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Replacement of a Spent Part That Was “Integral” to a Combination Claim Did Not Constitute Impermissible Reconstruction

January 11, 2007

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Last Month at the Federal Circuit - February 2007

Judges: Lourie, Schall, Dyk (author)

[Appealed from: ITC]

In Fuji Photo Film Co. v. International Trade Commission, Nos. 04-1618, 05-1274 (Fed. Cir. Jan. 11, 2007), the Federal Circuit held that Fuji Photo Film Company, Ltd. (“Fuji”) lacked standing to appeal the ITC’s decision. The Court also affirmed-in-part and reversed-in-part the ITC’s decision to impose civil penalties against Jack Benun, the Chief Operating Officer (“COO”) of Jazz Photo Corporation (“Jazz”). Specifically, the Court affirmed the finding that the majority of the disposable cameras were first sold abroad, but reversed the finding that the processes Jazz used to refurbish the cameras constituted impermissible reconstruction. Accordingly, the Court remanded the case for a recalculation of the appropriate civil penalty.

Fuji owns fifteen patents relating to lens-fitted film packages (“LFFPs,” i.e., disposable, single-use cameras). The LFFP comprises a plastic shell with camera components, such as a shutter, lens, viewfinder, and film advance mechanism. The LFFP is preloaded with film and, once it is ready to be developed, the consumer takes the entire LFFP to a film processor and receives back the negatives and prints, but not the LFFP. Jazz collected the used LFFP shells originally made by Fuji or its licensees, inserted new film, and refurbished the shells before selling them in the United States. Some of the collected LFFP shells were originally sold in the
United States, whereas others were first sold abroad.

In a prior appeal, the Court affirmed the ITC’s decision, finding that Jazz and other respondents infringed the Fuji patents and had failed to prove their affirmative defense that the LFFPs were permissibly repaired. The Court also affirmed both the ITC’s general exclusion order barring entry of infringing LFFPs and the cease and desist order barring Jazz—including its principals, officers, and directors—from importing infringing LFFPs.

The current issue before the Court stems from an enforcement proceeding to investigate Fuji’s allegation that Jazz, Benun, and Jazz’s then-president, Anthony Cossentino, violated the cease and desist order. The ALJ found a small portion of the LFFPs were permissibly repaired. The ALJ also found that Jazz had not satisfied its burden of proving permissible repair for the remaining LFFPs because the LFFPs had unexhausted patent rights or because Jazz had presented insufficient evidence of the processes used for repair. The ALJ thus imposed civil penalties on Jazz, Benun, and Cossentino, and the ITC affirmed but reduced Cossentino’s penalty. Jazz and Cossentino ultimately settled with the ITC, leaving only Fuji’s and Benun’s appeals before the Court.

Fuji appealed the ITC’s finding that some LFFPs were permissibly repaired. The Court, however, held that Fuji lacked standing to appeal. For Fuji to have standing to challenge the ITC’s penalty determinations, the civil penalties must be for ongoing violations. The Court concluded that there was no threat of ongoing violations because Jazz had filed for bankruptcy and is no longer in business. Furthermore, there was no threat of ongoing violations by Benun because the order only prohibits Benun’s activities on behalf of Jazz, which is nonexistent. Thus, Fuji’s appeal was dismissed.

Benun, on the other hand, argued that the ITC could not impose civil penalties against him because civil penalties can only be imposed on a person to whom a cease and desist order has been properly issued. Benun argued that because he was never found personally liable for infringement, the cease and desist order was not issued against him. The Court rejected this argument, however, because the ITC could properly enjoin Jazz’s officers, employees, and agents from encouraging future violations. The Court also rejected Benun’s argument that this rule does not apply to administrative orders, relying on analogous case law that has consistently upheld the inclusion of corporate officers in cease and desist orders issued by the Federal Trade Commission. Thus, because Benun was a “principal consultant” and COO who was part of the management team, the Court found the ITC did not err in issuing a cease and desist order against him.

Benun also argued that the civil penalties violated his due process rights under the Constitution because he did not have sufficient notice that the cease and desist order might impose personal liability on him. The Court rejected this argument, finding the order extended to principals of Jazz and, therefore, provided adequate notice that Benun’s conduct was subject to the order.

Alternatively, Benun argued that Jazz did not violate the cease and desist order because the accused activities constituted permissible repair. Permissible repair, however, only applies to products whose patent rights have been exhausted through a first sale in the United States. Benun argued that because Jazz had an informal compliance program to ensure that shells would only be collected from the United States, a presumption should arise that these shells were first sold in the United States. The Court disagreed and affirmed the ITC’s findings that the compliance program was too disorganized and incomplete to satisfy Benun’s burden of proof. Finally, Benun argued that the damages award it paid Fuji in a prior infringement litigation confers an implied license that would allow Jazz to refurbish the refurbished cameras at issue. But because an accused infringer does not obtain an implied license until it has paid full compensation, and because Benun had only paid a portion of the damages award, the Court rejected this argument as well.

Notwithstanding Benun’s arguments to the contrary, the Court found that Benun did not provide any evidence as to what the refurbishing processes involved, and only presented testimony from Jazz employees rather than disinterested witnesses. As such, the Court affirmed the ITC’s finding that Benun failed to provide complete and credible information verifying Jazz’s alleged refurbishing process.

Finally, the Court determined whether one additional step in Jazz’s refurbishing process— adding a new plastic back cover—converted the activity from permissible repair to impermissible reconstruction. Because the back covers must be broken to remove the film and must be replaced to prevent light exposure to the new film, Benun argued the back covers were spent parts and properly replaced. Citing case law holding that replacement of a spent part is a “fundamental example of a permissible repair,” the Court agreed.

Moreover, the Court found that the ITC had based its contrary conclusion on an erroneous standard. The ITC found that because the back cover was an integral component of the patent claim, its replacement weighed heavily in favor of finding impermissible reconstruction. But the Court rejected this standard because the back cover was part of a combination patent and was not separately patented. The Court relied on Aro Manufacturing Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961), where the Supreme Court rejected a repair-reconstruction test that looked to whether an “essential” or “distinguishing” part of the patented combination had been replaced. The Court saw no difference between the test rejected by the Supreme Court and the “integral component” test of the ITC. Thus, the Court reversed the ITC’s holding regarding the LFFPs that were refurbished by replacing the full back covers and remanded the case to the ITC to adjust the civil penalties accordingly.