In re Benun, Bankruptcy No. 03-32195 (MS).

386 B.R. 59

In re Jack C. BENUN, Debtor Fuji Photo Film Co., Ltd., Plaintiff, v. Jack C. BENUN, Defendant.

Bankruptcy No. 03-32195 (MS).

Adversary No. 03-2615 (MS).

United States Bankruptcy Court, D. New Jersey.

February 29, 2008.

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Lawrence Rosenthal, Esq., Matthew W. Siegal, Esq., Angie M. Hankins, Esq., Stroock, Stroock & Lavan, LLP, New York, NY, for Plaintiff, Fuji Photo Film Co., Ltd.

Bruce Buechler, Esq., Lowenstein Sandler PC, Roseland NJ, for Plaintlff, Fuji Photo Film Co., Ltd.

Dennis O'Grady, Esq., Joseph L. Schwartz, Esq., Seth H. Lieberman, Esq., Kevin J. Larner, Esq., Riker Danzig Scherer Hyland & Perretti, LLP, Morristown, NJ, for Defendant, Jack C. Benun.

OPINION

MORRIS STERN, Bankruptcy Judge.

TABLE OF CONTENTS
   I.  Background.............................................................................65
  II.  Pretrial Motions.......................................................................68
 III.  Scope of Trial.........................................................................70
       A.  Tranche I (1995 through August 21, 2001)...........................................71
           1.  District Court I Judgment......................................................71
           2.  Issue Preclusion...............................................................73
           3.  Factors Deemed Persuasive In Limiting the Scope of Trial.......................75
               (a)  "Willful" As Defined in Bankruptcy and Patent Law.........................75
               (b)  The Malice Requirement of § 523(a)(6)................................78
               (c)  District Court Refusal to Enhance Damages and the Federal
                      Circuit's Comments in Appeal II ........................................80
               (d)  The Repair Defense .......................................................81
           4.  This Court's Review of Pretrial Submissions....................................81
           5.  Conclusion — Scope of Trial of Tranche I Issues..........................82
       B.  Tranche II (August 21, 2001 to December 12, 2003) Issue Preclusion.................83
       C.  Trial Issues.......................................................................85
  IV.  Tranche II (August 21, 2001 to December 12, 2003): Claims of Patent
         Infringement, Inducement to Infringe, and Willful and Malicious Injury to
         Property per § 523(a)(6)........................................................85
       A.  Evidence Issues....................................................................85
       B.  Process of Refurbishing LFFPs......................................................85
           1.  Effort to Establish a Standard for Permissible Repair Processing...............85
           2.  Proof Required to Establish "Permissible Repair" Process.......................88
           3.  Determination as to Processing.................................................90
       C.  First Sale Requirement.............................................................95
       D.  Conclusion as to Infringement.....................................................100
       E.  Whether Fuji Established Benun's Willful and Malicious Injury to its
             Property for Purposes of § 523(a)(6) Exception to Discharge in
             Tranche II......................................................................102

           1.  Burden of Persuasion..........................................................102
           2.  Process of Repair.............................................................102
           3.  First Sale....................................................................103
               (a)  Factors Considered.......................................................103
               (b)  Evaluation of Factors....................................................106
               (c)  Findings Regarding Willful and Malicious Injury in Tranche II............106
               (d)  Summary of Tranche II "Willful and Malicious" Findings...................108
           4.  Calculation of Portion of Tranche II Judgment Excepted from
                 Discharge...................................................................109
               (a)  Reloads of Reloads.......................................................109
               (b)  October 1, 2002 — December 12, 2003 period.........................110
   V.  Tranche I (Pre-August 21, 2001): Whether Fuji Established Benun's Willful
         and Malicious Injury to Its Property for Purposes of § 523(a)(6) Exception
         to Discharge........................................................................110
  VI.  Issues of Enhancement of Compensatory Damages.........................................111
       A.  Lack of Clarity in the Patent Law.................................................112
       B.  Facts Establishing Infringement...................................................112
       C.  Facts Establishing Damages........................................................113
       D.  Effect of Judgments, Penalty and Bankruptcy on Damage Enhancement
             and Fees........................................................................114
       E.  Case, Taken as a Whole, Does Not Warrant Enhanced Damages.........................114
       F.  "Bad Faith" Finding of ITC II Compared and Contrasted.............................115
 VII.  Interest on Claims; Attorneys' Fees and Costs.........................................116
VIII.  Summary/Conclusion....................................................................118

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...