U.S. Philips Corporation v. Kbc Bank N.V. ( 2010 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
U.S. PHILIPS CORPORATION, a 
Delaware corporation,
Plaintiff-Appellant,
No. 08-56296
v.
D.C. No.
KBC BANK N.V.,
Movant-Appellee,  2:05-cv-08953-
R-PLA
and
OPINION
KXD TECHNOLOGY, INC., a
California corporation,
Defendant.

Appeal from the United States District Court
for the Central District of California
Manuel L. Real, District Judge, Presiding
Argued and Submitted
November 2, 2009—Pasadena, California
Filed January 12, 2010
Before: Ronald M. Gould and Carlos T. Bea, Circuit Judges,
and Donald W. Molloy* District Judge.
Opinion by Judge Gould
*The Honorable Donald W. Molloy, United States District Judge for the
District of Montana, sitting by designation.
925
U.S. PHILIPS v. KBC BANK N.V. 927
COUNSEL
Sean A. O’Keefe (argued), O’Keefe & Associates Law Cor-
poration, P.C., Newport Beach, California; Robert W. Pitts,
Law Office of Robert W. Pitts, Irvine, California, for
plaintiff-appellant U.S. Philips Corporation.
James M. Andriola (argued), Reed Smith LLP, New York,
New York; Tony L. Richardson, Reed Smith LLP, Los Ange-
les, California, for intervenor-appellee KBC Bank N.V.
OPINION
GOULD, Circuit Judge:
Appellant U.S. Philips (“Philips”) appeals the district
court’s April 28, 2008 order granting non-party Appellee-
Intervenor KBC Bank’s motion to modify a preliminary
injunction freezing the assets of the underlying defendants.
We vacate the modification order and remand on an open
record for any further proceedings in the district court consis-
tent with this opinion.
I
The present appeal derives from a patent infringement
action filed in 2005 in the United States District Court for the
928 U.S. PHILIPS v. KBC BANK N.V.
Central District of California by Philips against KXD Tech-
nology and its affiliates (the “KXD Defendants”). On July 31,
2007, the district court found that the KXD Defendants were
“in the process of liquidating and concealing their assets,” and
granted Philips a temporary restraining order (“TRO”) freez-
ing the KXD Defendants’ assets. The terms of the TRO pro-
hibited the KXD Defendants and “all persons in active
institutions, brokerages, or others in possession or control of
their assets” from “directly or indirectly transferring . . . , con-
cealing, secreting, distributing, disposing of, shipping in any
way or otherwise hiding assets and making [assets] unavail-
able to [Philips].” In accordance with the Federal Rules of
Civil Procedure, Philips deposited a $50,000 surety bond with
the Clerk of Court as a condition for entry of the TRO. See
Fed. R. Civ. P. 65(c).
On September 17, 2007, the district court entered a prelimi-
nary injunction incorporating the terms of the asset-freeze
TRO. However, on the same date—September 17, 2007—the
district court also entered a default judgment against all KXD
Defendants. The default judgment imposed a permanent
injunction prohibiting the KXD Defendants from infringing
Philips’s patents and awarded Philips treble compensatory
damages in the amount of $87,765,249. The default judgment
did not, however, incorporate the terms of the TRO or prelim-
inary injunction, and it did not impose an ongoing asset freeze
on the KXD Defendants. Why the district court entered a pre-
liminary injunction on the same day that it entered a default
judgment is unclear, and although the district court ordered
the $50,000 bond returned to Philips, the district court did not
state its unequivocal intent to dissolve the preliminary injunc-
tion.
The KXD Defendants kept accounts in the Singapore and
United States branches of Appellee-Intervenor KBC Bank.
Between August 1, 2007, and October 26, 2007—after the
TRO had been entered—a series of funds transfers were made
into those accounts. In total, approximately $2.6 million in
U.S. PHILIPS v. KBC BANK N.V. 929
funds were transferred. Some of these transfers may have vio-
lated the terms of the TRO, but we cannot be certain, because
Philips has never sought relief in the district court to enforce
the terms of the TRO.1
KBC Bank contends that, despite the TRO, preliminary
injunction, and default judgment entered against the KXD
Defendants, KBC Bank’s contractual and equitable rights,
triggered by possession of the $2.6 million in funds, entitle it
to “set off” the $2.6 million in funds against $2.86 million in
debts owed to KBC Bank by the KXD Defendants. KBC
Bank’s alleged contractual setoff right stems from a 2006
agreement between KBC Bank and certain KXD Defendants.
Whether or not KBC Bank has an equitable right of setoff
depends on what jurisdiction’s banking laws govern the
deposited funds.
Philips, on the other hand, insists that the TRO, preliminary
injunction, and default judgment entitle Philips to the $2.6
million, and that this entitlement is not subordinated to KBC
Bank’s asserted contractual and equitable setoff rights.
On March 31, 2008, KBC Bank intervened in the underly-
ing lawsuit between Philips and the KXD Defendants, moving
to modify the district court’s September 17, 2007 preliminary
injunction to permit the bank to exercise its setoff rights
regarding the $2.6 million in sequestered funds. The district
court granted KBC Bank’s motion.2 Philips appealed, and we
have jurisdiction over the interlocutory modification order
pursuant to 28 U.S.C. § 1292(a)(1).
On appeal, KBC Bank argues that Philips’s appeal is moot
because the TRO and preliminary injunction automatically
1
KBC Bank asserts that it has presently sequestered the $2.6 million in
funds. Philips has not indicated disagreement with that assertion.
2
Philips sought reconsideration of the modification order before the dis-
trict court, and its motion for reconsideration was denied.
930 U.S. PHILIPS v. KBC BANK N.V.
terminated on September 17, 2007, when the default judgment
was entered. Alternatively, KBC Bank argues that the district
court did not abuse its discretion in modifying the TRO and
preliminary injunction because KBC Bank’s equitable and
contractual setoff rights are superior to any rights Philips—a
mere judgment creditor—could acquire to the $2.6 million in
funds. Philips argues that the preliminary injunction remains
in effect, and that in any event, the district court’s modifica-
tion order was an inequitable nunc pro tunc modification of
the TRO and preliminary injunction that improperly vitiated
whatever rights Philips acquired under those orders.
II
We review the decision to modify a preliminary injunction
for abuse of discretion. Taylor v. Westly, 525 F.3d 1288, 1289
(9th Cir. 2008) (per curiam). A district court “necessarily
abuses its discretion when it bases its decision on an errone-
ous legal standard,” and therefore issues of law underlying the
modification order are reviewed de novo. Cmty. House, Inc.
v. City of Boise, 490 F.3d 1041, 1057 (9th Cir. 2007).
[1] Much argument on both sides of this case mistakenly
assumes that the preliminary injunction was extant when
modified. We restate the controlling rule governing the life-
span of a preliminary injunction: A preliminary injunction
imposed according to the procedures outlined in Federal Rule
of Civil Procedure 65 dissolves ipso facto when a final judg-
ment is entered in the cause. See Sweeney v. Hanley, 126 F.
97, 99 (9th Cir. 1903); see also United States ex rel. Bergen
v. Lawrence, 848 F.2d 1502, 1512 (10th Cir. 1988) (“With the
entry of the final judgment, the life of the preliminary injunc-
tion came to an end, and it no longer had a binding effect on
any one. The preliminary injunction was by its very nature
interlocutory, tentative and impermanent.” (quoting Madison
Square Garden Boxing, Inc. v. Shavers, 562 F.2d 141, 144 (2d
Cir. 1977))); Fundicao Tupy S.A. v. United States, 841 F.2d
1101, 1103 (Fed. Cir. 1988) (“[A]lthough a preliminary
U.S. PHILIPS v. KBC BANK N.V. 931
injunction is usually not subject to a fixed time limitation, it
is ipso facto dissolved by a dismissal of the complaint or the
entry of a final decree in the cause.”) (internal quotation
marks omitted); Cypress Barn, Inc. v. W. Elec. Co., 812 F.2d
1363, 1364 (11th Cir. 1987); 11A Charles Alan Wright,
Arthur R. Miller & Mary K. Kane, Federal Practice and Pro-
cedure § 2947 (2005). This principle stems from the very pur-
pose of a preliminary injunction, which is to preserve the
status quo and the rights of the parties until a final judgment
issues in the cause. See Univ. of Tex. v. Camenisch, 451 U.S.
390, 395 (1981) (“The purpose of a preliminary injunction is
merely to preserve the relative positions of the parties until a
trial on the merits can be held.”); Sierra On-Line, Inc. v.
Phoenix Software, Inc., 739 F.2d 1415, 1422 (9th Cir. 1984)
(“A preliminary injunction . . . is not a preliminary adjudica-
tion on the merits but rather a device for preserving the status
quo and preventing the irreparable loss of rights before judg-
ment.”).
[2] Here, Philips was awarded a default judgment against
all defendants in the underlying action on September 17,
2007. The preliminary injunction against the KXD Defen-
dants dissolved at that time. For that reason, it seems to us
incorrect to entertain argument about whether the district
court’s subsequent modification order was permissible. At the
time the district court entered that order, there was no prelimi-
nary injunction to be modified.
However, we reject KBC Bank’s argument that the dissolu-
tion of the preliminary injunction renders moot this appeal.
The district court entered an order modifying the preliminary
injunction at KBC Bank’s behest. That modification order is
still in effect. However, a modification order entered after a
preliminary injunction has dissolved is void ab initio, because
at that time there was no preliminary injunction to be modi-
fied. A district court cannot prospectively modify an injunc-
tion that is not in effect, nor may a district court modify a
preliminary injunction nunc pro tunc retroactively to expand
932 U.S. PHILIPS v. KBC BANK N.V.
or vitiate rights the parties have already accrued under an
injunction. See Singh v. Mukasey, 533 F.3d 1103, 1110 (9th
Cir. 2008) (“[T]he power [of a nunc pro tunc order] is a lim-
ited one, and may be used only where necessary to correct a
clear mistake and prevent injustice. It does not imply the abil-
ity to alter the substance of that which actually transpired or
to backdate events to serve some other purpose.” (quoting
United States v. Sumner, 266 F.3d 1005, 1009-10 (9th Cir.
2000))); Cypress Barn, 812 F.2d at 1364 (“The failure of a
court to act, or its incorrect action, can never authorize a nunc
pro tunc entry. If a court does not render judgment or renders
one which is imperfect or improper, it has no power to rem-
edy any of these errors or omissions by treating them as cleri-
cal misprisions.”); Crosby v. Mills, 413 F.2d 1273, 1277 (10th
Cir. 1969) (“An order may be entered nunc pro tunc to make
the record speak the truth but it cannot supply an order which
in fact was not previously made.”).
[3] If the preliminary injunction is dissolved, then a modifi-
cation of that preliminary injunction cannot stand, because it
was entered in error. The district court’s modification order
was not entered until April 28, 2008, after the preliminary
injunction had dissolved because of the entry of final judg-
ment. The modification order is therefore void, and we vacate
it.3
[4] Congress empowers us to “remand the cause and direct
the entry of such appropriate judgment, decree, or order, or
require such further proceedings to be had as may be just
under the circumstances.” 28 U.S.C. § 2106. Both parties
have an apparent claim to the $2.6 million in funds: Philips
3
Our holding does not affect Philips’s continuing ability to seek dam-
ages, through contempt proceedings, for any violations of the TRO and
preliminary injunction that may have occurred while those orders were in
effect. If any time limit for seeking such relief creates a barrier to a claim
by Philips, Philips may seek equitable tolling of any applicable limitations
period. Because that issue is not before us now, we express no view on
it.
U.S. PHILIPS v. KBC BANK N.V. 933
as a judgment creditor, and KBC Bank as a lender. Despite
the parties’ entreaties, we decline to determine whose claim
is superior at this time, because material issues of fact remain
unanswered.4 Cf. Gemco Latinoamérica, Inc. v. Seiko Time
Corp., 61 F.3d 94, 101 (1st Cir. 1995) (concluding that there
was no way to determine whether a bank’s claim to funds was
superior to the petitioner’s claim “short of a remand, exten-
sive further briefing and probably further fact-finding”). The
question whether Philips has a right as a judgment creditor
that is superior to rights of the KBC Bank to funds that origi-
nated from the KXD Defendants cannot be resolved until fac-
tual disputes are resolved at an evidentiary hearing. That
evidentiary hearing must arise in the course of a proceeding
brought by the parties to adjudicate explicitly their claims to
the funds. Such a proceeding is not now before us.
III
[5] Because the temporary restraining order and prelimi-
nary injunction dissolved when the default judgment issued,
the district court’s subsequent modification order is void ab
initio and we vacate it. We remand on an open record for fur-
ther proceedings in the district court not inconsistent with this
opinion.
VACATED and REMANDED.
4
These issues include: (1) when KBC Bank first had notice of the TRO,
(2) whether Philips has properly executed its judgment in regard to the
funds, (3) what jurisdiction the funds were transferred from, (4) what
jurisdiction the funds were transferred to, (5) who transferred the funds,
(6) which defendant’s account received the funds, (7) the respective rights
of the KXD Defendants to funds deposited in the KBC Bank accounts in
question, and (8) possibly other facts we do not list here, but that the par-
ties or the district court may view as relevant on remand.