Seiko Epson Corporation and Epson America, Inc. v. Nu-Kote International, Inc. And Pelikan Produktions, A.G., Defendants-Cross

Citation: 190 F.3d 1360Docket: 97-1313

Court: Court of Appeals for the Federal Circuit; October 19, 1999; Federal Appellate Court

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Seiko Epson Corporation and Epson America, Inc. (collectively "Epson") sued Nu-Kote International, Inc. and Pelikan Productions A.G. for patent infringement, unfair competition, false advertising, and trademark infringement related to ink cartridges. The district court initially granted a preliminary injunction against Nu-Kote for patent infringement, which was affirmed by the Federal Circuit. Epson later amended its complaint to include additional patent infringement claims and joined Pelikan as a defendant.

On March 5, 1997, the district court ruled that several of Epson's patents were unenforceable due to inequitable conduct during their prosecution, and on August 11, 1997, it declared another patent invalid. The court also declined to expand the injunction to cover an additional design patent, concluding that Epson was unlikely to succeed on that claim. The district court found infringement of one patent and modified the preliminary injunction accordingly.

Epson appealed the rulings on unenforceability and invalidity, with the Federal Circuit reversing the district court's findings, stating they were based on erroneous legal principles. Following this, Epson accused the defendants of violating the modified preliminary injunction, leading the district court to hold them in contempt and impose sanctions.

Nu-Kote filed for Chapter 11 bankruptcy protection shortly after oral arguments for the appeal, prompting discussions about whether the bankruptcy stay would affect the ongoing legal actions against it and its co-defendant Pelikan. The parties disputed the implications of the bankruptcy stay under 11 U.S.C. §362(a)(1).

A petition filed under specific sections of the Bankruptcy Code or the Securities Investor Protection Act automatically stays judicial and administrative actions against the debtor that could have been initiated prior to the bankruptcy case. The defendants assert that Nu-Kote's bankruptcy filing imposed a stay on all proceedings and that the appeal can only proceed with bankruptcy court permission. Epson filed an Emergency Motion for Relief From the Stay, which the bankruptcy court scheduled for a final hearing after ongoing litigation between Nu-Kote and Hewlett Packard. The court denied expedited treatment of Epson's motion, citing the need to avoid interference with Nu-Kote's case. The defendants claim the stay remains in effect as the court has not yet ruled on Epson's motion; however, it is clarified that Pelikan is not entitled to the benefits of the automatic stay. The automatic stay aims to protect the debtor from litigation burdens and facilitate an orderly claims resolution, but it does not prevent actions that do not threaten the debtor's assets. Furthermore, the stay does not absolve the debtor from contempt orders or injunctions issued prior to the bankruptcy filing. Courts have allowed claims against co-defendants not protected by the bankruptcy stay to proceed. Importantly, the automatic stay only protects the debtor and their property, not non-debtor parties or their assets, meaning actions against guarantors or affiliates of the debtor can continue despite the bankruptcy stay.

The automatic stay, established under §362(a), does not apply to non-bankrupt co-defendants of a debtor, even if there is a legal or factual connection between them. Case law, including Maritime Electric Co. v. United Jersey Bank and Marcus, Stowell, Beye Government Securities, Inc. v. Jefferson Investment Corp., confirms that such stays are limited to debtors and do not extend to co-defendants. Consequently, claims against the debtor and any counterclaims may proceed despite the stay. This principle also extends to pending appeals when a defendant files for bankruptcy; courts have continued to hear appeals concerning non-bankrupt defendants even after a bankruptcy filing (e.g., Austin v. Unarco Industries, Inc. and Clay v. Johns-Manville Sales Corp.). 

The non-bankrupt party is not protected by the bankruptcy court, allowing appeals to proceed without court action. In the case of the non-bankrupt defendant Pelikan, the appeal will continue based on established legal precedent. Regarding Nu-Kote, since the appeal was fully briefed and argued before its Chapter 11 filing, it does not incur additional litigation expenses from this decision. However, any claims against Nu-Kote require a bankruptcy court ruling to waive the protections of §362(a)(1), leaving the appeal concerning Nu-Kote in abeyance. Appeals related to proceedings against a debtor are automatically stayed, regardless of the roles of the parties involved.

The injunction against Nu-Kote for further infringement continues to be enforced during its bankruptcy proceedings. This injunction, which prohibits future pollution, remains valid despite bankruptcy, as established in case law. Bankruptcy protections do not shield Nu-Kote from liability for ongoing violations of this injunction. A prepetition state court order can be enforced through contempt proceedings against the debtor without conflicting with the automatic stay provisions of bankruptcy law. Consequently, Epson's motion to strike the bankruptcy suggestion and notice of stay is denied, as is the defendants' motion to stay the appeal. 

On the appeal's merits, Epson contests a ruling that four Suzuki patents are permanently unenforceable due to noncompliance with 37 C.F.R. §1.69, which governs foreign language oaths and declarations. The patents, initially from Japan, had declarations filed in English without accompanying Japanese translations. The district court deemed this a violation of §1.69, leading to the patents being classified as permanently unenforceable for inequitable conduct. Epson argues that §1.69 applies only to initial or supplemental oaths or declarations and asserts that it pertains to the duty of disclosure of prior art, relevant to the original application filings.

The purpose of §1.69, as outlined in the Federal Register, emphasizes the duty of candor and good faith required from applicants to the U.S. Patent and Trademark Office (USPTO), promoting the submission of relevant prior art information. It includes provisions for foreign language oaths to ensure non-English speaking inventors understand their obligations. Epson argues this requirement is crucial for foreign inventors' comprehension of their oaths but notes that there is no translation requirement for other filings, which can be submitted in English. 

Epson contends that the documents in question, which amended the labeling of certain drawings initially marked as "prior art" in Japanese applications, did not necessitate an oath. These drawings, Figures 9 and 10, were from the same inventors' parent applications and would qualify as prior art in Japan but not in the U.S. The accompanying declarations clarified that these figures represented earlier embodiments and were accepted by the examiner without objection.

The defendants challenge these assertions, claiming the drawings constitute prior art not found in the Japanese parent applications and that the amendments aimed to support a feature in a Hewlett-Packard patent, which they allege was concealed from the PTO. They also argue that the inventors were unaware of the implications of their signatures, regardless of their English proficiency. 

In light of these disputes, the special master ruled there was insufficient evidence that Figures 9 and 10 depicted prior art and found no prima facie case of fraud impacting the attorney-client privilege. The defendants did not contest these findings, which were made in the context of attorney-client privilege rather than inequitable conduct. Nonetheless, the master's conclusion regarding the absence of a prima facie case of fraud is pertinent to the §1.69 issue raised by the defendants.

Epson contends that any technical violations of §1.69 were remedied by subsequent documents, specifically Supplemental Declarations of Inventorship in both English and Japanese. These declarations affirmed that the inventors had reviewed the specification, including amendments related to Figures 9 and 10. The court agrees that the Japanese declarations addressed any potential flaws in the initial documents. Furthermore, Epson argues that inequitable conduct requires evidence of fraud or material misrepresentation with deceptive intent; otherwise, technical violations do not invalidate patents. The court supports this view, referencing case law that emphasizes the necessity of intent to deceive for a finding of inequitable conduct.

The district court's reliance on the English language of the declarations alone, despite the inventors' ability to understand English and claims of proper explanations, is deemed insufficient to establish inequitable conduct. The absence of clear and convincing evidence of fraud or deceptive intent leads to a reversal of the ruling of unenforceability for the Suzuki patents. Epson requests reinstatement of certain paragraphs from the preliminary injunction order based on the Suzuki patents, while defendants argue for broader standards for dissolving injunctions. The decision regarding the preliminary injunction lies within the trial court's discretion and will be reconsidered on remand under the correct legal standards.

The district court invalidated the D'190 design patent for ink cartridges, reasoning that the design was not a concern for consumers since the cartridge is not visible during use. This reasoning was found to be incorrect, as the validity of a design patent does not depend on visibility during use but rather on whether the design pertains to an article of manufacture and meets the requirements of Title 35. Case precedents were cited, including Keystone Retaining Wall Systems and In re Webb, which illustrate that designs not visible post-installation can still be patentable. Additionally, a design does not need to be aesthetically pleasing; it must not be solely functional, as established in L.A. Gear, Inc. v. Thom McAn Shoe Co. The district court's sole basis for invalidity was flawed, leading to the reversal of its judgment. 

Regarding the D'596 patent, Epson contended that the district court improperly denied a modification to include it in the preliminary injunction, suggesting that the court applied the same erroneous reasoning as with the D'190 patent. The defendants countered with arguments against adding the D'596 patent, including claims of non-infringement. The discretion to grant or deny a preliminary injunction lies with the trial court, where Epson can present its arguments.

In the contempt proceedings, the defendants faced sanctions for non-compliance with preliminary injunctions. Epson contended that the contempt citations were not appealable due to the lack of a final judgment, as damages had not been fully assessed, citing United States v. Westinghouse Elect. Corp. as support for this position.

A contempt order is considered final and appealable when the opportunity to remedy the contempt has lapsed and when the parties' positions have been impacted by the order. Relevant case law establishes that contempt orders are final when fines are imposed or when the order modifies an injunction. Conversely, if no sanctions have been applied and no impact on ongoing proceedings exists, an interlocutory appeal is unnecessary. In this case, the contempt orders are subject to review, and the denial of Epson's objection to the cross-appeal of the contempt order is affirmed.

The procedural history indicates a complex litigation process. A preliminary injunction was issued on November 30, 1995, restricting Nu-Kote from selling a specific ink cartridge model and preventing trademark violations related to Epson's patents. The Federal Circuit initially stayed this injunction due to inadequate findings from the district court. After the court issued the required findings, it ruled that additional Nu-Kote models also infringed Epson's patents, though the injunction was not updated to reflect this. The Federal Circuit later stayed parts of the injunction deemed vague and ultimately affirmed the district court's decision on November 25, 1996.

The district court denied Epson's request for a temporary restraining order on the RF-60 and RF-62 models and also denied motions for contempt against Nu-Kote, which continued to sell these products. On February 10, 1997, the court ruled that the Suzuki patents were unenforceable. Following a March 10, 1997 hearing, the court expressed intent to hold Nu-Kote and Pelikan in contempt for selling the RF-60, 61, and 62 models, to assess damages based on Epson's lost profits, and to order the removal of infringing products from shelves. A briefing schedule was established for calculating lost profits.

On August 11, 1997, the court ruled the D'190 patent invalid but found the 401 patent infringed, modifying the preliminary injunction to prohibit further infringement of specific claims and sales of several products. Epson was awarded $1,050,849.00 in lost profits and $31,413.45 in attorney fees as a sanction for violations occurring between November 30, 1995, and March 10, 1997.

On August 12, 1997, the court issued a written order holding the defendants in contempt for violating the injunction regarding RF-60, RF-61, 146, and 147 models from March 10, 1997, to August 6, 1997. Calculation of sanctions for the latter period was stayed pending appeal. The defendants contended that the profit accounting included sales made during a period when the injunction was stayed and challenged sanctions based on the invalidation of the Suzuki and D'190 patents. Epson countered that damages were properly calculated and noted that defendants did not appeal the false advertising grounds of the injunction.

The defendants argued that the injunction initially applied only to the RF-61 model, while Epson maintained that the RF-60 and RF-62 became subject to the injunction following the court's findings of patent infringement. The defendants also claimed that contempt could not be enforced against an injunction based on invalid patents, to which Epson responded that violations occurred before the patents were invalidated.

The defendants contest the contempt rulings based on the uncertain status of the preliminary injunction, particularly during the transitional periods of the Federal Circuit's stay and subsequent reinstatement. They assert that the RF-60 and RF-62 cartridges were not adjudicated for patent infringement, arguing that sanctions for violating the injunction cannot apply to these models. The district court clarified on December 19, 1996, that the RF-60 and RF-62 were not covered by the injunction, but later reversed this decision on March 10, 1997, stating that contempt could only be sanctioned for sales after an explicit injunction was issued on August 11, 1997.

On February 10, 1997, the court held the defendants in contempt for sales of the RF-61 models, which had been enjoined since November 30, 1995. Further hearings confirmed contempt for the RF-60 and RF-62 models, including Pelikan and generic products, for sales occurring from the same initial injunction date. The court established that the defendants had proper notice regarding the RF-61 products and upheld the contempt order with corresponding sanctions. Specific notice for the RF-60 and RF-62 models came with the August 11, 1997, amended injunction, limiting contempt findings for earlier sales of these models.

The ruling from August 11, 1997, addressed lost profits claims but excluded RF-60 and RF-62 sales from contempt sanctions prior to that date. While lost profits as a sanction for contempt is valid, recalculation is required based on these modifications. The district court's invalidity and unenforceability decisions are reversed, contempt orders are affirmed with modified sanctions limited to products specifically enjoined (RF-61 from November 30, 1995, onward and RF-60 and RF-62 from August 11, 1997), and the case is remanded for further proceedings. No costs are awarded.