United States District Court, Southern District of New York
May 15, 2001
INTERLINK INTERNATIONAL FINANCIAL SERVICES, INC., D/B/A EPAYLINK, PLAINTIFF,
MICHAEL BLOCK, DEFENDANT.
The opinion of the court was delivered by: Haight, Senior District Judge:
MEMORANDUM OPINION AND ORDER
In this action based upon a criminal statute prohibiting "fraud and
related activity in connection with computers," 18 U.S.C. § 1030, as
to which § 1030(g) creates a private right of action, defendant moves
the Court for an increase in the amount of the security previously
given by plaintiff pursuant to Rule 65(c), Fed. R. Civ. P., to obtain
a temporary restraining order ("TRO").
The exigencies of time preclude a detailed statement of the facts.
For present purposes it is sufficient to say that on April 26, 2001,
the Court on plaintiffs application signed an ex parte Order to Show
Cause containing a TRO and required plaintiff to furnish security in
the amount of $5,000. At a hearing on April 30, 2001, at which both
parties were represented by counsel, the Court directed that the
amount of security posted by plaintiff be increased to $100,000.
Plaintiff, ostensibly encountering some financial difficulty in
complying, had not yet furnished security in that amount when
defendant brought on the present motion for an order directing
plaintiff to furnish security in an amount greater than $100,000. The
Court conducted an evidentiary hearing on May 7, 8 and 9, 2001, and
heard oral arguments of counsel on May 9 and May 10. This Memorandum
Opinion decides defendant's motion.
Rule 65(c) provides in pertinent part:
No restraining order or preliminary injunction shall
issue except upon the giving of security by the
applicant, in such sum as the court deems proper, for the
payment of such costs and damages as may be incurred or
suffered by any party who is found to have been
wrongfully enjoined or restrained.
"The purpose of requiring security prior to issuance of an
injunction or a temporary restraining order is to guarantee payment
of costs and damages incurred by a party who is wrongfully enjoined
or restrained." 13 Moore's Federal Practice (3d. ed. 1997)
(hereinafter Moore) at 65-94.1. "The sum posted in a bond is
determinative of the limit that may be recovered by a wrongfully
restrained party; in the absence of proof that the movant sought to
enjoin with malicious intent and without probable cause, recovery by
a party later found to have been wrongfully enjoined will be limited
to that amount." Id. at 65-94. "The risk created by the rule limiting
recovery to the amount of the bond is that an enjoined party may be
unable to obtain adequate redress." Little Tor Auto Center v. Exxon
Company USA, 822 F. Supp. 141, 144 (S.D.N.Y. 1993).
The provision in Rule 65(c) that security shall be given "in such
sum as the court deems proper" indicates that "the district court is
vested with wide discretion in the matter of security," Ferguson v.
Tabah, 288 F.2d 665, 675 (2d Cir. 1961). A district court may
dispense with the posting of security entirely where parties sought
to be enjoined or restrained "have not shown that they will likely
suffer harm absent the posting of a bond," Doctor's Associates Inc.
v. Stuart, 85 F.3d 975, 985 (2d Cir. 1996); Ferguson, 288 F.2d at 675
("it has been held proper for the court to require no bond where
there has been no proof of likelihood of harm"); see also
International Controls Corp. v. Vesco, 490 F.2d 1334, 1356 (2d Cir.
1974) ("the district court may dispense with security where there has
been no proof of likelihood of harm to the party enjoined."); 11 A
Wright-Miller-Kane, Federal Practice and Procedure (2d ed. 1995)
(hereinafter Wright) at 293 ("the court may dispense with security
altogether if he grant of an injunction carries no risk of monetary
loss to the defendant.").
The district court need not order security in respect of asserted
economic damages that are "speculative at best," Inflight Newspapers
Inc. v. Magazines In-Flight LLC, 990 F. Supp. 119, 140 (E.D.N Y
1997); See also CVI/Beta Ventures Inc. v. Custom Optical Frames Inc.,
893 F. Supp. 508, 525 (D.Md. 1995) ("Claims based upon speculation or
conjecture, including claims for a business contemplated but not yet
established, will not support an award of damages on the [Rule 65(c)]
bond."), aff'd., 92 F.3d 1203 (4th Cir. 1996) (table).
Security furnished under Rule 65(c) will not include any damages
"for claims against the party who instituted the action other than
those directly attributable to the improvidently issued injunction."
11A Wright at 292; CVI/Beta, 893 F. Supp. at 525 ("Moreover, damages
claimed under an injunction bond must arise from the operation of the
injunction itself, not from damages caused by the suit independently
of the injunction.").
Applying these principles to the case at bar, defendant Block has
shown neither a likelihood nor a risk of economic harm resulting from
his compliance with the restraints imposed by the first decretal
paragraph of the TRO. The purpose of those restraints is to prevent
Block from interfering with or meddling in Interlink's business
operations and Interlink's relations with its clients. Block's
professed concern that these restraints preclude him from trying to
market the software program he developed to potential users is based
upon a fanciful and overbroad reading of the TRO's language.
Alternatively, Block has made no effort, and has laid no
preparatory plans, to engage in such marketing. Block testified at
the hearing that his business objective for the foreseeable future is
to continue working full time for the Sporn Group, Inc.; and there is
no suggestion in the record that the Sporn Group is interested in
Block's software program. Accordingly the damages that Block claims
these restraints might cause are entirely speculative and conjectural.
That leads to consideration of the mandatory provisions contained
in the second decretal paragraph of the TRO, which form the core of
Block's concerns as expressed during the hearing. Specifically, Block
is afraid that if he complies with those provisions, plaintiff
Interlink will gain unfettered and total access to the software
program Block developed, and then misappropriate (or convert, an
equally descriptive verb from the common law of torts) the program to
Interlink's own use, leaving Block uncompensated for his intellectual
While that concern lies at the heart of the matter, Block also
claims that his compliance with the first of three enumerated
categories of mandated conduct would be so time consuming that he
might lose his present employment as a computer consultant to the
Sporn Group and to a client of Sporn.*fn1 Block seeks to shore up
that calamitous possibility by submitting a letter dated May 2, 2001
from David Sporn, the president of the Sporn Group, to Block's
counsel, in which Sporn states that "there is a hiring freeze at the
client, and any extended time away from the workplace would be viewed
negatively and could actually result in termination." It is perhaps
not unduly cynical to suppose that counsel was the inspiration for
that letter; in any event, Block uses it as the basis for a demand
that the TRO security include an amount representing 120 days of lost
wages following an assumed termination of his present employment.
That assumed item of damages can only be described as speculative
and conjectural. Apart from Sporn's letter, with its obvious tactical
purpose, there is no evidence in the record that Block's continued
and limited attention to plaintiffs business would likely result in
the termination of his present employment. Indeed, the evidence
points the other way. Block has been a Sporn consultant since late
October, 2000; he testified that during the period between then and
mid-April, 2001, he would spend up to 20 hours a week on Interlink
business; and there is no evidence of dissatisfaction on the part of
the Sporn Group or its client with respect to Block's availability
until David Sporn's carefully phrased May 2 letter, clearly written
in contemplation of the Rule 65(c) hearing. Block is not entitled to
security against the spectre of a TRO-caused future loss of employment.*fn2
At least as fanciful and farfetched is Block's contention that he
is entitled to Rule 65(c) security in respect of claims that might
arise if the disclosures required by the TRO transform him into a
Lanham Act plaintiff.
The damage claim of substance arises out of the apparently
undisputed fact that Block's compliance with the second decretal
paragraph of the TRO, which requires Block to inform Interlink of the
software program's "User Codes and Server Information" and to turn
over to Interlink "all computer files and software," would give
Interlink complete knowledge of and access to all facets and aspects
of the software program that Block developed as a consultant to
Interlink during the period between January 1999 and the end of
October 2000 (when Block, having been paid nothing by Interlink,
became a computer consultant to the Sporn Group). Such knowledge and
access on the part of Interlink, Block argues, would amount to, or at
the least could lead to, a wrongful misappropriation of his
In postulating such a claim, Block is not engaging in mere
speculation or conjecture. Depending upon the particular facts, such
a claim may be viable in law. In Cole v. Control Data Corp.,
947 F.2d 313 (8th Cir. 1991), the Eighth Circuit upheld a jury
verdict in favor of the plaintiff computer programmer against his
former employer for the employer's breach of a contract to market a
software program the plaintiff developed during his employment with
defendant, and for defendant's wrongful conversion of the program
itself. "The jury returned a verdict against Control Data on the
breach of contract claim for $150,000 in actual damages, and on the
conversion claim for $2,000,000 in actual damages," 947 F.3d at 315,
both awards being affirmed on appeal.*fn3
Cole is instructive in the case at bar because it shows that a
company employee (or independent consultant to a company) can, during
the course of his employment (or consultancy), develop a computer
software program which becomes his intellectual property and is
vulnerable to misappropriation or conversion by the company.
Moreover, Cole also instructs that a plaintiff so situated is
entitled to recover separately on claims of breach of contract and
conversion. The Eighth Circuit rejected Control Data's contention
that "the damages for breach of contract and conversion are
duplicitous, allowing Cole double damages for a single injury on
alternative theories of liability." 947 F.2d at 320. The court of
appeals reasoned that "Cole sought separate damages for the breach of
contract, namely, the loss of profits for Control Data's failure to
market the software program, and separate damages for conversion,
namely, the value of the software program itself." Id. at 321. This
analysis demonstrates the error in the contention of plaintiff at bar
that Block's only legally viable claim against Interlink is one for
breach of contract. The facts could also give rise to a claim for
wrongful misappropriation of Block's software.
Accordingly the questions on this motion become whether this
potential harm entitles Block to security under Rule 65(c), and if
so, in what amount. Plaintiff makes three arguments why the security
should not be increased beyond the present $5,000 amount.
First, plaintiffs counsel contend that because Block's software
program has been in plaintiffs computer system for some time, any
appropriation (or misappropriation) occurred in the past, and thus
cannot be said to have been caused by the TRO. In almost the same
breath, counsel contend that plaintiff has no intention of
appropriating Block's program in the future.
The first of these two facially inconsistent contentions requires
no extended discussion. It borders on the frivolous to suggest that
Interlink successfully completed an appropriation of Block's before
seeking a TRO on April 26, 2001. Block, dissatisfied with his unpaid
status, embedded a password in the program for the precise purpose of
preventing total access by Interlink. Plaintiff seeks the TRO's
mandated disclosures for the precise purpose of obtaining that
access. It would distort reality to say that a thief has stolen a
bicycle when the bicycle remains fastened to a lamppost with a lock
and chain the owner uses to prevent a theft. Plaintiffs concept of
program misappropriation as a legal fait accompli is equally unrealistic.
Plaintiffs second contention is that it has no intention of using
Block's program, so that Block does not need security for the payment
of damages caused by a misappropriation. Plaintiff bases that
contention upon the testimony of (1) Yeruchem Levovitz, Interlink's
president, that he is dissatisfied with Block's program and has hired
another computer programming company, RK Software, to develop a
different one; and (2) Suman Jha, RK's senior programmer assigned to
the Interlink job, that RK has begun developing that new program and
does not need the Block program s source codes to complete it.
Levovitz and Jha say that they need the Block program's super user
password, source codes, and database design only for the limited
purpose of clearing up confusion in Interlink clients' accounts
generated by past transactions. It is no exaggeration to say that
Block views these disclaimers of a broader interest in his program
with deep suspicion and distrust.
Obviously, at this beginning stage of the litigation it cannot be
said with certainty that Block's compliance with the TRO would result
in a misappropriation of his program by Interlink. But Rule 65(c)
does not require the certainty of harm. The Rule mandates security
for such damages as may" (not "will") be suffered by a party
subsequently found to have been wrongfully enjoined; the draftsmen's
choice of verbs reflects an unavoidable uncertainty. 11A Wright at
292 says that Rule 65(c) security will usually be fixed in an amount
that covers the "potential" costs and losses the enjoined party will
suffer as the result of being enjoined or restrained, and at 293
speaks in terms of the "risk of monetary loss to the defendant." 13
Moore does not discuss directly the requisite potential or
probability of harm, but cautions at 65-93 that "[i]n setting the
amount of security for a preliminary injunction, the trial court
should err on the high side," since "an error on the low side may
produce irreparable injury, because damages for an erroneous
preliminary injunction may not exceed the amount of the bond." The
Second Circuit cases cited and quoted supra refer to the "likelihood"
In the case at bar, while the proposition falls well short of
certainty, I think Block has shown a sufficient risk or likelihood of
misappropriation of protected parts of his software program by
Interlink to entitle him to Rule 65(c) security. I cannot accept at
face value Levovitz's self-serving expressions of dissatisfaction
with and disinterest in Block's program; Levovitz is an intensely
interested witness whose present purpose is to avoid having to post
security in any significant amount. Jha is not directly interested in
the issue, but Interlink is a client of Jha's employer, RK Softwares,
and Jha was presumably made aware of what testimony would advance
Interlink's purposes. Levovitz's professions of dissatisfaction with
the performance of the Block program ring somewhat hollow, given his
testimony that with the program in operation Levovitz was growing the
business and signing up new clients, at least until operating
difficulties arose in mid-April, after Block had entered into his
consultancy retention by the Sporn Group. Block testified that his
program worked well, automatically keeping track of the transactions
of the customers of Interlink's clients, and that the most severe
problems arose from the inputting incompetence of an employee of
Interlink's principal client, U.S. Healthcard, thereby fulfilling the
Scripture of computing: "garbage in, garbage out." While Block is an
equally interested witness, on the basis of the limited record before
me I regard this as the more plausible explanation for the most
recent problems affecting the U.S. Healthcard account.
Moreover, the record makes it crystal clear that if Interlink and
its present consultant, RK Software, gain total and unfettered access
to Block's program, the risk exists for the misappropriation (or
conversion) of that program.
I further conclude, on the present record, that it is somewhat more
likely than not that in such circumstances, a misappropriation of
Block's program or protected parts of it would in fact occur.
I do not wish to be misunderstood. The record would not justify,
and I do not make, a prediction with any degree of certainty that
such a misappropriation will take place. However, as noted, the
district court must decide whether or not to direct the giving of
Rule 65(c) security at the very beginning of the case, when the
certainty of future harm is not and cannot be required. For the
reasons previously stated, I think that Block is entitled to security
with respect to the risk of misappropriation of the computer software
program he developed.
The remaining question is the amount of that security, which should
bear some relationship to the value of the program. A computer
software program may be valued by several recognized methods.
Frequently the issue arises in a taxation context. "[T]he three major
approaches to valuation have been used to ascertain the value of
computer software: the fair market approach, the income approach, and
the cost approach. Generally, the type of method employed will depend
on the software being valued." Reinhard, Tangible or Intangible — Is
That the Question? Conflict in the Texas Tax Classification System of
Computer Software, 29 St. Mary's L.J. 871, 907-08 (1998) (footnotes
The Tax Court considered these three valuation methods in Provitola
v. Commissioner, 1990 WL 141930 (U.S. Tax Ct., October 2, 1990),
where the issue was the value for charitable contribution purposes of
a software program its developer had donated to his alma mater,
Stetson University. The Tax Court stressed "the fair market value of
such property on the date of the contribution," and, looking to the
Income Tax Regulations, defined "fair market value" as "the price at
which the property would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or sell,
and both having reasonable knowledge of relevant facts." 1990 WL at
3. The court, accepting the reasoning of the Commissioner's expert
witness that "the chances were very slight that a system that had as
many problems as the LFMS software could be marketed successfully,
and that no one would have paid anything for the rights to the LFMS
software as it existed on the relevant dates," concluded that
"petitioner's donations had no value." Id. at 7. By way of contrast,
in Cole, 947 F.2d 313, which also turned on fair market value, the
Eighth Circuit upheld a jury award of $2,000,000 for the conversion
of a software program where the testimony of plaintiffs expert
witness, "setting forth three different pricing structures that
willing purchasers would have offered, . . . provided the jury with
adequate information to calculate Cole's damages with a reasonable
degree of certainty." Id. at 319.
In the case at bar, Block testified that he could not suggest a
fair market value, thus defined, for his software program.
Principally that is because he does not intend to sell it to others.
Rather, Block's business plan involves making the program's automated
transaction-monitoring capacity available to companies for a
per-transaction fee, with Block running the system himself: acting,
as it were, as his own Interlink. Nor was Block able to project at
present an annual income stream, that being the second of the three
generally recognized methods of valuing computer software programs.
Instead, Block utilized at the hearing the third method, the cost
approach, referred to by the Tax Court in Provitola as the
"replacement or development cost" or the "reproduction cost." 1990 WL
at 4. In applying that method, Block relies primarily upon In re
Unimet Corp., 74 B.R. 156 (Bankr. N.D. Ohio 1987), which considered
for corporate income tax purposes the value the debtor placed on
software programs it acquired in the purchase of another company, in
order to establish the new tax basis for depreciation or amortization
amounts. The Bankruptcy Court noted the parties' agreement "that an
appropriate methodology to calculate the value of the software is to
compute the cost of reproducing the reusable lines of computer code,"
74 B.R. at 168, although the parties "using similar methodology have
arrived at figures in excess of $8,800,000 apart," id., demonstrating
that valuation methods, like statistics, can be made to say almost
anything. The court performed its own analysis using the reproduction
method, and calculated the "value of reusable/potentially reusable
lines" at $3, 364, 200. Id. at 169.
Purporting to follow the Bankruptcy Court's reproduction cost
formula in Unimet, Block came up with the amount of$863, 173. See
summation of counsel, Tr. 484-86. But that calculation, summarized in
DX C, did not directly factor in the time Block actually spent
developing the software while a consultant to Interlink. As counsel
also argued in summation, Block testified that during the almost two
years of his relationship with Interlink, he "worked approximately 66
percent of his entire week on creative work that went to the
enhancement, creativity, design of his software as opposed to the
other one-third which was allocated to, to quote the record,
babysitting Mr. Levovitz or otherwise dealing with client inquiries"
id. at 487. Using his hourly rates of compensation, Block arrived at
an alternative reproduction cost of $362, 266.64. Id. at 489.
I accept in principle that reproduction cost is the appropriate
evaluation method to use in this case. Block's program has not been
sufficiently utilized to form the basis for income projections. I
reject plaintiffs contention that I should find a market value of
zero. Plaintiff bases that contention principally upon the Provitola
case, but the only contemplated use for the software program in
Provitola was its sale by the donee university to others, whereas
Block intends to keep his program and charge others to use it. In
that regard the case at bar more closely resembles the contemplated
use of the software programs in Unimet, which the Provitola court
distinguished on that ground:
Unimet, a bankruptcy case, dealt with the valuation of computer
programming codes which a corporation could reuse without
modification in software systems developed for particular
customers. The court held, under the facts of that case,
that reproduction cost was a reliable indicator of value.
The use of the computer code valued in Unimet, however,
is quite different from the use contemplated in the
instant case, inasmuch as the LFMS software was to be
held for sale. while the programming code in Unimet was
not. We consequently derive little guidance from Unimet.
1990 WL at 5 (emphasis added).
However, the alternative reproduction costs testified to by Block,
$863, 173 and $362, 266.64, are so wildly different as to compel the
inference that one of them is unacceptable. I conclude without
difficulty that the greater of these two amounts, purportedly based
upon a extrapolation from a quite different case, must be rejected.
The most reliable measure of this particular software program's
actual reproduction (or development) cost is the number of hours
Block actually spent developing it, multiplied by his hourly pay at
But I also conclude that the amount of time Block claims for
reproduction cost is exaggerated. Block bases his claim upon
two-thirds of the entire, nearly two-year period he spent at
Interlink. However, it stands to reason that development of the
program was completed at some time before the end of that period,
because Interlink had been using it before Block departed for the
Sporn Group. Block kept no records itemizing how he spent his time.
Block's description of the incessant demands Levovitz made upon him
argues in favor of a greater percentage of Block's time devoted to
such matters. So does Block's testimony that he was the only
individual at Interlink competent to respond to client's inquiries
and complaints about the running of the program.
I think that Block overstated the amount of time he spent on the
program's development. Accordingly his claimed reproduction cost must
In these circumstances, I hold that Block is entitled to security
under Rule 65(c) in the amount of $200,000 with respect to the value
of his software program.
The practical consequences of this holding are these:
1. Defendant remains subject to the restraints imposed by the first
decretal paragraph of the TRO, for which the present bond of $5,000
stands as sufficient security.
2. The mandatory provisions of the second decretal paragraph of the
TRO will come into effect twenty-four (24) hours after receipt by
counsel for defendant, by hand or by telefax, of a written
certification by counsel for plaintiff that security in an additional
amount of $200,000, in a form complying with Local Civil Rule 65.1.1,
has been posted.
3. If plaintiff posts the additional security called for by the
preceding paragraph, the Court will enter a Confidentiality Order
that will govern disclosures made by defendant in obedience to the
TRO. The Court will also specify reasonable limitations upon the time
that defendant must devote personally to his compliance with the
mandatory provisions of the second decretal paragraph of the TRO.
The forgoing is SO ORDERED.