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Patent Exhaustion Doctrine Retains a Territoriality Requirement

09-1487
May 27, 2010
Hendrix, Justin A.

Decision icon Decision

Last Month at the Federal Circuit - June 2010

Judges: Michel, Mayer, Linn (per curiam)

[Appealed from: D.N.J., Judge Hayden]

In Fujifilm Corp. v. Benun, No. 09−1487 (Fed. Cir. May 27, 2010), the Federal Circuit affirmed the district court’s entry of a jury verdict finding willful infringement of Fujifilm Corporation’s (“Fuji”) patents by Jack C. Benun and companies under his control (collectively “Benun”).

Fuji sells single−use cameras, or lens−fitted film packages (“LFFPs”), and owns patents directed to these products.  Once an LFFP is used by a consumer, it is taken to a film processor, who opens the LFFP and processes the film.  The film processor does not return the empty LFFP (“shell”) to the consumer.  One of Benun’s companies, Jazz Products LLC (“Jazz”), bought 1.4 million used LFFPs from a predecessor company, refurbished them, and sold them as new.  In 2005, the district court enjoined Benun from selling in the United States LFFPs not made from shells first sold in the United States by Fuji or its licensees and LFFPs not having a back cover that replaces the full back cover sold with the original LFFP.  The 1.4 million LFFPs Jazz purchased were detained due to ITC orders prohibiting importation of LFFPs that infringe Fuji’s patents.  Though most of the 1.4 million LFFPs were exported from the United States under ITC orders, nearly a million were re−imported after Customs released them based on a letter from Benun’s counsel.  The district court subsequently found Benun in contempt of the 2005 preliminary injunction and awarded Fuji attorney fees. 

Fuji then moved for partial SJ of infringement by all but Achiever−brand LFFPs, which the district court granted.  Benun’s motions for SJ were denied, including its motion for SJ that a bankruptcy sale of the predecessor company’s inventory to Jazz was a patent−exhausting first sale.  At the close of trial, the jury returned a willful infringement verdict, awarding a running royalty of $2.00 per infringing LFFP, amounting to over $16 million, as well as a $2.5 million lump−sum royalty payment.  Although Benun’s preverdict JMOL motion raised only the issue of noninfringement of Achiever−brand LFFPs, Benun’s postverdict JMOL motion also challenged the damages award and the inapplicability of a first−sale location.  After denial of the postverdict JMOL motion and its motion for a new trial on damages, Benun appealed. 

On appeal, Benun presented four issues: (1) whether the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008), eliminated the territoriality requirement for patent exhaustion announced in Jazz Photo Corp. v. U.S. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001) (“Quanta argument”); (2) whether the district court invoked nonmutual collateral estoppels and precluded one of Benun’s companies (“Polytech”) from presenting its permissible repair and first−sale defenses on the basis of court proceedings to which Polytech was not a party (“estoppel argument”); (3) whether a new trial on damages was warranted; and (4) whether the district court properly held Benun in contempt of a preliminary order enjoining importation of infringing LFFPs (“contempt argument”).

As an initial matter, the Federal Circuit considered whether Benun had waived the Quanta argument or the estoppel argument under Third Circuit law.  Though Benun raised the Quanta argument only in a postverdict, and not preverdict, JMOL motion, the Federal Circuit concluded that the argument was properly before the Court because Fuji did not raise a timely objection.  The Court, however, found that Benun had waived the estoppel argument by failing to raise it in either the preverdict or postverdict JMOL motion. 

Turning to the merits of the Quanta argument, the Federal Circuit concluded that Quanta did not eliminate the first−sale rule’s territoriality requirement.  The Court rejected Benun’s argument that Quanta created a rule of “strict exhaustion,” where a sale can trigger the doctrine regardless of whether it is made in the United States or in a foreign country.  The Court noted that Quanta did not involve foreign sales and explained that “a practicing use may be ‘outside the country,’ while an infringing use must occur in the country where the patent is enforceable.”  Slip op. at 8. 

The Federal Circuit next considered and rejected Benun’s new trial argument that the $2.00 running royalty and $2.5 million lump−sum payment were grossly excessive in light of the evidence.  Fuji’s expert testified that the parties would have agreed to a 40 cent royalty rate in a hypothetical negotiation.  But because of the difficulty in separating infringing LFFPs from noninfringing ones, Fuji’s expert relied on the sixth factor from Georgia−Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), to include all LFFPs, whether infringing or not, in the royalty base.  In other words, Fuji advocated an
all−product royalty base that would not vary and that would result in a consistent royalty amount.  Although this method resulted in a $2.00—rather than a 40 cent—royalty rate, the Court found the evidence underlying the consistent royalty amount supported a rate of up to $2.21.  The Court further concluded that the jury was entitled to rely on evidence of bundling and convoyed sales in determining the scope of the base.  For these reasons, that Court concluded that the $2.00 royalty rate was not excessive.  For the same reasons, the Court rejected Benun’s challenge to the lump−sum payment.

Finally, the Court rejected Benun’s challenge to the contempt order.  Benun argued that contempt was not supported by sufficient evidence of infringement, the imported cameras were redesigned, and Fuji’s patent rights were terminated during the bankruptcy sale by the predecessor company.  The Court found that Benun waived the first−sale argument by failing to raise it in either JMOL motion and found Benun’s other arguments unconvincing.

 

Summary authored by Justin A. Hendrix, Esq.