                            In the

United States Court of Appeals
              For the Seventh Circuit

No. 11-1446

R OCHE D IAGNOSTICS C ORPORATION,
                                              Plaintiff-Appellant,
                               v.


M EDICAL A UTOMATION S YSTEMS, INC.;
G REGORY A. M ENKE; and K URT M. W ASSENAAR,

                                           Defendants-Appellees.


       Appeal from the United States District Court for the
        Southern District of Indiana, Indianapolis Division.
      No. 1:10-cv-1718-SEB-DML—Sarah Evans Barker, Judge.


        A RGUED M AY 9, 2011—D ECIDED M AY 24, 2011




 Before EASTERBROOK, Chief Judge, and W OOD and
W ILLIAMS, Circuit Judges.
  E ASTERBROOK, Chief Judge. Roche Diagnostics makes
glucose monitors and other diabetes-related products
that incorporate software written by Medical Automation
Systems (MAS). Roche’s contract with MAS entitles it
to use the software for two years after the contract’s
initial term (2006 through 2010) and any extension. It
2                                                 No. 11-1446

also gives Roche a right of first refusal should MAS
agree to sell its stock or assets to one of Roche’s competi-
tors “during the term of this Agreement.” MAS notified
Roche that it would not extend the contract after the
original expiration date. Roche learned that investors in
MAS were negotiating to sell their stock to Alere, Inc.,
which Roche considers to be a competitor. It told MAS
in December 2010 that it would match Alere’s offer, but
MAS replied that, because the transaction would not
close until 2011, Roche’s right of first refusal did not apply.
  The contract provides for arbitration of disputes
about the right of first refusal but allows either party
to ask a judge for equitable relief while arbitration
is ongoing. Invoking the diversity jurisdiction, Roche
asked for an injunction pending arbitration. Because the
merits of the dispute will be resolved by the arbitrator,
we do not discuss the terms of the contract or the nature
of the parties’ contentions beyond the few words
already written. Some of these details appear in the
district court’s opinion. 2011 U.S. Dist. L EXIS 18117 (S.D.
Ind. Feb. 23, 2011). It is enough for now that the district
court concluded—and MAS does not deny—that Roche
has a reasonable chance of prevailing in the arbitration.
  The district court concluded that Roche will suffer
irreparable injury if Alere acquires MAS. The acquisi-
tion could undermine the value of Roche’s right to use
the software through 2012. The court also concluded
that the difficulty of undoing a sale (soon to be followed
by a merger) could reduce, if not eliminate, the value of
Roche’s right of first refusal. At the same time, the
No. 11-1446                                              3

district judge found, enjoining the sale would cause
irreparable harm to MAS and Alere by prolonging the
uncertainty about who is entitled to control MAS’s busi-
ness. Delay could reduce the value of MAS to Alere,
leading it to withdraw (or reduce the price), to the detri-
ment of MAS’s stockholders. The district judge con-
cluded that the best way to balance these competing
interests would be to allow the sale to proceed, subject
to a requirement that MAS allow Roche to use the soft-
ware through 2012. The district court issued an injunc-
tion implementing this decision; the injunction expires
as soon as the arbitrator renders a decision (or at the end
of 2012, if the arbitrator still has not acted).
  Roche asked us for an injunction pending appeal. We
concluded that the sale can proceed if MAS and Alere
respect Roche’s exclusive rights, and if the parties ensure
that MAS is maintained as a separate firm so that the
transaction can be undone and the business transferred
to Roche—with its full value intact—should the arbi-
trator rule in Roche’s favor. The hold-separate portion
of our injunction sets these conditions:
 1.   MAS survives the merger in its current form as an
      independent, though wholly or partially owned,
      corporate entity;
 2.   There are no material changes in MAS’s operations;
 3.   There are no material changes in MAS’s business
      plans;
 4.   Alere does not hire any current or former em-
      ployees, officers, or directors of MAS;
4                                                  No. 11-1446

    5.   MAS does not hire any current or former em-
         ployees, officers, or directors, of Alere;
    6.   No current or former employees, officers, or directors
         of Alere serve as directors or board members of
         MAS;
    7.   No current or former employees, officers, or directors
         of MAS serve as directors or board members of
         Alere;
    8.   MAS does not share with Alere any confidential
         or proprietary information regarding Roche or any
         other company with which MAS does business;
    9.   MAS does not share with Alere any of MAS’s own
         confidential and proprietary information except
         to the extent that MAS shares such information
         with third-parties in its normal course of business;
         and
    10. MAS does not transfer or dispose of any material
        assets or make any material acquisitions.
MAS and Alere elected not to close the transaction
under these conditions. We accelerated the briefing and
argument of the appeal. Meanwhile the arbitration is
under way: the arbitrator has allowed extended dis-
covery and set a hearing for September. This does not
seem like an expedited schedule, but none of the
litigants has complained.
  Appellate review of a district judge’s decision balancing
the harms in a proceeding requesting equitable relief is
deferential. See Ashcroft v. ACLU, 542 U.S. 656, 664–65
No. 11-1446                                               5

(2004). MAS contends that deferential review leads
straight to affirmance, because after an evidentiary
hearing the district judge reached a thoughtful conclu-
sion recognizing the injury that could be done by either
closing the deal or delaying the closing. The problem
with MAS’s argument is that the district judge included,
as an injury on MAS’s side of the ledger, the harm
that would be done by delaying a final decision about
whether MAS’s business goes to Alere or to Roche. The
district court wrote that this injury could be avoided
by allowing the sale to proceed. Yet closing the sale
will not avoid uncertainty. Until the arbitrator decides,
uncertainty continues whether the sale has closed or not.
The chance that the arbitrator will decide that Roche
properly exercised a right of first refusal, and thus is
entitled to acquire MAS, means that the final outcome
cannot be known today. It is the arbitration agreement
between Roche and MAS, not an injunction, that
prolongs uncertainty.
  Because “uncertainty” is a wash, we need to ask whether
Roche or MAS faces the greater harm. The district judge
said that Roche’s harm is the greater, if effects of uncer-
tainty from delay are put aside. We agree. Roche faces
harm from acts that may undermine its right to use the
software in connection with diabetes-related products.
And it faces harm from the fact that parties to the sale of
a business—whether accomplished by merger, the sale
of assets, or the transfer of all stock—commonly make
changes that impede any effort to restore the status quo
ante. Often the point of the deal is to give one firm access
to another’s assets, including its intellectual property,
6                                              No. 11-1446

and its executives too. The acquiring firm may install
new managers in order to protect or enhance its invest-
ment, may move assets to or from the acquired business
in order to achieve economies of scope (often called
synergies), and may alter the acquired firm’s business
plans substantially.
   A careful study concluded that changes of this kind
prevent divestiture that would solve antitrust problems.
See Kenneth G. Elzinga, The Antimerger Law: Pyrrhic
Victories?, 12 J.L. & Econ. 43 (1969). A recognition that
eggs can’t be unscrambled underlies the Hart-Scott-
Rodino Antitrust Improvements Act, 15 U.S.C. §§ 15c–15h,
18a, which entitles antitrust enforcers to notice of im-
pending sales and mergers, so that anticompetitive ac-
quisitions can be tackled while effectual relief is
still possible. And the difficulty of restoring an acquired
firm to its original independent situation is why we
conditioned closing on the defendants’ willingness to
hold the firms’ assets and management separate until
the arbitrator could make a decision. Their unwilling-
ness to accept these conditions implies a desire to take
one or more of the steps that would make the deal hard,
if not impossible, to reverse.
  An irreversible transaction would defeat Roche’s right
of first refusal, should the arbitrator vindicate Roche’s
position. MAS does not contend that this loss could
be compensated in damages. It would be difficult
indeed to know just how much more MAS is worth to
Roche than the price it must pay to match Alere’s of-
fer. MAS concedes that irreparable injury, and the
No. 11-1446                                              7

other conditions for injunctive relief, see Winter v. NRDC,
Inc., 555 U.S. 7 (2009), have been established. Its only
argument is that the district court did not abuse its dis-
cretion because the harms are in equipoise given
the loss it will suffer if uncertainty continues. Since the
uncertainty will continue until the arbitrator’s deci-
sion—when any injunction will expire—the harms are
one-sided. Roche is entitled to effective relief until the
arbitrator decides.
   This court’s hold-separate order protects Roche’s inter-
ests; it has not asked for more. After oral argument,
however, MAS asked us to modify two of the conditions,
which it said obstruct the transaction even though Alere
is willing to accept the other eight.
   Condition 6 provides: “No current or former employees,
officers, or directors of Alere [may] serve as directors
or board members of MAS.” This not only prevents
Alere from making substantial changes but also prevents
it from displacing MAS’s current managers, officers, and
directors, whose continuing presence may be essential
should MAS later be transferred to Roche. What worries
Alere is that, after closing, some promises in the acquisi-
tion agreement would cease to operate. MAS promised
Alere that before closing it would not incur liabilities
exceeding $100,000 except in the ordinary course of
business; would not allow assets to become subject to
a lien; would not sell new stock or acquire any new
business; would not dispose of its intellectual property;
and so on. These are normal terms of an acquisition
agreement. The promises expire when the transaction
8                                              No. 11-1446

closes, because the buyer can install its own personnel
to ensure that the business is well operated. If the sale
proceeds but condition 6 applies, however, Alere’s in-
vestment will be at risk: MAS’s old shareholders will
have their money and may neglect their duties or take
imprudent risks. Certainly their competitive edge will
be dulled.
  The way to handle this problem is not, however, to
modify condition 6. It is to add a new requirement, condi-
tion 11: “If Alere acquires MAS subject to the first 10
conditions, then MAS remains bound by all promises
in §7.7 of the acquisition agreement for as long as this
injunction remains in force.” All of the matters that
concern Alere are in §7.7, so this additional requirement
should ensure that the value of MAS does not deteriorate
while the arbitrator is adjudicating Roche’s conten-
tions. And because §7.7 is in force today, its continuation
pending the resolution of the arbitration cannot injure
Roche.
  Alere’s second concern arises from condition 9,
which limits the information that MAS can provide.
Alere believes that, after acquiring all of MAS’s stock, it
will be required to consolidate its financial statements
with those of MAS, something that would not be
possible if MAS can provide Alere with no more infor-
mation than MAS releases to the public. The SEC’s Regula-
tion S–X generally requires consolidation if a reporting
company such as Alere owns a majority of some other
company’s stock. See 17 C.F.R. §§ 210.3–01, 210.3–02,
210.3–03. But generally differs from always. Rules of the
No. 11-1446                                                9

Financial Accounting Standards Board permit a firm not
to prepare consolidated financial statements when
“control does not rest with the majority owner”. FASB Reg.
§810-10-15-10(a)(1). While the hold-separate conditions
are in force, control would not rest with Alere, which
would not violate any statute or regulation by
treating stock in MAS as an asset, rather than preparing
a consolidated financial statement. Similarly, Alere’s
lack of day-to-day control would excuse it from changing
or certifying MAS’s internal financial system in order
to comply with the Sarbanes–Oxley Act. This makes it
unnecessary to modify condition 9.
  One final matter calls for discussion. The district court
did not require Roche to post a bond as a condition of
the preliminary injunction that protects its contractual
period of exclusivity. Nor did this court require a bond
when enjoining the closing unless MAS and Alere im-
plement the hold-separate conditions. Normally an in-
junction bond or equivalent security is essential. See
Fed. R. Civ. P. 62(c), 65(c); Mead Johnson & Co. v. Abbott
Laboratories, 201 F.3d 883, 887–88, amended, 209 F.3d
1032 (7th Cir. 2000). Injunctions can injure litigants—
MAS’s investors certainly are injured by both the district
court’s injunction and our hold-separate order. And
preliminary injunctions, which may be issued in haste,
are more likely to be erroneous than injunctions issued
at the close of the litigation. A party injured by an errone-
ous preliminary injunction is entitled to be made
whole. Established doctrine has it that the damages
payable to a person injured by an erroneously issued
injunction cannot exceed the amount of the bond. W.R.
10                                              No. 11-1446

Grace & Co. v. Rubber Workers, 461 U.S. 757, 770 n.14 (1983);
Russell v. Farley, 105 U.S. 433, 437–38 (1882); Coyne-
Delany Co. v. Capital Development Board, 717 F.2d 385,
393–94 (7th Cir. 1983). Judges therefore should take care
that the bond is set high enough to cover the losses
that their handiwork could cause. A limit of zero—the
upshot of an injunction without a bond—is bound to be
too low.
  The reason why neither the district court nor this
court required a bond is that the contract between
Roche and MAS not only assigns to a court (rather than
an arbitrator) the question whether to block a sale
pending arbitration, but also waives both parties’ entitle-
ment to an injunction bond. By waiving the protection
of an injunction bond, MAS surrendered any right to
compensation should an injunction cause the deal to
fall through. But judges still should take account of the
risk that their deeds creates. We could, for example, set
a time limit on the injunction, though this would allocate
to Roche the risk that relief would expire, and the
sale close, before the arbitrator is done.
  We asked Roche’s counsel at oral argument whether
Roche is willing to compensate MAS’s investors for the
time value of money. Alere has offered $43 million for
all shares of MAS. That price, paid at a closing in
January 2011, is worth more than the same price paid
(by either Roche or Alere) at a closing in January 2012.
Counsel for Roche replied that the equity investors in
MAS would be fully compensated for any loss they
incur because of delay in receiving the purchase price,
No. 11-1446                                              11

and that if Roche eventually acquires the shares it will
pay the investors at least $43 million plus interest from
the time the MAS–Alere deal originally was scheduled
to close. We have taken that promise into account in
deciding that the hold-separate order should last until
the arbitrator is done—or decides that equitable relief is
no longer necessary, if that is earlier. Roche has made
a financial commitment to MAS’s investors and must
keep its word.
  The judgment of the district court is modified to in-
corporate the 11 hold-separate conditions stated in this
opinion. Alere and MAS can close their transaction if they
respect both those conditions and the district court’s
requirement that Roche receive its unimpaired period
of exclusive use of MAS’s diabetes-product software.
As modified, the judgment of the district court is affirmed.




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