Fuji Photo Film Co., LTD. v. Jack C. Benun

Date: February 29, 2008

FOR PUBLICATION

In re JACK C. BENUN, Debtor.

FUJI PHOTO FILM CO., LTD., Plaintiff, v. JACK C. BENUN, Defendant.

OPINION

APPEARANCES

LAWRENCE ROSENTHAL, ESQUIRE
MATTHEW W. SIEGAL, ESQUIRE
ANGIE M. HANKINS, ESQUIRE
Stroock, Stroock & Lavan, LLP
180 Maiden Lane
New York, NY 10038
Attorneys for Plaintiff, Fuji Photo Film Co., Ltd.

BRUCE BUECHLER, ESQUIRE
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, NJ 07068
Attorneys for Plaintiff, Fuji Photo Film Co., Ltd.

DENNIS J. O'GRADY, ESQUIRE
JOSEPH L. SCHWARTZ, ESQUIRE
SETH H. LIEBERMAN, ESQUIRE
KEVIN J. LARNER, ESQUIRE
Riker Danzig Scherer Hyland & Perretti LLP
Headquarters Plaza-One Speedwell Avenue
Morristown, NJ 07962
Attorneys for Defendant, Jack C. Benun

HONORABLE MORRIS STERN, Bankruptcy Judge

I. Background.

Fuji Photo Film Co., Ltd (“Fuji”) sues Chapter 7 debtor Jack C. Benun (“Benun”) to except from his bankruptcy discharge certain debt and claims arising from both established patent infringement and alleged continued infringement by Jazz Photo Corp. (“Jazz”) and Benun. In immediate dispute are complex questions of Benun’s purported “willful and malicious injury” to Fuji’s property rights in patents for disposable cameras. See 11 U.S.C. § 523(a)(6) (exception to discharge based upon such willful and malicious injury). This adversary proceeding was tried for twenty-three days over a period of more than nine months, and the court reaches the findings of fact and conclusions of law set forth hereinafter.

The Fuji-Jazz-Benun dispute has a decade-long history, during which Fuji pursued Benun and Jazz for patent infringement.1 Jazz, in liquidation following confirmation of a Chapter 11 liquidating plan, had been a corporation whose stock was owned by Benun’s family but which operated under his control. The Fuji-Jazz-Benun litigation trail, in summary form for present purposes, began with a Fuji-prompted investigation by the International Trade Commission (“ITC I”). On June 28, 1999 the ITC adopted an administrative finding that the importing and sale of certain “Lens-Fitted Film Packages” (disposable cameras referred to as “LFFPs”) by Jazz and a number of other importers violated Fuji’s patents. The Commission issued a General Exclusion Order and Order to Cease further infringement of Fuji’s patents (hereinafter the “Cease and Desist Order”). Jazz (not Benun) and others appealed to the Federal Circuit (“Appeal I”). In significant part, the appeal centered on what manner of refurbishment of Fuji-patented disposable camera shells would be an allowable “repair,” as distinguished from an infringing “reconstruction.” Meanwhile, immediately on the heels of the 1999 ITC I decision, Fuji sued Jazz, its Hong Kong subsidiary and Benun in an infringement/damage action in the United States District Court for the District of New Jersey (“District Court I”). The chronology of these three matters is:

•ITC initial investigation (ITC I) - March 18, 1998 to June 28, 1999;

•Fuji District Court patent suit (District Court I) - June 23, 1999 to March 18, 2003 (judgment date); and

•Appeal of ITC I to Federal Circuit (Appeal I) - September 28, 1999 to August 21, 2001 (decision date).

Appeal I resulted in a reversal of the ITC on the basic concept of allowing repair. While disposable camera shells could be repaired, the affirmative defense of such repair had yet to be established by the appellants (including Jazz). The Federal Circuit’s lengthy opinion included only the most generalized description of “how to” refurbish LFFPs so that the affirmative defense of “repair” could be advanced by Jazz and others (leaving future process issues for eventual case-by-case resolution). The Federal Circuit reversal applied “to LFFPs for which the patent right was exhausted by first sale in the United States, and that were permissibly repaired.” Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d at 1110. The “first sale in the United States” (emphasis added) requirement has taken on overriding significance. There was a remand to the ITC for implementation of the decision, which, in turn, generated a request for comment by the ITC. Fuji’s comment included a request for an enforcement proceeding (as to the earlier Commission Cease and Desist Order), targeting not only Jazz, but also Benun and Jazz’s then president (Cossentino). On September 24, 2002 the ITC acceded to Fuji’s request by initiating an enforcement proceeding against Jazz, Benun and Cossentino (“ITC II”).

District Court I, long stayed pending the Federal Circuit’s decision in Appeal I, resulted in a near $30 million judgment against Jazz, its Hong Kong subsidiary and Benun, jointly and severally. The judgment of March 18, 2003 (covering infringement only through the date of the decision in Appeal I, August 21, 2001) propelled Jazz and Benun into this court. Jazz filed a Chapter 11 petition on May 20, 2003, and Benun filed a like petition on July 2, 2003.2

District Court I included a jury finding that Jazz and Benun had proven the affirmative defense of repair for only a small portion of the more than forty million refurbished LFFPs Jazz had sold between 1995 and August 21, 2001. Something less than four million refurbished LFFPs were proven repaired in an approved process, and only 9.5% of the total sales of refurbished LFFPs were established as the product of patent exhaustion via the necessary first sale by Fuji or a Fuji licensee in the United States.3 The infringing sale of reconstructed cameras, however, was found to be “not willful” on Jazz’s part; moreover, while Benun was found to have induced this infringement, that inducement was determined by the jury to be “not willful.” The jury also determined that Jazz had willfully infringed, and Benun had, correspondingly, willfully induced that infringement, for some 1,209,760 newly made (not refurbished) LFFPs.4 Notwithstanding this jury finding as to willfulness, the Court declined to award enhanced damages and attorneys’ fees “under the circumstances of this case.” 249 F. Supp. 2d at 457 n.30.

Appeal II from District Court I specifically addressed (among other points of appeal and cross-appeal) the Jazz/Benun challenge to the willfulness determination as to the newly made LFFPs and Fuji’s challenge to the refusal to enhance damages (argued on appeal by Fuji as to refurbished LFFPs); on January 14, 2005 District Court I was affirmed on all points of appeal. Meanwhile, ITC II had been initially interrupted by the bankruptcies.5 Eventually, this court issued an order removing any perceived bankruptcy obstacle to the continuation of the ITC II enforcement proceeding. Things went badly there for Jazz and Benun. On July 27, 2004 the ITC adopted administrative findings that Jazz, with Benun’s complicity, had again infringed Fuji’s patents (now, after August 21, 2001). On the day of the Federal Circuit’s January 14, 2005 affirmance of the District Court in Appeal II, the ITC levied a $13,675,000 penalty (for violation of the 1999 Cease and Desist Order for the August 21, 2001 through December 12, 2003 period), jointly and severally, against Jazz and Benun. The penalty is due the United States government; however, Fuji has filed claims in the Jazz and Benun bankruptcies based upon the ITC findings. The ITC II penalty was appealed, again to the Federal Circuit (“Appeal III”). That appeal, on Benun’s behalf (only), after Jazz’s withdrawal, generally affirmed ITC II. Yet there was a reversal of a portion of the ITC’s finding, the appeal approving the remolding of certain “spent parts” in the allowable process of repair. See Appeal III, 474 F.3d at 1295-98. (On remand to the ITC, the penalty was reduced based upon the spent-part reversal, to $13,138,000.) In a related branch of the Fuji-Jazz-Benun disputes, certain containers of LFFPs were denied entry into the United States by United States Customs in August 2004. Customs acted pursuant to the ITC’s Cease and Desist Order. Jazz challenged Customs by application of October 4, 2004 to the Court of International Trade (the “CIT”). That Court tried the dispute (between the United States government and Jazz, to the exclusion of would-be intervenor Fuji), in November 2004. Some (but not all) LFFPs were deemed to have been established as compliant with the affirmative defense of first sale/repair, and were thus released into the United States.6 The United States government appealed; on February 28, 2006, the Federal Circuit affirmed the decision of the CIT. II. Pretrial Motions. As would be expected, the parties engaged in substantial pretrial motion practice. Fuji sought discovery access to Jazz-Benun’s counsel in District Court I/ITC II; that access was denied. Fuji Photo Film Co., Ltd. v. Benun, 339 B.R. 115 (Bankr. D.N.J. 2006). The parties cross-moved for summary judgment, pressing (among other arguments) each side’s perception of the preclusive effects of District Court I and/or ITC II. Summary judgment as to willful and malicious injury to Fuji’s patent rights was denied to both sides,7 while the court solicited more structured and precise input from the parties as to standards for Benun’s state of mind, application of those standards in time frames before and after August 21, 2001, and preclusion. See December 16, 2005 transcript (docket entry 35) at 55:23-58:13. Ultimately, these issues were readdressed on the eve of trial. Direct experience with the Fuji-Jazz-Benun disputes, and exposure to the disputes in other forums, served to alert this court to trial management obstacles. The overgeneralized summary judgment motions, each selectively relying on litigation history, drove home the need to rein in the scope of the trial. Hence, this court ordered that direct testimony be fully presented in written form and prior to trial. Declarations or affidavits were required (with proffers allowed for adverse or unavailable witnesses). Notwithstanding the written submissions, unless otherwise agreed by the parties, witnesses would have to be available at trial for cross-examination. Rebuttal testimony was not covered by the written submission requirement. See January 30, 2006 transcript (docket entry 57) at 10:10-12:22; February 6, 2006 transcript (docket entry 63) at 28:1-23. Trial exhibits were to be premarked and submitted pretrial; stipulations as to exhibits and facts were to be the subject of counsels’ conferences in the days leading up to trial. Unfortunately, while exhibits generally were duly marked and submitted, essentially no stipulations were developed as to exhibits or facts (either because time ran out, or entrenched positions reflecting the bitterness of long-fought matters prevailed, or a combination of these causes). The prospect of a long trial (where no quarter would be given by either side) became clear. Last minute maneuvering by the parties included (among other efforts): Fuji’s abandonment of some of its substantive claims;8 Fuji’s limitation of its infringement damage claim to the outside date of December 12, 2003;9 Fuji’s motion to limit (and foreclose) court consideration of the CIT Case and its Federal Circuit affirmance (based upon the December 12, 2003 damage cutoff, since the CIT Case dealt with LFFP shipments in August 2004); Benun’s motion to limit (i.e., foreclose) Fuji’s reliance on the testimony of a proposed witness, Bilka;10 and, an extension of the continuum of motions (starting with the unmatured summary judgment motions and running through trial threshold motion practice) seeking to limit the scope of trial based upon various concepts of preclusion. Fuji’s self-imposed limitations were not objected to; its effort to have this court disregard the CIT Case were generally unsuccessful;11 and, the Bilka testimony was not excluded, though the basis and foundation for his cataloging were issues deferred to trial.12 Scope of trial issues was rebriefed and argued both shortly before trial and on the first day of trial, and decided at those hearings.13