation of unions against unjustified interference or harassment.” Dinko v. Wall, 531 F.2d 68, 75 (2d Cir.1976). Accordingly, we have construed “good cause” in § 501(b) “to mean that plaintiff must show a reasonable likelihood of success and, with regard to any material facts he alleges, must have a reasonable ground for belief in their existence.” Id.2
In this case, we must determine whether the district court, in determining plaintiff's “reasonable likelihood of success,” properly anticipated the equitable defense of “unclean hands” based on costs that defendants incurred in defending a prior lawsuit brought by the same plaintiff. As a preliminary matter, we agree with the district court that unclean hands may be a basis for determining a plaintiff's “reasonable likelihood of success” under section 501(b). . . . In our view, if a district court determines that a plaintiff seeking leave to file a complaint under § 501(b) will likely be faced with the equitable defense of unclean hands, then the district court may factor this determination into its decision upon the plaintiff's reasonable likelihood of success. Therefore, we think that a determination of a plaintiff's unclean hands is an appropriate factor—though not necessarily a dispositive one—to be used when deciding whether to grant a plaintiff leave to file a complaint under section 501(b).
Thus, we must determine whether Dunlop–McCullen's failure to pay costs taxed against him in his prior action against the Union constitutes unclean hands. The doctrine of unclean hands is based on the principle that “since equity tries to enforce good faith in defendants, it no less stringently demands the same good faith from the plaintiff.” 11A Charles Alan Wright, Arthur R. Miller, Mary Kay Kane, Federal Practice and Procedure: Civil 2d § 2946, at 108 (1995) (quotation marks and citation omitted). We have held, however, that “[m]isconduct ... unrelated to the claim to which it is asserted as a defense, does not constitute unclean hands.”A.H. Emery Co. v. Marcan Prods. Corp., 389 F.2d 11, 18 (2d Cir.1968) (quotations and citations omitted). Moreover, “while equity does not demand that its suitors shall have led blameless lives, as to other matters, it does require that they shall have acted fairly and without fraud or deceit as to the controversy in issue.” Precision Instrument Mfg. Co. v. Automotive Maint. Mach. Co., 324 U.S. 806, 814–15, 65 S.Ct. 993, 89 L.Ed. 1381 (1945) (quotation marks and citation omitted); see also Warner Bros. Inc. v. Gay Toys, Inc., 724 F.2d 327, 334 (2d Cir.1983) (“[T]he defense of unclean hands applies only with respect to the right in suit.”). Further, “[t]he unclean hands defense is not an automatic or absolute bar to relief; it is only one of the factors the court must consider when deciding whether to exercise its discretion and grant an injunction.” 11A Wright, Miller, Kane, Federal Practice and Procedure: Civil 2d § 2946, at 111. “The doctrine of unclean hands also may be relaxed if defendant has been guilty of misconduct that is more unconscionable than that committed by plaintiff.” Id. § 2946, at 112.
One district court has held that a § 501(b) plaintiff's involvement in prior litigation is an insufficient ground for finding absence of good cause. See Woods v. Local No. 12 Sheet Metal Workers Int'l Ass'n, 438 F.Supp. 578, 581 (W.D.Pa.1977). Without invoking the doctrine of unclean hands explicitly, the defendants in Woods asserted that a plaintiff's prior LMRDA litigation, which was found meritless, precluded a finding of good cause under section 501(b). Because the plaintiffs had alleged colorable claims that dealt with issues different from those in the prior litigation, however, the court “deem[ed] it appropriate to grant plaintiffs access to [the] court.”Id. The outcome in Woods, however, while instructive, does not ultimately resolve the issues in this case because the court's conclusion in Woods did not employ this Court's heightened good cause requirements for § 501(b) cases. We agree with the court in Woods, however, that a plaintiff may not be denied leave to file a complaint under § 501(b) where plaintiff alleges issues different from those raised in a prior similar action dismissed on the merits. Therefore, Dunlop–McCullen's previous case against the Union that, as we discuss below, involved substantially different allegations, should not act as a bar to proceeding here under § 501(b).
B. The Impact of Dunlop–McCullen's Previous Cases
On February 24, 1994, Dunlop–McCullen filed a pro se complaint (the “1994 Complaint”) in the district court against the Union, two of the individual defendants in this action, and the Retail Wholesale and Department Store Union AFL–CIO (the “International”). . . . His complaint contained several causes of action including violations of § 301 of the National Labor Relations Act, 29 U.S.C. § 185, and various sections of LMRDA, 29 U.S.C. §§ 411, 501(b), & 529. Dunlop–McCullen, 1996 WL 3940, at *1.
The 1994 Complaint was based on the following facts. In September 1992, Dunlop–McCullen became a candidate for Executive Vice–President of the Union. *91 1996 WL 3940, at *1. Pursuant to Department of Labor rules, he was entitled, at his own expense, to have the union mail his campaign literature. Id. On December 21, 1992, he was billed $1601.50, the amount the Union incurred from his election mailing. Id. Dunlop–McCullen lost the election.
In April 1993, Dunlop–McCullen filed for bankruptcy. On November 24, 1993, the Union commenced an adversary proceeding against Dunlop–McCullen, under § 523(a) of the Bankruptcy Code (the “Code”), objecting to the discharge of the debt owed by him to the Union under §§ 727(a)(4)(A) and (D) of the Code. See In re Dunlop–McCullen, No. 1–93–12859–352, at 1 (Bankr.E.D.N.Y. July 31, 1995) (hereinafter “Order Dismissing Adversary Proceeding”). Dunlop–McCullen counterclaimed alleging that the Union violated the automatic stay provisions of § 362(a) of the Code and moved to dismiss the adversary proceeding. Id. at 1–2.
In September 1993, Dunlop–McCullen was elected the Queens Chairperson, entitled to sit on the Executive Board (the “Board”) of the Union. Dunlop–McCullen, 1996 WL 3940, at *1. On September 23, 1993, the Board voted to void Dunlop–McCullen's election because, according to the Union Constitution, he was ineligible to be elected officer. Id. To be eligible for any Union office, members have to be in continuous good standing for twelve months prior to being nominated for elective office. Id. at *2. According to the Union, in January 1993, Dunlop–McCullen ceased to be a member in good standing when he failed to pay the Union for mailing his 1992 campaign literature. Id.
In the 1994 Complaint, he alleged that when the Board voided his 1992 election and removed him from office in September 1993, he was “disciplined” without a hearing required under LMRDA, 29 U.S.C. § 411(a)(5), 529, and under the Local and International Unions' Constitutions. Id. at *2. Secondarily, Dunlop–McCullen alleged that the Union failed to process his grievances fairly, circumvented its obligations under collective bargaining agreements, committed fraud in persuading members to accept a new collective bargaining agreement, libeled him, and violated his rights to free speech and due process. Finally, similar to the instant action, Dunlop–McCullen claimed that the Union breached its fiduciary duties by allowing the non-member daughter of Samuels, a union official, to make use of a car rented by Local 1–S for Samuels, in violation of 29 U.S.C. § 501(b).
Meanwhile, on July 26, 1994, the Bankruptcy Court held a trial to resolve the adversarial proceeding initiated by the Union and Dunlop–McCullen's counterclaims; both parties were represented by counsel. Almost a year later, on July 31, 1995, the bankruptcy court found from the evidence that “there was no false oath or account or withheld information such as would bar discharge” of the debt and that “Local 1–S was not fraudulently induced to incur the Debtor's debt to it within Section 523(a)(2)(A).” Order Dismissing Adversary Proceeding, at 2. Furthermore, the bankruptcy court held that “Local 1–S had willfully violated the automatic stay” provisions. Id. As a result, the bankruptcy court ordered the Union to pay Dunlop–McCullen $800 in punitive damages and fees and disbursements to his attorney under Section 362(h) for willful violation of the automatic stay. Id. at 3. There is no evidence that these sums have been paid to Dunlop–McCullen by the Union.
In a separate order, the bankruptcy court ordered “that Local 1–S will treat the Debtor as though he had been in good standing continuously for purposes of seniority, advancement, elective office, and any similar purpose” and that “Local 1–S will restore Debtor to his elected office as Chairman of the Macy's Queens Store for the remainder of the term for which he was elected” in 1992. In re Dunlop–McCullen, No. 1–93–12859–352, at 2 (E.D.N.Y. July 31, 1995) (hereinafter “Order Directing Remedial Relief”). Further, the bankruptcy court determined that Dunlop–McCullen “is now and has always been a member ... in good standing ... entitled to all the privileges ... attendant thereto, including his ... right to stand for future election.” Id. at 2. As a result, Dunlop–McCullen regained his position on Local 1–S's Executive Board—a position he still holds.
In the district court proceedings, also in late July 1995, defendants filed motions for summary judgment on all of Dunlop–McCullen's claims, which were granted on January 3, 1996. The district court held that under the LMRDA and the Union's Constitution “removal from office did not constitute discipline” requiring due process and that the Union's “good standing requirement” was not shown to be unreasonable or unevenly applied to Dunlop–McCullen. Dunlop–McCullen, 1996 WL 3940, at *2. In analyzing Dunlop–McCullen's second set of allegations individually, the district court found them each to be without merit. Lastly, the district court ruled that Dunlop–McCullen failed to adduce evidence sufficient “to show that plaintiff formally requested the Executive Board of Local 1–S to institute legal proceedings against Samuels.” Id. at *4. On February 22, 1996, judgment was entered dismissing the complaint in favor of defendants.
Dunlop–McCullen appealed to this Court, which affirmed the district court by summary order. Dunlop–McCullen v. Local 1–S RWDSU–AFL–CIO, No. 96–7104, 1996 WL 614814 (2d Cir. Oct. 25, 1996). On November 8, 1996, the International and the Local each submitted a separate statement of costs in the amounts of $1037.76 and $1063.83, respectively, but only one was filed. On January 10, 1997, however, the Clerk of this Court filed an amended order for bills of costs for the International and the Local in the amounts of $929.66 and $946.65, respectively. According to the records of the Clerk of the Court for the Southern District of New York, no satisfaction of judgment has been filed on either of these awards.
After analyzing Dunlop–McCullen's previous cases involving the Union, we find that the plaintiff does not have unclean hands which would bar him from obtaining leave to file a complaint under section 501(b) of the LMRDA. First, the magistrate judge's Report overstates the causal connection between Dunlop–McCullen's bankruptcy proceeding and his failure to pay his campaign debt to the Union. The district court in the previous case made no finding that Dunlop–McCullen filed for bankruptcy with the express and sole purpose of avoiding his debt to the Union. On the contrary, after a full trial on that very issue, in which the Union's interests were duly represented by counsel, the bankruptcy court found that Dunlop–McCullen was guilty of no wrongdoing that might disentitle him to a discharge of the debt. The bankruptcy court even went so far as to order that Dunlop–McCullen be reinstated to his elective office. We think that it would be inappropriate here to second-guess the bankruptcy court by reaching our own determination that Dunlop–McCullen was bent on wasting the Union's assets in declaring bankruptcy which discharged his debt to the Union. Therefore, we find that the outcome of Dunlop–McCullen's previous bankruptcy proceeding does not provide evidence of plaintiff's unclean hands which would prevent his “reasonable likelihood of success” in the instant § 501(b) proceeding.
In contrast, we think that a plaintiff's failure to pay an assessment of costs awarded to the Union (by prior order of this Court) in a previous case may be evidence of unclean hands where the plaintiff alleges that officers of the same Union wasted its assets in violation of 29 U.S.C. § 501(a). Nonetheless, the Union has outstanding debts to Dunlop–McCullen in the form of punitive damages and attorney's fees from the bankruptcy proceeding that roughly equal what Dunlop–McCullen owes the Union in costs from the appellate proceeding in the previous case. Plus, Dunlop–McCullen received his bankruptcy judgment against the Union in July 1995, more than a year before the Union received its judgment for appellate costs against him in November 1996. Thus, any evidence that Dunlop–McCullen “wasted the union's funds” in the amount taxed in appellate court costs should be counterbalanced by bankruptcy court damages and fees due to him from the Union. Further, Dunlop–McCullen is correct that because the International Union is not a party to the instant proceeding any costs awarded to it in the previous case have little bearing on our determination of his unclean hands vis a vis a new action against the Local Union.
As discussed above, in determining whether the doctrine of unclean hands bars an equitable remedy, courts are permitted to weigh the wrongdoing of the plaintiff against the wrongdoing of the defendant. 11A Charles Alan Wright, Arthur R. Miller, Mary Kay Kane, Federal Practice and Procedure: Civil 2d § 2946, at 112. Where, as here, the wrongful conduct of both the plaintiff and the defendants are remarkably similar in quality and extent, equity requires this Court to look to whether the defendants' wrongdoing alleged in the complaint is of a greater magnitude than the plaintiff's wrongdoing. Admittedly, more than a few of the claims that Dunlop–McCullen alleged are not actionable under § 501(b). For example, § 501(b) provides no basis for his claims regarding the “sweetheart” deal with Macy's or the improper tenure of Pizzingrillo as shop steward. See Gurton v. Arons, 339 F.2d 371, 375 (2d Cir.1964) (“[Section 501] applies to fiduciary responsibility with respect to the money and property of the union and ... it is not a catch-all provision [permitting suit] on any ground of misconduct.”). Dunlop–McCullen, however, has alleged claims that “centrally challenge [the] misuse of union ‘money and property.’ ” Guzman v. Bevona, 90 F.3d 641, 646 (2d Cir.1996) (quoting 29 U.S.C. § 501(a)). Especially in view of the fact that any wrongdoing attributable to the plaintiff is counter-balanced by that attributable to the defendants, the additional alleged misdeeds of defendants are sufficient to permit this litigation to proceed further. Therefore, Dunlop–McCullen should not be prevented from being granted leave to file suit under § 501(b) based on the unclean hands doctrine. Accordingly, we remand this case for further consideration by the district court consistent with this opinion.
III. CONCLUSION
We order that the judgment of the district court be vacated, and this case be remanded for further consideration consistent with this opinion.
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If the parties neither raise nor seek to prove unclean hands, may the court raise the issue itself during the course of the trial? That is an issue that presents itself in the next case we consider:
The LEILA CORPORATION OF ST. PETE, a Florida corporation; et al.
v.
Fareed OSSI and Ossi Consulting Engineers, Inc., a Florida corporation; et al.
138 So.3d 470 (District Court of Appeal of Florida, 2nd Dist.)
Jan. 17, 2014.Rehearing Denied March 5, 2014.
Opinion
ALTENBERND, Judge.
The Appellants, the Leila Corporation of St. Pete; Susan J. Agia, individually and as trustee of the Susan J. Agia Living Trust; and Dr. Raymond Agia, appeal a final judgment, which the Appellees, Fareed Ossi; Ossi Consulting Engineering, Inc.; and Ossi Construction, Inc., also appeal. The trial court entered a final judgment on numerous claims and counterclaims. It denied relief to all parties seeking affirmative relief on a theory that all claims were barred by the doctrine of unclean hands. We conclude that the trial court erred in deciding that the claims were all barred by this doctrine. We doubt that any of the claims are barred by this doctrine. Accordingly, we reverse the judgment on appeal and remand for further proceedings.
I. THE CONDOMINIUM DEVELOPMENT AND RESULTING LAWSUIT
The facts in this case are quite complex. The explanation of the facts in this opinion is intended to explain our holding; it may exclude details that would be important to the trial court in ultimately deciding the various claims on remand.
In 1976, Dr. Agia purchased undeveloped land in St. Pete Beach, Florida. In 1993, he transferred this land to an irrevocable trust, the beneficiaries of which were his two daughters. His wife Susan Agia was the trustee of this irrevocable trust. Despite this transfer, it appears that Dr. Agia may have maintained practical, if not legal, control over this property and over the decisions to develop the property.
Fareed Ossi worked with Dr. Agia beginning in the 1990s to develop this property. This working relationship was not adequately documented by written employment contracts or partnership agreements. Mr. Ossi prepared plans for a condominium development known as the Cabrillo Condominiums. Some of this work was performed by his corporation, Ossi Consulting Engineers, Inc.
In 2005, the Leila Corporation was formed to be the owner and developer of this property. The corporation purchased the land from the irrevocable trust for $5,850,000. Some of the money to purchase the land was borrowed from a bank by the Leila Corporation. The corporation apparently also gave a promissory note in the amount of $2,850,000 to the irrevocable trust to purchase the land. This loan was guaranteed by Mr. Ossi.
Dr. Agia had no ownership interest in the Leila Corporation. As a legal matter, it would appear that he had had no ownership of any part of this development after he transferred the land to the irrevocable trust in 1993. The Leila Corporation, as a stock corporation, was seventy-five percent owned by Susan Agia and twenty-five percent owned by Mr. Ossi. The two shareholders entered into a written shareholders' agreement. Mr. Ossi was president of the corporation and contributed an initial $125,000 to its capital. Susan Agia contributed $375,000 to its capital. Thus, their initial capital contributions aligned with their equity ownership in the corporation.
The Leila Corporation entered into a construction contract with Ossi Construction, Inc., which was owned by Robert Ossi, the son of Fareed Ossi, to construct the condominiums. That work was performed primarily in 2005 and 2006.
During the construction of the condominium, there allegedly was a need for additional capital contributions. Mr. Ossi did not or could not make his contributions, and Mrs. Agia advanced money in addition to her own contributions to cover the shortfall. When the units were ready to be sold, allegedly Dr. Agia and his wife purchased one of the units for fair market value and the other units were available for sale to the public. The timing of the completion of this condominium development unfortunately coalesced with a downturn in the real estate market. The result was a long list of disputes between and among these parties. Because Dr. Agia and Fareed Ossi seemingly had strong influence over their respective families, the litigation took on the appearance of a family feud between the Agias and the Ossis.
Without attempting to describe every claim in the lawsuit, Fareed Ossi sued to dissolve the corporation and obtain an accounting. He also sought damages of more than $500,000 from Dr. Agia and his wife. Ossi Consulting Engineers sought $322,050 from Dr. Agia for services allegedly rendered on an oral contract to provide construction administration services. Susan Agia sought damages against Fareed Ossi for the capital contributions that she made on his behalf. The Leila Corporation sought damages from Fareed Ossi both in his capacity as an officer of the corporation and for alleged professional negligence. The Leila Corporation also sought damages from Ossi Consulting Engineers for breach of the oral contract for construction administration and for professional negligence. Finally, Ossi Construction sued the Leila Corporation for the unpaid balance of the construction contract, and the Leila Corporation counterclaimed for damages arising from construction defects. By our count there were seven different legal parties seeking relief for, against, or among one another. Although the interests of each party seem distinct to this court and this dispute probably could have been severed into several separate lawsuits, it was tried with one law firm representing the parties associated with the Agia family and another law firm representing the parties associated with the Ossi family.
At the end of the nonjury trial, the trial court entered a final judgment denying relief to every party seeking relief based on a determination that all claims were barred by the doctrine of unclean hands arising from actions taken by Dr. Agia in connection with an automobile accident.
II. THE AUTOMOBILE ACCIDENT
In 2004, Dr. Agia was in an automobile accident. He apparently was at fault in the accident and someone died. He was concerned that his insurance coverage was inadequate and that he might have personal liability for the accident. He was sued as a result of the accident, but our record contains no information about the outcome of that case. Because of his concern, Dr. Agia was hesitant to have assets in his name alone that could be used to satisfy a judgment. Apparently, the decision to have the stock in the Leila Corporation owned by Susan Agia was influenced by Dr. Agia's concerns.
At the time the corporation was created, Dr. Agia had not been sued for the accident. It was only a possibility that a judgment might eventually be entered against him. No asset owned by Dr. Agia that could have been used to satisfy any future judgment was placed into the corporation. We do not know whether Dr. Agia owned the car involved in the accident, but if he owned it jointly with his wife, the stock of the Leila Corporation actually created an easy asset against which to collect a judgment.
Even if the corporate structure was created to permit Susan Agia to use funds in a jointly owned bank account to fund the construction of the condominiums, that plan would not appear to defraud creditors or to be unlawful in any manner.
III. THE DOCTRINE OF UNCLEAN HANDS CANNOT BAR ALL CLAIMS
We note that the doctrine of unclean hands was not raised as a defense to all claims, although it was raised in a generic fashion as a defense to a portion of the claims. The trial court seems to have gravitated toward this defense for all claims due to the amalgamated fashion in which the case was tried.
As explained in the preceding section, the steps taken by Dr. Agia do not seem to fall within any recognized concept of unclean hands. “It is a fundamental principle of equity that no one shall be permitted to profit from his own fraud or wrongdoing, and that one who seeks the aid of equity must do so with clean hands.” Yost v. Rieve Enters., Inc., 461 So.2d 178, 184 (Fla. 1st DCA 1984). “Unclean hands may be asserted by a defendant who claims that the plaintiff acted toward a third party with unclean hands with respect to the matter in litigation.” Quality Roof Servs., Inc. v. Intervest Nat'l Bank, 21 So.3d 883, 885 (Fla. 4th DCA 2009).
The pleadings contain no allegations, by any of the parties, that this corporate structure was in any way used with the intent of defrauding creditors. Nonetheless, the trial court determined that the parties participated in a plot to hide Dr. Agia's assets from a potential judgment creditor. The court deemed the plan “conceived in fraud” and dismissed all claims on the authority of Whitelock v. Geiger, 368 So.2d 372 (Fla. 3d DCA 1979). In Whitelock, contracting parties admitted to devising, participating in, or carrying out a fraudulent scheme intended to defraud creditors. Id. at 374. Here, despite the lack of similar evidence or party allegations of fraud, the court sua sponte found applicable the doctrine of unclean hands and determined that the parties “should be left to settle their dispute without the aid of the court.” The competent, substantial evidence presented at the nonjury trial does not support the findings necessary for this legal conclusion.
From a legal perspective, Dr. Agia actually has a very limited role in this lawsuit. He may be serving as an agent of one or more of the other parties, but he has no ownership interest in the development. The occurrence of the automobile accident, for example, should have no relevance to the claims between the Leila Corporation and Ossi Construction.
On remand, we leave it to the discretion of the trial court as to whether it can resolve these various claims on the current record or whether it needs any additional proceedings. Although the claims were tried in this collective fashion, given that none of the legal theories seem to involve all of the parties, it might be helpful for the trial court to create separate final judgments to resolve claims only between or among the parties affected by the particular claims.
Reversed and remanded.
DAVIS, C.J., and WALLACE, J., Concur.
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How much leeway does a party have to raise the defense of unclean hands. Is there a cut off point for asserting the defense? Must the defense relate directly to the conduct of the plaintiff against the party asserting the defense. These issues are considered in the following case:
QUALITY ROOF SERVICES, INC., Appellant,
v.
INTERVEST NATIONAL BANK, Appellee.
21 So.3d 883 (District Court of Appeal of Florida, 4th Dist.)
Oct. 28, 2009.
Opinion
PER CURIAM.
The appellant, Quality Roof Services, Inc. (“Quality Roof”), appeals the trial court's order denying Quality Roof's Amended Motion to Amend Answer to Plaintiff's Complaint and the resulting Order Granting Motion For Final Summary Judgment, For Entry of Final Judgment of Foreclosure of Apartment Complex and For Award of Attorneys' Fees and Costs, and the award of Partial Summary Judgment of Foreclosure of Apartment Complex. This court has jurisdiction. Fla. R.App. P. 9.030(b)(1)(A).
This appeal arises from a foreclosure action filed by Intervest against The Villas at Lauderhill, LLC, the owner of an uninhabitable, hurricane-damaged apartment complex (“the Villas”). Quality Roof is a roofing contractor that subcontracted to furnish materials, labor, and equipment for roofing, stucco, and other hurricane repairs for the Villas. Intervest is the lender which refinanced the Villas' pre-existing mortgage indebtedness. Intervest filed a first mortgage on the property and recorded on August 19, 2005. Quality Roof recorded a claim of lien against the Villas for unpaid invoices on July 25, 2007.
Intervest filed its foreclosure action on November 29, 2007. Quality Roof was joined as a defendant because of its recorded claim of lien. Quality Roof did not raise any affirmative defenses, nor did it cross-claim to enforce or foreclose its claim of lien. The Villas at Lauderhill, LLC, consented to final summary judgment and the sale of the property, and Intervest moved for final summary judgment on June 11, 2008. The hearing on the motion was scheduled for July 17, 2008. Quality Roof did not file any affidavits or other evidence in contravention of Intervest's summary judgment motion and supporting affidavits.
On July 3, 2008, Quality Roof moved to amend its answer and assert an affirmative defense of unclean hands against Intervest to prevent Intervest's foreclosure. Responding on July 14, 2008, Intervest claimed that the amendment would be futile and prejudicial. On July 16, 2008, the day before the hearing, Quality Roof served an amended motion to amend its answer, which elaborated its allegations of Intervest's unclean hands. In the amended motion to amend, Quality Roof alleged that Intervest failed to properly distribute insurance proceeds it had received from a hurricane damage insurance claim on the Villas; and but for Intervest's wrongful actions, the default would not have occurred and the property would not have been foreclosed upon.
On July 17, 2008, the trial court held a hearing on both Quality Roof's Motion to Amend and Intervest's motion for final summary judgment. In denying the Motion to Amend, the trial judge found that although allowing the amendment would not prejudice Intervest, the amendment would be futile in the context of the case as currently postured. We agree that Intervest would not be prejudiced, but disagree that allowing the amendment would be futile. We therefore reverse and remand.
A trial court's denial of a motion to amend is reviewed for abuse of discretion. See Noble v. Martin Mem'l Hosp. Ass'n, 710 So.2d 567, 568 (Fla. 4th DCA 1997). Florida Rule of Civil Procedure 1.190(e) states that “[a]t any time in furtherance of justice, upon such terms as may be just, the court may permit any process, proceeding, pleading, or record to be amended or material supplemental matter to be set forth in an amended or supplemental pleading.” A court “should be especially liberal when leave to amend is sought at or before a hearing on a motion for summary judgment.” Thompson v. Bank of New York,862 So.2d 768, 770 (Fla. 4th DCA 2003) (citation omitted); see also Montero v. Compugraphic Corp., 531 So.2d 1034, 1036 (Fla. 3d DCA 1988). In ruling on a motion for leave to amend, “all doubts should be resolved in favor of allowing an amendment, and the refusal to do so generally constitutes an abuse of discretion unless it clearly appears that allowing the amendment would prejudice the opposing party, the privilege to amend has been abused, or amendment would be futile.” Cason v. Fla. Parole Comm'n, 819 So.2d 1012, 1013 (Fla. 1st DCA 2002); see also Fields v. Klein, 946 So.2d 119, 121 (Fla. 4th DCA 2007); Thompson, 862 So.2d at 770. A proposed amendment is futile if it is insufficiently pled, id., or is “insufficient as a matter of law,” Burger King Corp. v. Weaver,169 F.3d 1310, 1320 (11th Cir.1999).
Although the unclean hands defense may be asserted in foreclosure cases when the parties are in privity, see, e.g.,Knight Energy Servs., Inc. v. Amoco Oil Co., 660 So.2d 786, 789 (Fla. 4th DCA 1995); Lamb v. Pike, 659 So.2d 1385, 1387 (Fla. 3d DCA 1995), privity is not an essential element of the equitable defense. Unclean hands may be asserted by a defendant who claims that the plaintiff acted toward a third party with unclean hands with respect to the matter in litigation. . . . .
Here, the trial court should have allowed Quality Roof to assert its affirmative defense of unclean hands. The affirmative defense was sufficiently pled and, as a matter of law, is sufficient to be able to prevent a foreclosure. Based on Quality Roof's allegations that the default and foreclosure would not have occurred but for Intervest's unclean hands, Quality Roof need not be in privity with Intervest to assert its affirmative defense. We note, however, that unclean hands may not be used in this case to subordinate Intervest's mortgage to Quality Roof's lien. Indeed, at oral argument, counsel for Quality Roof conceded that Quality Roof did not seek to have its lien become superior to Intervest's mortgage. Therefore, on remand, the trial *886 court should allow Quality Roof to assert its affirmative defense of unclean hands.
Reversed and remanded.
POLEN, STEVENSON and GERBER, JJ., concur.
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Questions:
1. To what extent are the notions of fairness connected to Justinian’s Institutes idea of justice? What are the sources used to determine whether actions point to “unclean” hands?
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3. Equity and Remedies—Injunction and specific performance.
Recall the readings from Chapter 3. One of the principal characteristics of common law is the quite limited palette of remedies available to compensate for liability Justice Holmes reminded us of one explanation—the move from vengeance and the delivery of the offending object or person, to the payment of compensation for loss. Since all common law breaches involved loss, the premise is that such loss might be compensated by the receipt of money. But such a limited range of remedies was not always satisfactory. And equity developed two powerful additional remedial forms. The first—injunction—essentially gave the court the power to order a party to do or refrain from doing something connected intimately to the litigation. The injunctive power has become an extraordinarily powerful tool of courts in the management of the resolution of disputes. And it has become an essential tool for disputes in a modern regulatory state. The other, specific performance, was developed in recognition of the premise that it is sometimes unfair for a party to stand on a contract, or on the ability to avoid it, and by so doing take advantage unfairly of a situation to would require only the payment of compensation.
The cases that follow serve to illustrate the rules and the process through which courts might avail themselves of, and litigants seek exercise of, a judicial power to do equity in a remedial context.
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Injunction:
WALGREEN COMPANY,
v.
SARA CREEK PROPERTY COMPANY, B.V., a/k/a Sara Creek Beta, and Phar–Mor Corporation,.
966 F.2d 273 (7th Cir., 1992)
Opinion
POSNER, Circuit Judge.
This appeal from the grant of a permanent injunction raises fundamental issues concerning the propriety of injunctive relief 775 F.Supp. 1192 (E.D.Wis.1991). The essential facts are simple. Walgreen has operated a pharmacy in the Southgate Mall in Milwaukee since its opening in 1951. Its current lease, signed in 1971 and carrying a 30–year, 6–month term, contains, as had the only previous lease, a clause in which the landlord, Sara Creek, promises not to lease space in the mall to anyone else who wants to operate a pharmacy or a store containing a pharmacy. Such an exclusivity clause, common in shopping-center leases, is occasionally challenged on antitrust grounds, Milton Handler & Daniel E. Lazaroff, “Restraint of Trade and the Restatement (Second) of Contracts,” 57 N.Y.U.L.Rev. 669, 683–708 (1982); Note, “The Antitrust Implications of Restrictive Covenants in Shopping Center Leases,” 86 Harv.L.Rev. 1201 (1973)—implausibly enough, given the competition among malls; but that is an issue for another day, since in this appeal Sara Creek does not press the objection it made below to the clause on antitrust grounds.
In 1990, fearful that its largest tenant—what in real estate parlance is called the “anchor tenant”—having gone broke was about to close its store, Sara Creek informed Walgreen that it intended to buy out the anchor tenant and install in its place a discount store operated by Phar–Mor Corporation, a “deep discount” chain, rather than, like Walgreen, just a “discount” chain. Phar–Mor's store would occupy 100,000 square feet, of which 12,000 would be occupied by a pharmacy the same size as Walgreen's. The entrances to the two stores would be within a couple of hundred feet of each other.
Walgreen filed this diversity suit for breach of contract against Sara Creek and Phar–Mor and asked for an injunction against Sara Creek's letting the anchor premises to Phar–Mor. After an evidentiary hearing, the judge found a breach of Walgreen's lease and entered a permanent injunction against Sara Creek's letting the anchor tenant premises to Phar–Mor until the expiration of Walgreen's lease. He did this over the defendants' objection that Walgreen had failed to show that its remedy at law—damages—for the breach of the exclusivity clause was inadequate. Sara Creek had put on an expert witness who testified that Walgreen's damages could be readily estimated, and Walgreen had countered with evidence from its employees that its damages would be very difficult to compute, among other reasons because they included intangibles such as loss of goodwill.
Sara Creek reminds us that damages are the norm in breach of contract as in other cases. Many breaches, it points out, are “efficient” in the sense that they allow resources to be moved into a more valuable use. Patton v. Mid–Continent Systems, Inc., 841 F.2d 742, 750–51 (7th Cir.1988). Perhaps this is one—the value of Phar–Mor's occupancy of the anchor premises may exceed the cost to Walgreen of facing increased competition. If so, society will be better off if Walgreen is paid its damages, equal to that cost, and Phar–Mor is allowed to move in rather than being kept out by an injunction. That is why injunctions are not granted as a matter of course, but only when the plaintiff's damages remedy is inadequate. Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265, 279 (7th Cir.1986). Walgreen's is not, Sara Creek argues; the projection of business losses due to increased competition is a routine exercise in calculation. Damages representing either the present value of lost future profits or (what should be the equivalent, Carusos v. Briarcliff, Inc., 76 Ga.App. 346, 351–52, 45 S.E.2d 802, 806–07 (1947)) the diminution in the value of the leasehold have either been awarded or deemed the proper remedy in a number of reported cases for breach of an exclusivity clause in a shopping-center lease. . . . . Why, Sara Creek asks, should they not be adequate here?
Sara Creek makes a beguiling argument that contains much truth, but we do not think it should carry the day. For if, as just noted, damages have been awarded in some cases of breach of an exclusivity clause in a shopping-center lease, injunctions have been issued in others. . . . . The choice between remedies requires a balancing of the costs and benefits of the alternatives. Hecht Co. v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 591, 88 L.Ed. 754 (1944); Yakus v. United States, 321 U.S. 414, 440, 64 S.Ct. 660, 674, 88 L.Ed. 834 (1944). The task of striking the balance is for the trial judge, subject to deferential appellate review in recognition of its particularistic, judgmental, fact-bound character. K–Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 915 (1st Cir.1989). As we said in an appeal from a grant of a preliminary injunction—but the point is applicable to review of a permanent injunction as well—“The question for us [appellate judges] is whether the [district] judge exceeded the bounds of permissible choice in the circumstances, not what we would have done if we had been in his shoes.”Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 390 (7th Cir.1984).
The plaintiff who seeks an injunction has the burden of persuasion—damages are the norm, so the plaintiff must show why his case is abnormal. But when, as in this case, the issue is whether to grant a permanent injunction, not whether to grant a temporary one, the burden is to show that damages are inadequate, not that the denial of the injunction will work irreparable harm. “Irreparable” in the injunction context means not rectifiable by the entry of a final judgment. Diginet, Inc. v. Western Union ATS, Inc., 958 F.2d 1388, 1393 (7th Cir.1992); Vogel v. American Society of Appraisers, 744 F.2d 598, 599 (7th Cir.1984). It has nothing to do with whether to grant a permanent injunction, which, in the usual case anyway, is the final judgment. The use of “irreparable harm” or “irreparable injury” as synonyms for inadequate remedy at law is a confusing usage. It should be avoided. Owen M. Fiss & Doug Rendleman, Injunctions 59 (2d ed. 1984).
The benefits of substituting an injunction for damages are twofold. First, it shifts the burden of determining the cost of the defendant's conduct from the court to the parties. If it is true that Walgreen's damages are smaller than the gain to Sara Creek from allowing a second pharmacy into the shopping mall, then there must be a price for dissolving the injunction that will make both parties better off. Thus, the effect of upholding the injunction would be to substitute for the costly processes of forensic fact determination the less costly processes of private negotiation. Second, a premise of our free-market system, and the lesson of experience here and abroad as well, is that prices and costs are more accurately determined by the market than by government. A battle of experts is a less reliable method of determining the actual cost to Walgreen of facing new competition than negotiations between Walgreen and Sara Creek over the price at which Walgreen would feel adequately compensated for having to face that competition.
That is the benefit side of injunctive relief but there is a cost side as well. Many injunctions require continuing supervision by the court, and that is costly. . . . A request for specific performance (a form of mandatory injunction) of a franchise agreement was refused on this ground in North American Financial Group, Ltd. v. S.M.R. Enterprises, Inc., 583 F.Supp. 691, 699 (N.D.Ill.1984); see Edward Yorio, Contract Enforcement: Specific Performance and Injunctions § 3.3.2 (1989). This ground was also stressed in Rental Development Corp. v. Lavery, 304 F.2d 839, 841–42 (9th Cir.1962), a case involving a lease. Some injunctions are problematic because they impose costs on third parties. Shondel v. McDermott, 775 F.2d 859, 868 (7th Cir.1985). A more subtle cost of injunctive relief arises from the situation that economists call “bilateral monopoly,” in which two parties can deal only with each other: the situation that an injunction creates. . . . The sole seller of widgets selling to the sole buyer of that product would be an example. But so will be the situation confronting Walgreen and Sara Creek if the injunction is upheld. Walgreen can “sell” its injunctive right only to Sara Creek, and Sara Creek can “buy” Walgreen's surrender of its right to enjoin the leasing of the anchor tenant's space to Phar–Mor only from Walgreen. The lack of alternatives in bilateral monopoly creates a bargaining range, and the costs of negotiating to a point within that range may be high. Suppose the cost to Walgreen of facing the competition of Phar–Mor at the Southgate Mall would be $1 million, and the benefit to Sara Creek of leasing to Phar–Mor would be $2 million. Then at any price between those figures for a waiver of Walgreen's injunctive right both parties would be better off, and we expect parties to bargain around a judicial assignment of legal rights if the assignment is inefficient. R.H. Coase, “The Problem of Social Cost,” 3 J. Law & Econ. 1 (1960). But each of the parties would like to engross as much of the bargaining range as possible—Walgreen to press the price toward $2 million, Sara Creek to depress it toward $1 million. With so much at stake, both parties will have an incentive to devote substantial resources of time and money to the negotiation process. The process may even break down, if one or both parties want to create for future use a reputation as a hard bargainer; and if it does break down, the injunction will have brought about an inefficient result. All these are in one form or another costs of the injunctive process that can be avoided by substituting damages.
The costs and benefits of the damages remedy are the mirror of those of the injunctive remedy. The damages remedy avoids the cost of continuing supervision and third-party effects, and the cost of bilateral monopoly as well. It imposes costs of its own, however, in the form of diminished accuracy in the determination of value, on the one hand, and of the parties' expenditures on preparing and presenting evidence of damages, and the time of the court in evaluating the evidence, on the other.
The weighing up of all these costs and benefits is the analytical procedure that is or at least should be employed by a judge asked to enter a permanent injunction, with the understanding that if the balance is even the injunction should be withheld. The judge is not required to explicate every detail of the analysis and he did not do so here, but as long we are satisfied that his approach is broadly consistent with a proper analysis we shall affirm; and we are satisfied here. The determination of Walgreen's damages would have been costly in forensic resources and inescapably inaccurate. . . . The lease had ten years to run. So Walgreen would have had to project its sales revenues and costs over the next ten years, and then project the impact on those figures of Phar–Mor's competition, and then discount that impact to present value. All but the last step would have been fraught with uncertainty.
We may have given too little weight to such uncertainties in American Dairy Queen Corp. v. Brown–Port Co., 621 F.2d 255, 257 n. 2 (7th Cir.1980), but in that case the district judge had found that the remedy at law was adequate in the circumstances and the movant had failed to make its best argument for inadequacy in the district court. Id. at 259. It is difficult to forecast the profitability of a retail store over a decade, let alone to assess the impact of a particular competitor on that profitability over that period. Of course one can hire an expert to make such predictions, Glen A. Stankee, “Econometric Forecasting of Lost Profits: Using High Technology to Compute Commercial Damages,” 61 Fla.B.J. 83 (1987), and if injunctive relief is infeasible the expert's testimony may provide a tolerable basis for an award of damages. We cited cases in which damages have been awarded for the breach of an exclusivity clause in a shopping-center lease. But they are awarded in such circumstances not because anyone thinks them a clairvoyant forecast but because it is better to give a wronged person a crude remedy than none at all. It is the same theory on which damages are awarded for a disfiguring injury. No one thinks such injuries readily monetizable, . . . but a crude estimate is better than letting the wrongdoer get off scot-free (which, not incidentally, would encourage more such injuries). Randall R. Bovbjerg et al., “Valuing Life and Limb in Tort: Scheduling ‘Pain and Suffering,’ ” 83 Nw.U.L.Rev. 908 (1989). Sara Creek presented evidence of what happened (very little) to Walgreen when Phar–Mor moved into other shopping malls in which Walgreen has a pharmacy, and it was on the right track in putting in comparative evidence. But there was a serious question whether the other malls were actually comparable to the Southgate Mall, so we cannot conclude, in the face of the district judge's contrary conclusion, that the existence of comparative evidence dissolved the difficulties of computing damages in this case. Sara Creek complains that the judge refused to compel Walgreen to produce all the data that Sara Creek needed to demonstrate the feasibility of forecasting Walgreen's damages. Walgreen resisted, on grounds of the confidentiality of the data and the cost of producing the massive data that Sara Creek sought. Those are legitimate grounds; and the cost (broadly conceived) they expose of pretrial discovery, in turn presaging complexity at trial, is itself a cost of the damages remedy that injunctive relief saves.
Damages are not always costly to compute, or difficult to compute accurately. In the standard case of a seller's breach of a contract for the sale of goods where the buyer covers by purchasing the same product in the market, damages are readily calculable by subtracting the contract price from the market price and multiplying by the quantity specified in the contract. But this is not such a case and here damages would be a costly and inaccurate remedy; and on the other side of the balance some of the costs of an injunction are absent and the cost that is present seems low. The injunction here, like one enforcing a covenant not to compete (standardly enforced by injunction, Yorio, supra, 401–08), is a simple negative injunction—Sara Creek is not to lease space in the Southgate Mall to Phar–Mor during the term of Walgreen's lease—and the costs of judicial supervision and enforcement should be negligible. There is no contention that the injunction will harm an unrepresented third party. It may harm Phar–Mor but that harm will be reflected in Sara Creek's offer to Walgreen to dissolve the injunction. (Anyway Phar–Mor is a party.) The injunction may also, it is true, harm potential customers of Phar–Mor—people who would prefer to shop at a deep-discount store than an ordinary discount store—but their preferences, too, are registered indirectly. The more business Phar–Mor would have, the more rent it will be willing to pay Sara Creek, and therefore the more Sara Creek will be willing to pay Walgreen to dissolve the injunction.
The only substantial cost of the injunction in this case is that it may set off a round of negotiations between the parties. In some cases, illustrated by Boomer v. Atlantic Cement Co., 26 N.Y.2d 219, 309 N.Y.S.2d 312, 257 N.E.2d 870 (1970), this consideration alone would be enough to warrant the denial of injunctive relief. The defendant's factory was emitting cement dust that caused the plaintiffs harm monetized at less than $200,000, and the only way to abate the harm would have been to close down the factory, which had cost $45 million to build. An injunction against the nuisance could therefore have created a huge bargaining range (could, not would, because it is unclear what the current value of the factory was), and the costs of negotiating to a point within it might have been immense. If the market value of the factory was actually $45 million, the plaintiffs would be tempted to hold out for a price to dissolve the injunction in the tens of millions and the factory would be tempted to refuse to pay anything more than a few hundred thousand dollars. Negotiations would be unlikely to break down completely, given such a bargaining range, but they might well be protracted and costly. There is nothing so dramatic here. Sara Creek does not argue that it will have to close the mall if enjoined from leasing to Phar–Mor. Phar–Mor is not the only potential anchor tenant. Liza Danielle, Inc. v. Jamko, Inc., 408 So.2d 735, 740 (Fla.App.1982), on which Sara Creek relies, presented the converse case where the grant of the injunction would have forced an existing tenant to close its store. The size of the bargaining range was also a factor in the denial of injunctive relief in Gitlitz v. Plankinton Building Properties, Inc., 228 Wis. 334, 339–40, 280 N.W. 415, 418 (1938).
To summarize, the judge did not exceed the bounds of reasonable judgment in concluding that the costs (including forgone benefits) of the damages remedy would exceed the costs (including forgone benefits) of an injunction. We need not consider whether, as intimated by Walgreen, exclusivity clauses in shopping-center leases should be considered presumptively enforceable by injunctions. Although we have described the choice between legal and equitable remedies as one for case-by-case determination, the courts have sometimes picked out categories of case in which injunctive relief is made the norm. The best-known example is specific performance of contracts for the sale of real property. . . . The rule that specific performance will be ordered in such cases as a matter of course is a generalization of the considerations discussed above. Because of the absence of a fully liquid market in real property and the frequent presence of subjective values (many a homeowner, for example, would not sell his house for its market value), the calculation of damages is difficult; and since an order of specific performance to convey a piece of property does not create a continuing relation between the parties, the costs of supervision and enforcement if specific performance is ordered are slight. The exclusivity clause in Walgreen's lease relates to real estate, but we hesitate to suggest that every contract involving real estate should be enforceable as a matter of course by injunctions. Suppose Sara Creek had covenanted to keep the entrance to Walgreen's store free of ice and snow, and breached the covenant. An injunction would require continuing supervision, and it would be easy enough if the injunction were denied for Walgreen to hire its own ice and snow remover and charge the cost to Sara Creek. Cf. City of Michigan City v. Lake Air Corp., 459 N.E.2d 760 (Ind.App.1984). On the other hand, injunctions to enforce exclusivity clauses are quite likely to be justifiable by just the considerations present here—damages are difficult to estimate with any accuracy and the injunction is a one-shot remedy requiring no continuing judicial involvement. So there is an argument for making injunctive relief presumptively appropriate in such cases, but we need not decide in this case how strong an argument.
AFFIRMED.
HARLINGTON WOOD, Jr., Senior Circuit Judge, concurring.
I gladly join in the affirmance reached in Judge Posner's expert analysis.
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Specific Performance:
LACLEDE GAS COMPANY,
v.
AMOCO OIL COMPANY,
522 F.2d 33 (8th Cir., 1975)
Opinion
ROSS, Circuit Judge.
The Laclede Gas Company (Laclede), a Missouri corporation, brought this diversity action alleging breach of contract against the Amoco Oil Company (Amoco), a Delaware corporation. It sought relief in the form of a mandatory injunction prohibiting the continuing breach or, in the alternative, damages. The district court held a bench trial on the issues of whether there was a valid, binding contract between the parties and whether, if there was such a contract, Amoco should be enjoined from breaching it. It then ruled that the “contract is invalid due to lack of mutuality” and denied the prayer for injunctive relief. The court made no decision regarding the requested damages. Laclede Gas Co. v. Amoco Oil Co., 385 F.Supp. 1332, 1336 (E.D.Mo.1974). This appeal followed, and we reverse the district court's judgment.
On September 21, 1970, Midwest Missouri Gas Company (now Laclede), and American Oil Company (now Amoco), the predecessors of the parties to this litigation, entered into a written agreement which was designed to provide central propane gas distribution systems to various residential developments in Jefferson County, Missouri, until such time as natural gas mains were extended into these areas. The agreement contemplated that as individual developments were planned the owners or developers would apply to Laclede for central propane gas systems. If Laclede determined that such a system was appropriate in any given development, it could request Amoco to supply the propane to that specific development. This request was made in the form of a supplemental form letter, as provided in the September 21 agreement; and if Amoco decided to supply the propane, it bound itself to do so by signing this supplemental form.
Once this supplemental form was signed the agreement placed certain duties on both Laclede and Amoco. Basically, Amoco was to “(i)nstall, own, maintain and operate . . . storage and vaporization facilities and any other facilities necessary to provide (it) with the capability of delivering to (Laclede) commercial propane gas suitable . . . for delivery by (Laclede) to its customers' facilities.” Amoco's facilities were to be “adequate to provide a continuous supply of commercial propane gas at such times and in such volumes commensurate with (Laclede's) requirements for meeting the demands reasonably to be anticipated in each Development while this Agreement is in force.” Amoco was deemed to be “the supplier,” while Laclede was “the distributing utility.”
For its part Laclede agreed to “(i)nstall, own, maintain and operate all distribution facilities” from a “point of delivery” which was defined to be “the *36 outlet of (Amoco) header piping.” Laclede also promised to pay Amoco “the Wood River Area Posted Price for propane plus four cents per gallon for all amounts of commercial propane gas delivered” to it under the agreement.
Since it was contemplated that the individual propane systems would eventually be converted to natural gas, one paragraph of the agreement provided that Laclede should give Amoco 30 days written notice of this event, after which the agreement would no longer be binding for the converted development.
Another paragraph gave Laclede the right to cancel the agreement. However, this right was expressed in the following language:
This Agreement shall remain in effect for one (1) year following the first delivery of gas by (Amoco) to (Laclede) hereunder. Subject to termination as provided in Paragraph 11 hereof (dealing with conversions to natural gas), this Agreement shall automatically continue in effect for additional periods of one (1) year each unless (Laclede) shall, not less than 30 days prior to the expiration of the initial one (1) year period or any subsequent one (1) year period, give (Amoco) written notice of termination.
There was no provision under which Amoco could cancel the agreement.
For a time the parties operated satisfactorily under this agreement, and some 17 residential subdivisions were brought within it by supplemental letters. However, for various reasons, including conversion to natural gas, the number of developments under the agreement had shrunk to eight by the time of trial. These were all mobile home parks.
During the winter of 1972-73 Amoco experienced a shortage of propane and voluntarily placed all of its customers, including Laclede, on an 80% Allocation basis, meaning that Laclede would receive only up to 80% Of its previous requirements. Laclede objected to this and pushed Amoco to give it 100% Of what the developments needed. Some conflict arose over this before the temporary shortage was alleviated.
Then, on April 3, 1973, Amoco notified Laclede that its Wood River Area Posted Price of propane had been increased by three cents per gallon. Laclede objected to this increase also and demanded a full explanation. None was forthcoming. Instead Amoco merely sent a letter dated May 14, 1973, informing Laclede that it was “terminating” the September 21, 1970, agreement effective May 31, 1973. It claimed it had the right to do this because “the Agreement lacks ‘mutuality.’ ”1
The district court felt that the entire controversy turned on whether or not Laclede's right to “arbitrarily cancel the Agreement” without Amoco having a similar right rendered the contract void “for lack of mutuality” and it resolved this question in the affirmative. We disagree with this conclusion and hold that settled principles of contract law require a reversal.
I.
A bilateral contract is not rendered invalid and unenforceable merely because one party has the right to cancellation while the other does not. . . . The important question in the instant case is whether Laclede's right of cancellation rendered all its other promises in the agreement illusory so that there was a complete failure of consideration. This would be the result had Laclede retained the right of immediate cancellation at any time for any reason.
* * * * *
We are satisfied that, while Laclede did not expressly promise to purchase all the propane requirements for the subdivisions from Amoco, a practical reading of the contract provisions reveals that this was clearly the intent of the parties. . . .
Once Amoco had signed the supplemental letter agreement, thereby making the September 21 agreement applicable to any given Jefferson County development, it was bound to be the propane supplier for that subdivision and to provide a continuous supply of the gas sufficient to meet Laclede's reasonably anticipated needs for that development. It was to perform these duties until the agreement was cancelled by Laclede or until natural gas distribution was extended to the development.2
For its part, Laclede bound itself to purchase all the propane required by the particular development from Amoco. . . . . When analyzed in this manner, it can be seen that the contract herein is simply a so-called “requirements contract.” Such contracts are routinely enforced by the courts where, as here, the needs of the purchaser are reasonably foreseeable and the time of performance is reasonably limited. . . .
.
We conclude that there is mutuality of consideration within the terms of the agreement and hold that there is a valid, binding contract between the parties as to each of the developments for which supplemental letter agreements have been signed.
II.
Since he found that there was no binding contract, the district judge did not have to deal with the question of whether or not to grant the injunction prayed for by Laclede. He simply denied this relief because there was no contract. Laclede Gas Co. v. Amoco Oil Co., supra, 385 F.Supp. at 1336.
Generally the determination of whether or not to order specific performance of a contract lies within the sound discretion of the trial court. Landau v. St. Louis Public Service Co., 364 Mo. 1134, 273 S.W.2d 255, 259 (1954). However, this discretion is, in fact, quite limited; and it is said that when certain equitable rules have been met and the contract is fair and plain“specific performance goes as a matter of right.” Miller v. Coffeen, 365 Mo. 204, 280 S.W.2d 100, 102 (1955), quoting, Berberet v. Myers, 240 Mo. 58, 77, 144 S.W. 824, 830 (1912). (Emphasis omitted.)
With this in mind we have carefully reviewed the very complete record on appeal and conclude that the trial court should grant the injunctive relief prayed. We are satisfied that this case falls within that category in which specific performance should be ordered as a matter of right. See Miller v. Coffeen, supra, 280 S.W.2d at 102.
Amoco contends that four of the requirements for specific performance have not been met. Its claims are: (1) there is no mutuality of remedy in the contract; (2) the remedy of specific performance would be difficult for the court to administer without constant and long-continued supervision; (3) the contract is indefinite and uncertain; and (4) the remedy at law available to Laclede is adequate. The first three contentions have little or no merit and do not detain us for long.
There is simply no requirement in the law that both parties be mutually entitled to the remedy of specific performance in order that one of them be given that remedy by the court. Beets v. Tyler, 365 Mo. 895, 290 S.W.2d 76, 80 (1956); Rice v. Griffith, 349 Mo. 373, 161 S.W.2d 220, 225 (1942).
While a court may refuse to grant specific performance where such a decree would require constant and long-continued court supervision, this is merely a discretionary rule of decision which is frequently ignored when the public interest is involved. . . .
Here the public interest in providing propane to the retail customers is manifest, while any supervision required will be far from onerous.
Section 370 of the Restatement of Contracts (1932) provides:
Specific enforcement will not be decreed unless the terms of the contract are so expressed that the court can determine with reasonable certainty what is the duty of each party and the conditions under which performance is due.
We believe these criteria have been satisfied here. As discussed in part I of this opinion, as to all developments for which a supplemental agreement has been signed, Amoco is to supply all the propane which is reasonably foreseeably required, while Laclede is to purchase the required propane from Amoco and pay the contract price therefor. The parties have disagreed over what is meant by “Wood River Area Posted Price” in the agreement, but the district court can and should determine with reasonable certainty what the parties intended by this term and should mold its decree, if necessary accordingly.3 Likewise, the fact that the agreement does not have a definite time of duration is not fatal since the evidence established that the last subdivision should be converted to natural gas in 10 to 15 years. This sets a reasonable time limit on performance and the district court can and should mold the final decree to reflect this testimony.
It is axiomatic that specific performance will not be ordered when the party claiming breach of contract has an adequate remedy at law. Jamison Coal & Coke Co. v. Goltra, 143 F.2d 889, 894 (8th Cir.), cert. denied, 323 U.S. 769, 65 S.Ct. 122, 89 L.Ed. 615 (1944). This is especially true when the contract involves personal property as distinguished from real estate.
However, in Missouri, as elsewhere, specific performance may be ordered even though personalty is involved in the “proper circumstances.” Mo.Rev.Stat. s 400.2-716(1); Restatement of Contracts, supra, s 361. And a remedy at law adequate to defeat the grant of specific performance “must be as certain, prompt, complete, and efficient to attain the ends of justice as a decree of specific performance.” National Marking Mach. Co. v. Triumph Mfg. Co., 13 F.2d 6, 9 (8th Cir. 1926). Accord, Snip v. City of Lamar, 239 Mo.App. 824, 201 S.W.2d 790, 798 (1947).
One of the leading Missouri cases allowing specific performance of a contract relating to personalty because the remedy at law was inadequate is Boeving v. Vandover, 240 Mo.App. 117, 218 S.W.2d 175, 178 (1949). In that case the plaintiff sought specific performance of a contract in which the defendant had promised to sell him an automobile. At that time (near the end of and shortly after World War II) new cars were hard to come by, and the court held that specific performance was a proper remedy since a new car “could not be obtained elsewhere except at considerable expense, trouble or loss, which cannot be estimated in advance.”
We are satisfied that Laclede has brought itself within this practical approach taken by the Missouri courts. As Amoco points out, Laclede has propane immediately available to it under other contracts with other suppliers. And the evidence indicates that at the present time propane is readily available on the open market. However, this analysis ignores the fact that the contract involved in this lawsuit is for a long-term supply of propane to these subdivisions. The other two contracts under which Laclede obtains the gas will remain in force only until March 31, 1977, and April 1, 1981, respectively; and there is no assurance that Laclede will be able to receive any propane under them after that time. Also it is unclear as to whether or not Laclede can use the propane obtained under these contracts to supply the Jefferson County subdivisions, since they were originally entered into to provide Laclede with propane with which to “shave” its natural gas supply during peak demand periods.4 Additionally, there was uncontradicted expert testimony that Laclede probably could not find another supplier of propane willing to enter into a long-term contract such as the Amoco agreement, given the uncertain future of worldwide energy supplies. And, even if Laclede could obtain supplies of propane for the affected developments through its present contracts or newly negotiated ones, it would still face considerable expense and trouble which cannot be estimated in advance in making arrangements for its distribution to the subdivisions.
pecific performance is the proper remedy in this situation, and it should be granted by the district court.
CONCLUSION
For the foregoing reasons the judgment of the district court is reversed and the cause is remanded for the fashioning of appropriate injunctive relief in the form of a decree of specific performance as to those developments for which a supplemental agreement form has been signed by the parties.
Questions:
1. How do specific performance and injunction differ from each other in scope and application? Is it possible to identify specific performance as a narrow application of the general equitable power of the courts to command parties to do or refrain from doing something that is inherent in the injunctive power.
2. Applying equitable principles, can you think of the limits to the court’s resort to the injunctive power? What do you think the limits of that power ought to be. Does Art. III of the U.S. Constitution provide another set of constraints? We take up this last question in Chapters 24 and25.
Ramey Photo 
