## Facts

- American Hospital Supply Corporation (AHS) became the exclusive U.S. distributor of Hospital Products’ reusable surgical stapling systems under a written agreement beginning in 1982.
- The contract had an initial three-year term and automatic one-year renewals (up to ten years) unless AHS gave at least 90 days’ notice of termination; the notice deadline for the initial term was June 3, 1985.
- On June 3, 1985, Hospital Products demanded to know whether AHS intended to renew and asserted that silence would result in renewal; AHS responded the same day that it was not terminating and the contract was renewed.
- Hospital Products nevertheless announced it would treat the agreement as terminated and sent a June 7 telegram to AHS’s dealers stating AHS was no longer an authorized distributor.
- AHS held approximately $10–$30 million in stapler inventory and alleged threatened harm to dealer relationships and goodwill.
- AHS sued for breach of contract and sought a preliminary injunction compelling Hospital Products to honor the distributorship and stop interference; after an evidentiary hearing, the district court granted the injunction conditioned on a $5 million bond.
- Hospital Products, in financial distress and reorganizing in bankruptcy, appealed the injunction under 28 U.S.C. § 1292(a)(1).

## Issues

1. What standard governs whether to grant preliminary injunctive relief, including how to weigh likelihood of success against harms to each side.
2. Whether AHS showed a sufficient likelihood of success that Hospital Products breached the agreement by refusing to honor the automatic renewal, despite allegations that AHS previously repudiated.
3. Whether AHS faced irreparable harm and inadequate legal remedies, including risks from Hospital Products’ insolvency and damage to goodwill and dealer relations.

## Decision

- The Seventh Circuit affirmed the preliminary injunction.
- The court framed the preliminary-injunction inquiry as minimizing the expected cost of error, commonly expressed as granting relief when the plaintiff’s probability of success times its harm from denial exceeds the defendant’s probability of success times its harm from an erroneous grant.
- The court held the district court acted within its discretion in finding AHS had a substantial probability of success on the contract claim and that the balance of harms favored interim relief.
- The $5 million bond was a significant protection against losses from a wrongful injunction.
- Given the evidentiary hearing and the district court’s weighing of the parties’ financial conditions and contractual arguments, there was no abuse of discretion.

## Legal Principles

- Preliminary injunction decisions are reviewed for abuse of discretion; factual findings are reviewed for clear error and legal conclusions de novo.
- The likelihood-of-success and balance-of-harms factors can be analyzed together as an expected-cost-of-error calculation rather than as separate, rigid elements.
- A strong showing of likely irreparable harm can justify preliminary relief even when merits questions remain disputed, so long as the district court reasonably assesses probabilities and harms.
- Risk that a damages judgment will be uncollectible because of the defendant’s insolvency can support a finding that legal remedies are inadequate.
- Threatened loss of goodwill and disruption of established commercial relationships may constitute irreparable harm where damages are difficult to quantify.

## Conclusion

The court affirmed preliminary injunctive relief enforcing an exclusive distributorship, holding that the district court reasonably balanced merits likelihood and comparative harms—using an expected-cost-of-error approach—and could treat insolvency risk and threatened loss of goodwill as supporting irreparable harm despite disputed contract defenses.


Am. Hosp. Supply Corp. v. Hosp. Prods. Ltd., 780 F.2d 589 (7th Cir. 1986)