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U.S. D.I.D. Corp. v. Windstream Communications, Inc.

United States Court of Appeals, Second Circuit

December 22, 2014

U.S. D.I.D. CORP., Plaintiff-Appellant,
v.
WINDSTREAM COMMUNICATIONS, INC., Defendant-Appellee

Argued: March 31, 2014.

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[Copyrighted Material Omitted]

Page 130

Appeal from the United States District Court for the Southern District of New York. No. 12-cv-4023 -- Jesse M. Furman, Judge.

Appeal from an order of the United States District Court for the Southern District of New York (Furman, Judge) awarding the defendant damages from security posted by the plaintiff upon the grant of a temporary restraining order under Rule 65(c) of the Federal Rules of Civil Procedure. We hold tat the district court retained jurisdiction to award such damages from the security after the plaintiff's notice of voluntary dismissal under Rule 41(a)(1)(A)(i) of the Federal Rules of Civil Procedure. Because we conclude that the district court must determine that the defendant was wrongfully restrained before awarding recovery on the security, however, we remand. Finally, we find that, where the district court determines that the defendant was wrongfully restrained by being required to provide services to the plaintiff, it may order recovery from the security in an amount equal to the market value of the services provided. Accordingly, we VACATE and REMAND.

JOSEPH K. SCULLY, Day Pitney LLP, Hartford, Connecticut (Nancy Kourland, Rosen & Associates, P.C., New York, New York, on the brief), for Plaintiff-Appellant.

BRIAN J. BUTLER, Bond, Schoeneck & King, PLLC, Syracuse, New York, for Defendant-Appellee.

OPINION

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DRONEY, Circuit Judge.

This appeal presents the question of whether a defendant may recover costs and damages from security posted by a plaintiff in obtaining a temporary restraining order (" TRO" ), even though the plaintiff later filed a notice of voluntary dismissal without prejudice, preventing a final adjudication on the merits. The U.S. District Court for the Southern District of New York (Furman, Judge ) granted Plaintiff-Appellant U.S. D.I.D. Corp. (" D.I.D." ) a TRO against Defendant-Appellee Windstream Communications, Inc. (" Windstream" ). In doing so, the district court required D.I.D. to post security with the court clerk under Rule 65(c) of the Federal Rules of Civil Procedure (the " TRO security" or " Rule 65(c) security" ).[1] The district court later denied D.I.D.'s motion for a preliminary injunction and dissolved the TRO, concluding that D.I.D. failed to show a likelihood of success on the merits of the underlying suit. Soon afterward, D.I.D. filed a notice of voluntary dismissal without prejudice under Rule 41(a)(1)(A)(i) of the Federal Rules of Civil Procedure. Windstream then moved for an award of costs and damages from the TRO security. The district court found that awarding recovery from such security requires a final adjudication on the merits. It went on to conclude, however, that D.I.D.'s voluntary dismissal without prejudice functioned as a final adjudication on the merits and allowed recovery on the TRO security.

We agree that a district court may grant recovery from a TRO security after the plaintiff files a notice of voluntary dismissal. We hold that recovery from a TRO security requires only a determination that the defendant was wrongfully restrained, and not necessarily a final adjudication on the merits. Because the district court never made this specific determination, we VACATE the judgment of the district court and REMAND for the district court to determine whether, and for what time period, Windstream was wrongfully restrained by the TRO, and to calculate the damages accordingly.

BACKGROUND

D.I.D. was, during the relevant time, a small, privately held business engaged in the resale of telecommunications services to " calling card" providers, " call centers," and similar businesses. D.I.D. in turn purchased telecommunications services from PAETEC Communications, Inc. (" PAETEC" ) under a long distance service calling agreement (the " Service Agreement" or the " Agreement" ) entered into on May 5, 2011. The Agreement contained a " limitations of service" clause, which stated that D.I.D. " may not purchase services under this retail service agreement and resell services to end users." J.A. 81. The Agreement also contained a termination provision, stating that " [a] party may terminate the Agreement on thirty (30) days' written notice if the other party materially breaches the Agreement . . . ." J.A. 80.

Windstream acquired PAETEC in late 2011. On March 27, 2012, Windstream informed D.I.D. that it had determined that D.I.D. was engaged in resale of Windstream's services, in violation of the Agreement's

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" limitations of service" clause. Windstream indicated that it would raise D.I.D.'s rates to what the parties later referred to as " interim" rates--between its lower " retail" rates and its higher " wholesale" rates--until June 1, 2012. Windstream stated that it would further increase D.I.D.'s rates to its " standard wholesale rates" after June 1. In response to Windstream's rate change notification, D.I.D. did not deny that it was engaged in the resale of Windstream's telecommunications services. Instead, D.I.D. alleged that Windstream's attempt to raise its rates constituted an impermissible restriction on the resale of telecommunications services in violation of federal law.

On May 3, 2012, Windstream sent D.I.D. a termination notice. Windstream asserted that its differential pricing structure for retail customers and wholesalers was lawful, and that D.I.D. " specifically agreed to that distinction when [it] signed [its] retail contract." J.A. 116. Windstream indicated that it interpreted D.I.D.'s most recent response " as an improper refusal to pay the increased rates" and that it would terminate D.I.D.'s services five days later, on May 8, 2012. Id. Windstream later agreed not to disconnect D.I.D.'s service before May 21, 2012.

On May 21, 2012, D.I.D. filed a complaint and a motion for a TRO against Windstream in the U.S. District Court for the Southern District of New York. The district court granted the TRO that day, enjoining Windstream from terminating service to D.I.D. In issuing the order, the district court required that D.I.D. deposit $314,672.80, an amount equal to twice the charges on Windstream's most recent monthly invoice, as security into the registry of the district court.

The district court held a hearing on May 23, 2012, which it continued until June 4, 2012. At the June 4 hearing, the district court determined that it would " allow Windstream to increase the rates to the wholesale rates effective June 1[]" until the hearing on D.I.D.'s motion for a preliminary injunction, scheduled for June 21, 2012. J.A. 629. Throughout the course of these hearings, the TRO remained in effect, and Windstream continued to provide telecommunications services to D.I.D.[2]

At the June 21, 2012 hearing, the district court denied D.I.D.'s motion for a preliminary injunction and dissolved the TRO. The district court concluded that although D.I.D. had established irreparable harm at the time the TRO was first issued, any risk of such harm that remained on June 21 resulted from D.I.D.'s failure to use the time when the TRO was in effect to obtain a new service provider. The district court further concluded that D.I.D. had failed to establish a likelihood of success on the merits of the underlying contractual dispute. The district court determined that D.I.D. was engaged in the resale of telecommunications services, and that this resale constituted a material breach of the Service Agreement. Finally, in response to D.I.D.'s contention that Windstream's May 3 notice of termination was ineffective because it provided that services would be terminated on May 8, before the end of the Agreement's thirty-day termination notice requirement, the district court concluded that this issue was moot. The district court reasoned that under New York law a termination notice that incorrectly identifies the termination

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date nevertheless becomes effective as of the correct termination date.

After issuing this ruling, the district court asked counsel for Windstream whether it objected to the return of the TRO security to D.I.D. Windstream's counsel responded: " No objection, your Honor, considering you are dissolving the TRO." J.A. 653. The district court also noted that Windstream had not filed an answer to D.I.D.'s complaint, even though Windstream's answer was due that day. Windstream's counsel requested an extension, and the district court granted an extension until 5 p.m. the following day, June 22, 2012.

Early in the day on June 22, before Windstream filed its answer, D.I.D. filed a notice of dismissal without prejudice under Rule 41(a)(1)(A)(i) of the Federal Rules of Civil Procedure. Three days later, Windstream sent a letter to the district court requesting recovery from the TRO security. In the letter Windstream's counsel acknowledged that he had not objected to the return of the TRO security at the June 21 hearing. He explained, however, that at the time of the hearing he was not aware that Windstream had just issued an invoice in the amount of $244,888.79 for services rendered between May 15, 2012 and June 14, 2012. Windstream requested that the district court direct the payment of that amount from the TRO security.

On January 7, 2013 the district court issued an opinion and order concluding that D.I.D.'s voluntary dismissal established that Windstream was entitled to recover from the TRO security. See U.S. D.I.D. Corp. v. Windstream Commc'ns, Inc. ( U.S. D.I.D. II ), 916 F.Supp.2d 501 (S.D.N.Y. 2013).[3] The district court found that recovery on Rule 65(c) security--" a[t] least in this Circuit" --required a final adjudication on the merits. Id. at 506-07. The district court nevertheless concluded that a voluntary dismissal without prejudice may function as a final adjudication on the merits for the purpose of recovery on Rule 65(c) security. Id. at 508-11. Because D.I.D.'s decision to enter a voluntary dismissal without prejudice immediately followed the court's denial of D.I.D.'s motion for a preliminary injunction and the dissolution of the TRO, and because there was no reason to explain D.I.D.'s voluntary dismissal other than the court's determination that D.I.D. was unlikely to prevail on the merits, the district court concluded that the dismissal qualified as a final adjudication on the merits. Id. at 514-15. Finally, the district court calculated the damages recoverable against the TRO security at $227,271.92, a figure that it reached based on the " interim" rates that Windstream charged for the period from May 22, 2012 (when the TRO was first entered) to May 31, 2012, and the wholesale rates for the period from June 1, 2012 to June 21, 2012 (when the TRO was dissolved). Id. at 515-16. This appeal followed.

DISCUSSION

D.I.D. raises four issues on appeal. First, D.I.D. argues that the district court lacked jurisdiction to order recovery from the TRO security because the district court's order followed D.I.D.'s voluntary dismissal without prejudice. Second,

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D.I.D. contends that Windstream is equitably estopped from asserting and has waived its claim to recovery from the TRO security. Third, D.I.D. argues that the district court erred in concluding that D.I.D.'s voluntary dismissal established that Windstream had been wrongfully restrained by the TRO. Finally, D.I.D. asserts that, even if Windstream were entitled to recovery from the TRO security, the district court erred in calculating the amount based on the rates charged by ...


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