# Fuji Photo Film Co. v. Benun (In Re Benun)

> United States Bankruptcy Court, D. New Jersey · February 29, 2008 · 386 B.R. 59

URL: https://www.frixlaw.com/law-library/cases/1542377

## Case

- **Full name:** In Re Jack C. BENUN, Debtor. Fuji Photo Film Co., Ltd., Plaintiff, v. Jack C. BENUN, Defendant
- **Court:** United States Bankruptcy Court, D. New Jersey
- **Decided:** February 29, 2008
- **Citations:** 386 B.R. 59; 2008 Bankr. LEXIS 651; 2008 WL 583891
- **Precedential status:** Published
- **Opinion:** Opinion by Stern
- **Judges:** Morris Stern
- **Cited by:** 5 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1542377

## How later opinions describe it (automated extraction)

- stating in dicta that if compelled, the court would apply the subjective standard

## Opinion text

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
*65
1. Burden of Persuasion.102
2. Process of Repair.102
a First Sole. 103
(a) Factors Considered.. CO O t — 1
(b) Evaluation of Factors <50 O t-H
(c) Findings Regarding Willful and Malicious Injury in Tranche II <0 © t-H
(d) Summary of Tranche II “Willful and Malicious” Findings . OO O t-H
4. Calculation of Portion of Tranche II Judgment Excepted from Discharge. C5 O t-H
(a) Reloads of Reloads. 05 O t-H
(b) October 1, 2002 — December 12, 2003 period. O t-H tH
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 H t-H t-H
A. Lack of Clarity in the Patent Law. N tH tH
B. Facts Establishing Infringement. (M t-H t-H
C. Facts Establishing Damages. CO t-H t-H
D. Effect of Judgments, Penalty and Bankruptcy on Damage Enhancement and Fees. ^ t — I tH
E. Case, Taken as a Whole, Does Not Warrant Enhanced Damages ^ tH t-H
F. “Bad Faith” Finding of ITC II Compared and Contrasted. lO t-H t-H
VIL 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 (“Ben-un”) 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
*66
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
/”). 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
/”). 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
7) — 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
/, 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 1,
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
*67
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
*68
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 in-tervenor 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
7/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.
*69
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 re-fleeting 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
*70
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
III.
Scope of Trial.
District Court I
provides a clear line of demarcation for matters remaining in dispute
sub judice. Debts
of Jazz/Benun (for established “injury” to Fuji) are unambiguously defined as those damages liquidated by the now-affirmed judgment. Thus, Benun’s debt (hereinafter “Tranche I Damages”) due Fuji for inducing infiingement is established for the 1995 through August 21, 2001 period.
Fuji
claims
14
against Benun arising in the post-August 21, 2001 period run through the December 12, 2003 cutoff date (hereinafter “Tranche II Alleged Damages”). Though ITC II, through the Administrative Law Judge’s opinion of April 6, 2004 (covering approximately 150 pages), is the basis for a
penalty assessment,
neither the ITC nor any court has reduced
Fuji’s claim
in Tranche II to judgment in Fuji’s favor and against Ben-un. In fact, through this adversary proceeding, Fuji has of necessity sought to reduce its claims to liquidated debt status for Tranche II,
15
and
seeks a determina
*71
tion of exception to discharge for
both tranches of damages.
Benun has challenged Fuji’s Tranche II claims and all allegations of exception to discharge.
The scope of this trial has thus been impacted by issue preclusion and/or the persuasive or advisory effect of
District Court I
and ITC II — each having fully addressed questions of infringement
(District Court I
as to Tranche I and ITC II as to Tranche II).
A.
Tranche I (1995 through August 21, 2001).
1.
District Court I Judgment.
ITC I, prompted by Fuji, named twenty-seven respondents including Jazz. The list of “unlawful activities” contained in the operative statute, § 387 of the Tariff Act of 1930, as amended, 19 U.S.C. § 1337 (“ § 337”) includes “[t]he importation into the United States [and] ... sale ... after importation ... of articles that ... infringe a valid and enforceable United States patent....” 19 U.S.C. § 1337 . Fuji alleged that the twenty-seven respondents had infringed fifteen patents owned by Fuji relating to LFFPs. The Administrative Law Judge (“ALJ”), in his initial determination, found that twenty-six of the twenty-seven respondents, including Jazz, had violated § 337 by infringing Fuji’s patents. The ALJ recommended cease and desist orders against each of the domestic respondents and a general exclusion order against importing infringing LFFPs. The ITC adopted the recommendations of the ALJ, as well as the ALJ’s pertinent findings with respect to infringement in ITC I.
The ALJ had reasoned that the common activities of some of the respondents in refurbishing
16
the spent shells amounted to “effectively recreating the patented single use camera of [Fuji] and its licensees, and hence [was] impermissible reconstruction.” ITC I at 5. For the other respondents, the ALJ found that there was “insufficient information in the record about the processes employed by their suppliers [of LFFPs] ... [and thus] those respondents failed to carry their burden of proof....”
Id.
Thus, the
affirmative defense
of “repair” was denied twenty-six respondents and the Cease and Desist Order issued.
In Jazz’s appeal to the Federal Circuit, a stay of the ITC Cease and Desist Order was granted pending decision on the appeal. This was said to have been the first Federal Circuit stay of an ITC exclusion order pending appeal. Cases and Recent Developments,
Patentee Exhausted Patent Rights By First Sale Of Cameras Sold In The U.S. For Single Use; Single Use Label Did Not Create Sufficient Restriction On Sale To Bring Sale Out Of Ambit Of Exhaustion,
11 Fed. Cir. B.J. 457 , 525 (2001-02).
The ALJ, in his initial determination, had summarized the following common steps employed by the respondents to refurbish the spent shells, and had found the process to be “impermissible reconstruction”:
*72
• removing the cardboard cover;
• opening the LFFP body (usually by cutting at least one weld);
• replacing the winding wheel or modifying the film cartridge to be inserted;
• resetting the film counter;
• replacing the battery in flash LFFPs;
• winding new film out of a canister onto a spool or into a roll;
• resealing the LFFP body using tape and/or glue;
• applying new cardboard cover.
264 F.3d at 1101. In reversing this “impermissible reconstruction” finding, the Federal Circuit explained:
The Commission adopted the ALJ’s findings and conclusions that the reman-ufacturers were not simply repairing an article for which either the producer or the purchaser expected a longer useful life, pointing out that the purchaser discarded the camera after use. The Commission ruled that the respondents were not simply repairing the LFFP in order to achieve its intended life span, but created a new single use camera that would again be discarded by its purchaser after use.
... [The] Supreme Court decisions which underlie precedent require that infringing reconstruction be a “second creation” of the patented article. Although the Commission deemed this requirement met by the “remanufactured” LFFPs, precedent places the acts of inserting new film and film container, resetting the film counter, and resealing the broken case — the principal steps performed by the remanufacturers — as more akin to repair.
Id.
at 1105-06.
However, the Federal Circuit’s reversal of the Commission’s determination on the common eight steps did not fully vindicate the activities of all respondents. Indeed, the Federal Circuit affirmed the ITC’s finding of infringement with respect to all respondents (including Jazz) who had failed to provide sufficient evidence of their repair processes to show permissible repair. And, permissible repair, as an affirmative defense, had to be established by
both
the processing steps
and exhaustion of patent rights by lawful first sale in the United States. Id.
at 1105. The “first United States sale” requirement had not been raised before the ITC, and appears to have surprised the parties-in-interest.
See
Final Jury Instructions (hereinafter “Jury Instructions”) in
District Court I,
Docket Entry 143-2, Ex. A at No. 27(A) (“During ... this lawsuit, the court which supervises patent law cases has clarified the law in a way that none of the parties expected.... A little over a year ago, the supervising court announced the rule about shells first sold in the U.S_ [N]o one knew before that time the source of shells would be important .... ”);
see also District Court I,
249 F.Supp.2d at 450; Daniel J. Gifford,
How Do the Social Benefits and Costs of the Patent System Stack Up in Pharmaceuticals?,
12 J. Intell. PROP. L. 75, 120-21 (2004) (“In the past, U.S. courts tended to apply exhaustion to unrestricted sales abroad by a U.S. patentee or a party in privity with a U.S. patentee. Recently, however, the Federal Circuit
[Appeal
7] has ruled that for exhaustion to apply, ‘the authorized first sale must have occurred under the United States patent,’ a view that appears to embrace a domestic, rather than international, view of exhaustion.”).
ITC I faded away, but for the persistence of the Cease and Desist Order of 1999 (and other ancillary matters, including a Jazz bond forfeiture issue).
See
Ex. P-118A at p. 4 n. 4.
It is with the background of ITC I and
Appeal I
that, in
District Court I,
the jury reached the following verdict:
*73
• Jazz infringed Fuji’s patents with respect to 39,889,850 of the 40,099,369 refurbished cameras sold by Jazz from 1995 through August 21, 2001;
• Jazz infringed Fuji’s patents with respect to 1,209,760 newly made cameras sold during this period;
• Mr. Benun induced Jazz Photo’s infringement with respect to 39,103,664 cameras;
• Defendants’ sale of newly-made cameras was willful, but their sale of refurbished cameras was not willful;
• A reasonable royalty for Jazz’s alleged infringement is 56 cents per infringing camera sold; and
• Fuji lost profits of $3,531,711.70 as a result of Jazz’s sales of refurbished cameras and $112,749.63 as a result of Jazz’s sales of newly-made cameras.
249 F.Supp.2d at 441.
Pursuant to the parties’ stipulations, the District Court:
(1) determine[d] whether the factual refurbishment processes found by the jury constituted legally permissible repair or legally impermissible reconstruction; and (2) determine[d] the number of legally infringing cameras and applied] that number mathematically to the jury’s damages verdict in order to determine the total amount of damages to be awarded.
Id.
at 441. Judgment was entered against Benun in the total amount of $22,919,783.60 (56$ per infringing camera, including both refurbished and the newly made Sesame Street™ cameras) plus prejudgment interest (of almost $7 million).
Id.
at 459. Benun’s Tranche I “injury” to Fuji property is thus established; however, the “willful” and “malicious” aspects of the § 523(a)(6) exception to discharge must be admeasured against issue preclusion and related concepts.
2.
Issue Preclusion.
Issue preclusion (or, collateral estoppel) “prevents relitigation of a particular fact or legal issue that was litigated in an earlier action.”
Seborowski v. Pittsburgh Press Co.,
188 F.3d 163, 169 (3d Cir.1999)
(citing Parklane Hosiery Co., Inc. v. Shore,
439 U.S. 322, 326 , 99 S.Ct. 645 , 58 L.Ed.2d 552 (1979)). _ It has “the dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation.”
Parklane Hosiery,
439 U.S. at 326 , 99 S.Ct. 645 . The Supreme Court has held that the principles of collateral estoppel apply to nondis-chargeability proceedings in bankruptcy.
Grogan v. Gamer,
498 U.S. 279 , 284-85 n. 11, 111 S.Ct. 654 , 112 L.Ed.2d 755 (1991). Because the infringement determination of
District Court I
was rendered by a federal court, this court must apply federal principles of collateral estoppel.
In re Docteroff,
133 F.3d 210, 214 (3d Cir.1997).
For a party to be estopped from relit-igating an issue, the following elements must be present: (1) the issue sought to be precluded must be the same as the one involved in the prior action; (2) the issue must have been actually litigated; (3) the issue must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment.
Id. (citing In re Ross,
602 F.2d 604, 608 (3d Cir.1979);
accord
Restatement (Second) of Judgments § 27 (1982)).
Did the willful infringement/non-willful infringement jury findings of
District Court I
involve the same issues now being presented to this court under
*74
§ 523(a)(6)?
17
As will be more fully discussed, the concept of willful patent infringement is broader than the “willful ... injury” of the Bankruptcy Code. Among the differences in concept, patent law includes reckless as well as intentional acts in the ambit of “willful infringement”; bankruptcy law limits § 523(a)(6) willful injury to intentional
injury
(an apparently more curtailed concept than intentional acts). As applied in this case, logic would justify preclusion to the extent of the “same issue” determination as to refurbished cameras (but not those newly molded).
More specifically, to the extent that Benun was found by the jury to have committed
no willful
inducement to infringe in reloading used camera shells, it was decided that he acted neither intentionally, thus of necessity not injuring Fuji intentionally (the bankruptcy focus), nor recklessly; this finding would therefore meet the “same issue” general requisite of Restatement (Second) of Judgments § 27. The finding of
willful
infringement with respect to the newly molded 1,209,760 unit “Sesame Street™” order differs; that jury determination could well have been based upon a broader willfulness conception in patent law — which includes recklessness— rather than the more circumscribed bankruptcy law’s “willfulness.” As to the evolving standards for “willful” infringement,
see In re Seagate Technology, LLC,
497 F.3d 1360 (Fed.Cir.2007). Moreover, the “malicious” aspect of § 523(a)(6) was never before the jury.
Notwithstanding the apparent satisfaction of general issue preclusion rules by at least the nonwillful infringement finding (for refurbished LFFPs), issue preclusion “is subject to a number of equitable exceptions designed to assure that the doctrine is applied in a manner that will serve the twin goals of fairness and efficient use of private and public litigation resources.”
National R.R. Passenger Corp. (AMTRAK) v. Pa. P.U.C.,
288 F.3d 519 , 525 (3d Cir.2002) (referring to Restatement (Second) of Judgments § 27). Notably, the Restatement provides that an issue, otherwise meeting the requirements for preclusion, is not precluded when “[t]he party against whom preclusion is sought had a significantly heavier burden of persuasion with respect to the issue in the initial action than in the subsequent action; the burden has shifted to his adversary; or the adversary has a significantly heavier burden than he had in the first action.... ”
Id.
at 525 n. 3 (quoting Restatement (Second) of Judgments § 28(4)).
The
District Court I
jury finding of
no willfulness
with respect to patent infringement for refurbishing LFFPs was based on a “clear and convincing” burden of persuasion.
See
Jury Instructions at No. 50. That same high standard was applied in the
willful
infringement finding as to the newly molded LFFPs.
Id.
Section 523 exceptions to bankruptcy discharge need only be proven by the less weighty preponderance standard.
Grogan,
498 U.S. at 291 , 111 S.Ct. 654 . Application of the burden differential exception to this case would have the
nonwillful
finding as to refurbished cameras not pre-clusive (because the lesser bankruptcy burden could theoretically have been satisfied); conversely, the heavy burden met in
District Court I
as to
willful
infringement for the newly molded LFFPs would support preclusion (though here the “same
*75
issue” deficit cannot be overcome because “recklessness” may have been at the heart of the jury decision).
While there is some precedent for overriding the burden differential issue preclusion exception of Restatement (Second) of Judgments § 28(4),
18
as will be set forth below, collateral estoppel need not be applied
sub judice
in order to establish Ben-un’s right to a discharge of-the nonwillful infringement aspect of the
District Court I
judgment. Rather, as to the largest part Tranche I damages (arising from nonwillful infringement for impermissibly reconstructing LFFPs, i.e., failing to establish the affirmative defense of repair), the jury finding
in conjunction with various other factors
has persuaded this court that the § 528(a)(6) exception to discharge cannot be proven by Fuji.
19
3.
Factors Deemed Persuasive In Limiting the Scope of Trial.
(a)
‘Willful”
As
Defined in Bankruptcy and Patent Law.
“[B]ecause of bankruptcy’s underlying concern for affording a new beginning, statutory exceptions to discharge are generally construed ‘narrowly against the creditor and in favor of the debtor.’ ”
Boston Univ. v. Mehta (In re Mehta),
310 F.3d 308, 311 (3d Cir.2002)
(quoting In re Pelkowski
990 F.2d 737, 744 (3d Cir.1993)). The burden of proof in the general exception-to-discharge adversary proceeding thus falls on the creditor.
20
Section 523(a)(6) provides that a discharge does not relieve an individual of a debt “for willful and malicious injury by the debtor ... to the property of another entity.” The Supreme Court addressed the “willful” requirement as follows:
The word “willful” in (a)(6) modifies the word “injury,” indicating that nondis-chargeability takes a deliberate or intentional
injury,
not merely a deliberate or intentional
act
that leads to injury. Had Congress meant to exempt debts resulting from unintentionally inflicted injuries, it might have described instead “willful acts that cause injury.” Or, Congress might have selected an addi
*76
tional word or words, i.e., “reckless” or “negligent,” to modify “injury.” Moreover, as the Eighth Circuit observed, the (a)(6) formulation triggers in the lawyer’s mind the category “intentional torts,” as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend “the
consequences
of an act,” not simply “the act itself.” Restatement (Second) of Torts § 8A, comment a, p. 15 (1964) (emphasis added).
Kawaauhau v. Geiger,
523 U.S. 57, 61-62 , 118 S.Ct. 974 , 140 L.Ed.2d 90 (1998). Specifically,
Geiger
held that a prepetition judgment of medical malpractice against a debtor, based on “negligent or reckless” conduct, would
not
satisfy the requirements of § 523(a)(6).
Id.
at 60, 118 S.Ct. 974 .
Since
Geiger ,
Circuits have split over the extent to which the Supreme Court defined “willful.” The uncertainty on this issue stems from
Geiger’s
citation to the Restatement (SecoNd) of ToRts § 8A. In language not cited by the Supreme Court, but included in the same section, the Restatement encompasses in its definition of “intent” not only the situation in which the actor “desires” the consequences, but, in an alternative
second prong,
where the actor “believes that the consequences are substantially certain to result from [his act].” RESTATEMENT (SECOND) OF TORTS § 8A.
The Sixth Circuit found the Court’s analysis in
Geiger
to favor adoption of the unquoted Restatement language.
In re Markowitz,
190 F.3d 455, 464 (6th Cir.1999). The
Markowitz
Court noted that the Eighth Circuit opinion which
Geiger
affirmed defined “willful” to include the “substantially certain” language from the Restatement.
Id. (citing In re Geiger,
113 F.3d 848, 857 (8th Cir.1997)).
21
In
Markowitz ,
the Sixth Circuit found that a debt resulting from legal malpractice would not be excepted from bankruptcy discharge. 190 F.3d at 466 . “[T]he mere fact that Markowitz should have known his decisions and actions put [his client] at risk is ... insufficient to establish a ‘willful and malicious injury.’ He must will or desire harm, or believe injury is substantially certain to occur as a result of his behavior.”
Id.
at 465 n. 10. Other Circuits have agreed with or used similar reasoning to that of
Markowitz
and have adopted the two-pronged
subjective
test for willfulness.
See, e.g., In re Su,
290 F.3d 1140 (9th Cir.2002);
In re Englehart,
229 F.3d 1163 (10th Cir.2000) (unpublished) (also noting at 2000 WL 1275614 at *2 that
Geiger’s
characterization of “unintended” injury as “neither
desired
nor
in fact anticipated by the debtor”
mapped closely to the Restatement language).
The Fifth Circuit, while adopting the two-pronged test for willfulness, has held that the “substantially certain” prong is an
objective
test.
In re Miller,
156 F.3d 598, 606 (5th Cir.1998). Such an objective test has been viewed as contrary to the mandate of
Geiger,
in that it disregards the actor’s state of mind in favor of an objective standard similar to recklessness.
See In re Su,
290 F.3d at 1145-46 . In addition, the Fifth Circuit’s test is contrary to the plain text of the Restatement, which requires that the
“actor
... believes that the consequences are substantially certain to result” from his act. Restatement (Second) of Torts, § 8A (emphasis added).
*77
The Third Circuit has not formally addressed the issue of how to define willfulness since the decision in
Geiger.
Prior to
Geiger,
the Third Circuit defined the willfulness requirement with reference to the Restatement, including the “substantially certain” language, and excluded from “substantially certain” those acts which have only a “high probability” of harm.
In re Conte,
33 F.3d 303, 307-08 (3d Cir.1994). Though
Conte
would support the adoption by this court of a two-pronged test for willfulness, it is unclear in
Conte
whether the Third Circuit intended a subjective or objective test for the “substantially certain” prong. Although the
Conte
Court quoted the Restatement, the test was often formulated without linking “substantially certain” to the mind of the actor. Lower court decisions within this Circuit have used the second alternative of the two-pronged test, but have found that the facts satisfied both subjective and objective standards, and therefore declined to choose one.
See In re Elwood,
319 B.R. 371 (E.D.Pa.2005);
In re Conner,
302 B.R. 509 (Bankr.W.D.Pa.2003);
In re Scott,
294 B.R. 620 (Bankr.W.D.Pa.2003).
22
Ultimately, taking the strongest cue from
Geiger,
this court would, if compelled, apply the subjective standard to both prongs of what should be the two-pronged willfulness definition for § 523(a)(6).
Contra, In re Pavlovskiy,
2007 WL 2048965 (Bankr.D.N.J.) (reading
Conte
as allowing objective proof of substantial certainty to injury). However, notwithstanding the burden placed upon plaintiff by the subjective standard (and particularly as to the substantial certainty prong), the court need not “simply take the debtor’s word for his state of mind.”
In re Su,
290 F.3d at 1146 n. 6. “[I]n addition to what a debtor may admit to knowing, the bankruptcy court may consider circumstantial evidence that tends to establish what the debtor must have actually known when taking the injury producing action_”
Id.
The net effect of evaluating circumstantial evidence is that in many cases proofs might well be assessed in a way which would narrow the conceptual gap between pure subjectivity and objectivity.
Cf. Field v. Mans,
516 U.S. 59, 72-76 , 116 S.Ct. 437 , 133 L.Ed.2d 351 (1995) (reasonableness not irrelevant in gauging subjective state of mind). And, as will be demonstrated hereinafter,
this case would be decided the same regardless of this conceptual diferential.
Notwithstanding some of the above-stated variation in the “willfulness” definition under the Bankruptcy Code, willfulness in the patent infringement context is clearly a
broader
concept. It includes
recklessness,
23
and therefore runs counter to
Geiger.
*78
24
The
District Court I
jury determined that Benun’s conduct in the refurbishing of LFFPs was not, for
patent law purposes,
proven (by the clear and convincing standard) to have been willful (and was therefore not even proven reckless). Thus, even without considering other factors, this court was at trial outset most skeptical that either prong of the Restatement definition of willfulness could now be established by Fuji, such that the
willful injury
requirement of
Geiger
could be proven.
Before the Federal Circuit added definition to the repair defense for LFFPs, an entire marketplace was operating in the field. ITC I, initiated in 1998 (three years into the Jazz-Benun period of operation), cited
twenty-seven refurbishers.
The refurbishing of LFFPs was controversial— with the ITC finding it to be a patent violation on the basis of the inapplicability of the repair defense. This conclusion was
reversed
by the Federal Circuit (after questioning the ITC’s restrictive position by issuing a rare
stay pending appeal
of the Cease and .Desist Order). The law was thus unclear before August 21, 2001. (Indeed, as will be discussed
infra,
the law remains less than well defined.) Moreover, the first sale in the United States requirement announced by the Federal Circuit was acknowledged as being a complete surprise to the case participants.
Given this background, the prospect of this court finding subjective willfulness for exception-to-discharge purposes with regard to Tranche I (by a preponderance of the evidence rather than the clear and convincing standard applied by the jury in
District Court I)
in Benun’s inducement
25
of Jazz to infringe through refurbishing LFFPs, was unlikely.
Distinguish
the garden-variety § 523(a)(6) cases where infringement was clear and indefensible.
See In re Trantham,
304 B.R. 298 (6th Cir.BAP2004);
In re Wood,
309 B.R. 745 (Bankr.W.D.Tenn.2004). Moreover, applying an objective standard, i.e., that any
reasonable person
would have known of the substantial certainty of infringement and thus injury to Fuji, would not increase the likelihood of Fuji proving its case.
(b)
The Malice Requirement of § 523(a)(6).
Post-Geiger,
the “malicious injury” requirement of § 523(a)(6) has been described as follows: “A ‘malicious’ injury involves ‘(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or
*79
excuse.’ ”
In re Su,
290 F.3d at 1146 -47
(quoting In re Jercich,
238 F.3d 1202, 1209 (9th Cir.2001)). However, courts disagree over whether malice is actually distinct from willfulness and whether malice requires a subjective or objective test.
See, e.g., In re Sicroff,
401 F.3d 1101, 1106 (9th Cir.2005)
(citing In re Su’s
definition of malice and emphasizing that “it is the wrongful act that must be committed intentionally rather than the injury itself’— a subjective test only with regard to the act);
In re Bundick,
303 B.R. 90, 109 (Bankr.E.D.Va.2003) (defining malice as a distinct test in which “the debtor’s subjective mind set is central to the inquiry as to whether debtor acted deliberately in knowing disregard of a creditor’s rights in property”);
In re Miller,
156 F.3d at 603 (defining “willful and malicious injury” as a “unitary concept entailing a single two-pronged test” in which one prong is subjective and the other is objective);
In re Markowitz,
190 F.3d at 465 n. 10 (holding that “the lack of an excuse or justification for his actions will not alone make [the debtor’s] debt non-dischargeable under § 523(a)(6)” but at no time expressly indicating that willfulness and malice are distinct concepts
post-Geiger).
As with willfulness, the Third Circuit has not since
Geiger
formally considered the definition of malice under § 523(a)(6).
In re Conte
remains the most recent Third Circuit precedential case involving § 523(a)(6); there the Court defined the requirement for a malicious injury as one which is “wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will.” 33 F.3d at 308
0quoting In re Braen,
900 F.2d 621 , 626 (3d Cir.1990), in turn
quoting
4 AlaN N. ResotcK AND HenRY J. Sommer, Collier on BanKruptoy § 523.16[1] (15th ed.1989)).
Yet Benun’s activities relative to camera refurbishment were not without at least the color of “excuse,” though not ultimately found to have been a function of “just cause.”
26
Before August 21, 2001, the first sale in the United States requirement was unanticipated by all parties-in-interest,
and
the process of repair of LFFPs (as distinguished from reconstruction) was undefined. While this state of the law has not served as a defense to the reloading aspect of the patent infringement claim of Fuji (i.e., has not established “just cause” for infringement), excuse
sub judice
(by mistake or otherwise,
even when tested by
*80
objective standards),
is palpable. And, the related jury finding of “no willfulness” in
District Court I
drives this point home (notwithstanding no record of first sale in the United States for 90% of the refurbished LFFPs and the ultimate
absence of proofs
of process in five of the eight Chinese factories). Therefore, Fuji’s ability to prove the malice component of § 523(a)(6) was, at trial outset (like willfulness), most doubtful.
(c)
District Court Refusal to Enhance Damages and the Federal Circuit’s Comments in Appeal II.
Judge Hochberg in
District Court I
noted that “[t]he paramount consideration in determining whether to award enhanced damages is ‘the egregiousness of the defendant’s conduct based on all the facts and circumstances.’ ” 249 F.Supp.2d at 457 n. 30
(quoting Riles v. Shell Exploration & Prod. Co.,
298 F.3d 1302, 1313 (Fed.Cir.2002)). The District Court found that enhanced damages were not warranted for the jury verdict of
willful infringement
with respect to the
newly molded
LFFPs.
Id.
at 457. This finding was based in part, on the following reasons:
Fuji adduced
no direct evidence
at trial that any Defendant had actual knowledge that any supplier was providing Jazz with cameras refurbished from newly-made shells, but rather relied upon an inference arising out of the fact that the cameras were sold and the credibility of Mr. Benun....
Id.
(emphasis added).
On appeal, Fuji asserted that the District Court abused its discretion “in refusing to enhance damages for the
refurbished
LFFPs” (emphasis in original). 394 F.3d at 1379.
27
Fuji did not appeal the trial court’s refusal to enhance damages for the newly made LFFPs. In denying Fuji’s argument raised on appeal, the Federal Circuit focused on the jury’s willfulness findings, as follows:
Fuji has narrowly tailored its enhanced damages cross-appeal to contest damages accruing from Jazz’s infringing sales between 1999 and 2001. As
Fuji itself points out, the district court did not address the refurbished LFFP sales in its enhanced damages analysis, most likely because the jury did not find these sales willful.
Rather, the district court considered the newly-made LFFP sales that the jury deemed willful infringement. While Fuji complains that the district court failed in its analysis, it does not point to any support in the record where it either requested the district court to consider the ITC determination in the enhanced damages inquiry or, in the alternative, to reconsider the jury finding that the refurbished LFFP sales were not willful.
Id.
at 1379-80 (emphasis added).
This court is influenced by (i) the jury’s finding of an absence of willful behavior by Benun in participating in the refurbishing of LFFPs, (ii) Fuji’s failure to challenge that jury finding at the trial level, or to raise the issue on appeal, (iii) the Federal Circuit’s ease in linking that finding to the absence of consideration of damage enhancement as to refurbishment, and (iv) the District Court’s undisturbed conclusion
*81
that all the facts and circumstances of the case did not justify — even where willfulness was found — enhancement of damages. Indeed, the nonenhancement of damages even as to the newly molded cameras — i.e., that willful infringement as determined by the jury — is a telling point regarding the broad patent definition of
willfulness
and the actual state of mind of Benun in promoting sales of LFFPs.
(d)
The Repair Defense.
Benun and Jazz’s affirmative defense of repair in
District Court I
met with only very limited success. As to the “repair versus reconstruction” processing issue, Jazz actually proved its case for three of the eight Chinese factories doing its LFFP refurbishment work.
28
Only 4,009,937 of the nearly forty million LFFPs at issue were proven to have been repaired. Jazz did not see fit to present trial testimony as to the balance of the factories’ procedures.
29
The exhaustion
by first United States
sale component of Jazz’s repair affirmative defense was divined by the jury to be 9.5% of Jazz’s sales. By calculating the “intersection” of the two-component jury findings, Jazz (and Benun) were given “credit” by way of their affirmative defense for only 380,944 refurbished LFFPs. The balance of the forty-million cameras was the basis for judgment entered against the defendants in
District Court I.
Jazz/Benun were found to have not carried their burden of proving the repair affirmative defense as to the vast majority of the LFFPs refurbished and sold between 1995 and August 21, 2001. However, (i) the complexity of the law here, (ii) the “surprise” aspect of the first sale in the United States requirement, and (iii) proof of processing requirements for three of the eight Chinese factories supplying Jazz LFFPs, are factors militating against a conclusion of “willful and malicious” injury to Fuji in Tranche I.
4.
This Court’s Review of Pretrial Submissions.
Trial obstacles in this case included: the period of time covered by the claims (1995 to August 21, 2001, and then forward to December 12, 2003); the complexity of the patent issues; and the litigation and enforcement history (through ITC, District Court, Bankruptcy Court and CIT tracks).
*82
Given all of that, written proffers and declarations of direct cases of the parties were required as a trial threshold matter.
Fuji’s proposed direct case, reviewed by this court to determine the scope of trial as hearings were to begin, added nothing to the proof of Benun’s alleged “willful and malicious” conduct in
refurbishing LFFPs,
up to August 21, 2001. Thus, a repetition of large segments of the
District Court I
trial, concluded in March 2003 after weeks of exhaustive hearings (covering the six-year period ending August 2001), would be contrary to the fair and efficient administration of justice. The jury — albeit applying a higher standard of proof — found Benun’s conduct in inducing infringement through LFFP refurbishment, to be
not willful
(i.e., neither willful in bankruptcy terms nor even reckless in patent terms). Fuji’s submissions, read in a light most favorable to Fuji, did not add to its case as to Benun’s state of mind on the Tranche I injury due to refurbishment.
5.
Conclusion
— Scope
of Trial of Tranche I Issues.
This court concluded at trial outset that a retrial of Tranche I injury due to refurbishment of LFFPs would not serve the ends of justice. The jury finding of “no willfulness” in
District Court I,
augmented by the District Court’s refusal to enhance damages (even as to Benun’s willful behavior),
Appeal II’s
ready linkage of the non-willfulness finding to obviate damage enhancement, the breadth of the patent law in this area (i.e., that Benun was not even found to be reckless as to LFFP refurbishment), the broad commercial practice of shell refurbishing ongoing in the marketplace (twenty-seven entities originally named in ITC I), and the complex and unsettled state of the affirmative defense of repair before August of 2001,
30
were substantially persuasive as to limiting the scope of trial. In conjunction with the aforestated persuasive factors, a review of Fuji’s case as presented in writing convinced this court that Fuji could not prove by a preponderance of the evidence that Benun willfully and maliciously injured Fuji by refurbishing LFFPs in Tranche I.
31
This effectively provided Benun with a partial summary judgment on the first day
*83
of trial.
32
Thus, trial of
Tranche I
allegations only proceeded as to Benun’s state of mind in inducing infringement through the sale of the “Sesame Street™” order of LFFPs, made from newly molded shells.
B.
Tranche II (August 21, 2001 to December 12, 2003) Issue Preclusion.
Fuji has contended that ITC II, finding infringement by Jazz and inducement to infringe by Benun (as well as bad faith in the violation of the longstanding Cease and Desist Order), should be given certain pre-clusive effect
sub judice.
Of course, the $13 million penalty assessed by the ITC enures to the benefit of the United States (not Fuji), so that there has been no liquidation of Jazz/Benun debt to Fuji in ITC II. Nevertheless, Fuji contends that certain “building block” determinations of the ITC should be adopted by this court.
Broadly, it is established that ITC decisions with respect to patent issues should have no claim or issue preclusive effect in later district court litigation. The legislative history of the Trade Reform Act of 1974 supports this view as follows:
The Commission is not, of course, empowered under existing law to set aside a patent as being invalid or to render it unenforceable, and the extent of the Commission’s authority under this bill is to take into consideration such defenses and to make findings thereon for the purposes of determining whether section 337 is being violated.
... In patent-based cases, the Commission considers, for its own purposes under section 337, the status of imports with respect to the claims of U.S. patents. The Commission’s findings neither purport to be, nor can they be, regarded as binding interpretations of the U.S. patent laws in particular factual contexts. Therefore, it seems clear that any disposition of a Commission action by a Federal Court should not have a res judicata or collateral estoppel effect in cases before such courts.
S. Rep. NO. 93-1298 at 196 (1974)
as reprinted in
1974 U.S.C.C.A.N. 7186, 7329. Indeed, “the ITC takes the position that its decisions have no
res judicata
effect in [district court] litigation.”
Corning Glass Works v. United States Int’l Trade Comm’n,
799 F.2d 1559 , 1570 n. 12 (Fed.Cir.1986).
Given the jurisdictional limitations on the relief available in the ITC, the Federal Circuit has long held that a prior ITC decision cannot have patent claim preclu-sive or patent issue preclusive effect in the district court.
Bio-Technology Gen. Corp. v. Genentech, Inc.,
80 F.3d 1553, 1564 (Fed.Cir.1996).
See also Texas Instruments, Inc. v. United States Int’l Trade Comm’n,
851 F.2d 342 , 344 (Fed.Cir.1988) (“This court has stated that the ITC’s determinations regarding patent issues
*84
should be given no res judicata or collateral estoppel effect.”)- However, Fuji had tailored its preclusion argument before this court, contending (as it did in
District Court
f) that though
legal determinations
of the ITC were not preclusive,
factual findings
should be given preclusive effect. Judge Hochberg in
District Court I
rejected this argument, as follows:
Plaintiffs urged this Court to adopt the position advanced by Judge Longobardi of the District Court of Delaware in
In re Convertible Rowing Exerciser Patent Litigation,
814 F.Supp. 1197 (D.Del.1993). Judge Longobardi held that while the Federal Circuit has decided that
legal
findings rendered by the ITC do not carry a preclusive effect, the same cannot be said of
factual
findings.
Id.
at 1204-05 . This Court does not concur with this view. The decision in
Convertible Rowing
preceded
Texas Instruments.
The Federal Circuit in
Texas Instruments
had ample opportunity to distinguish between a factual or legal preclusive effect and did not do so. Nor is the analysis in
Texas Instruments
limited to legal findings. Consequently, this Court declines to follow
Convertible Rowing
and instead affords both the factual and legal findings of the ITC and the appeal thereof persuasive value only.
Cf. Minnesota Mining and Manufacturing v. Beautone Specialties Co., Ltd.,
117 F.Supp.2d 72 (D.Mass.1999) (distinguishing
Convertible Rowing
as outdated and hinting that
Convertible Ruling
was effectively overturned by
Texas Instruments).
Fuji Photo Film Co. v. Jazz Photo Corp.,
173 F.Supp.2d at 274 n. 2 (emphasis added).
This court agrees with Judge Hochberg, that neither legal determinations nor factual findings of the ITC can serve as a basis for issue preclusion. Nevertheless, there remains the question of whether and to what extent this court should consider ITC II, which fully litigated at least the patent infringement issues in Tranche II. The Federal Circuit has provided some guidance here.
[O]nce we accept, as we have done at least since 1986, that ITC decisions are not binding on district courts in subsequent cases brought before them, it necessarily follows that accused infringers can raise whatever defenses they believe are justified, regardless whether they previously raised them and lost in the ITC.
The district court can attribute whatever persuasive value to the prior ITC decision that it considers justified.
And we, on appeal, must be free to thoroughly review the district court’s decision. As a court we are bound to follow our own precedents, and, to the extent that we have previously ruled on a matter, a subsequent panel will have powerful incentives not to deviate from that prior holding, short of thoroughly justified grounds.
Texas Instruments, Inc. v. Cypress Semiconductor Corp.,
90 F.3d 1558, 1569 (Fed.Cir.1996) (emphasis added).
This court thus concluded (again, immediately before trial) that Tranche II claims would have to be proven fully by Fuji. However, while the findings and determinations of ITC II are not preclusive, they would be considered by this court. This is particularly the case because of the ITC’s expertise in the area of patent law, its familiarity with the LFFPs refurbishment issues, and the detailed opinion rendered in ITC II. As will be discussed hereinafter, consideration of the “persuasive value” of ITC II has substantially impacted on this trial, most plainly as to evidentiary rulings. Moreover, at approximately the midpoint of the trial period (January 11, 2007), the Federal Circuit affirmed much (but not all) of ITC II.
*85
C.
Trial Issues.
As a result of the threshold determination of this court, the issues remaining for trial were established as:
(i) The Tranche I state of mind of Ben-un (whether Benun was “willful and malicious”) in his participation in the sale of 1,209,760
newly molded
LFFPs; and
(ii) The
full array
of Fuji’s Tranche II claims, i.e., whether Jazz/Benun “injured” Fuji by infringing
33
while not establishing the repair affirmative defense; if such injury be proven, the damages attributable to same; and whether such injury — if any— was “willful and malicious” in accordance with § 523(a)(6) so as to render all or any part of any damage award adjudged herein excepted from the bankruptcy discharge.
34
These issues will be dealt with in reverse order, as fully set forth below.
35
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).
A.
Evidence Issues.
In order to understand and evaluate the persuasive effect of ITC II, this court con-eluded that evidence admitted in ITC II should be liberally admitted in this proceeding. Accepting same into evidence was not automatic for the ITC II exhibits, but they were given the equivalent of a rebuttable presumption of admissibility. This was particularly the case since Benun (who was the party generally on the “receiving end” of Fuji’s-offered ITC II exhibits at trial here) had the opportunity to review and contest them in ITC II.
See, e.g.,
7/26/06 Tr. at 89:20-97:23; 7/27/06 Tr. at 134:15-138:1.
B.
Process of Refurbishing LFFPs.
1.
Effort to Establish a Standard for Permissible Repair Processing.
With the benefit of
Appeal III,
permissible repair processing for LFFPs becomes somewhat clearer. However, even today it is not a model of clarity. An original “eight-step” program was identified by the ALJ as common processing among the twenty-seven remanufacturers targeted in ITC I. In fact, the Commission rejected (incorrectly as it turned out) that eight-step process, thus as a practical matter denying the concept of permissible repair
for LFFPs
in ITC I.
36
*86
The process approved in
Appeal I
is as follows:
1) [R]emoving the cardboard cover; 2) opening the LFFP body; 3) replacing the winding wheel or modifying the film cartridge to be inserted; 4) resetting the film counter; 5) replacing the battery in flash LFFPs; 6) winding new film out of a canister onto a spool or into a roll; 7) resealing the LFFP body using tape and/or glue; 8) applying a new cardboard cover.
474 F.3d at 1286 n. 1.
The eight-step processing was no magic or immutable formulation.
37
Indeed, an extended nineteen-step process (defined by Jazz in ITC II as its refurbishing technique) was sanctioned and approved in
Appeal III.
The nineteen steps were:
1) [Tjesting the battery; 2) breaking the weld so that the camera can be opened; 3) opening the camera’s back; 4) disengaging the film advance disabling mechanism; 5) inserting the battery in the camera; 6) cleaning the viewfinder and taking lens; 7) testing the flash; 8) resetting the film counter; 9) inserting the film cartridge and securing the back closed; 10) applying black tape to areas where potential light leakage may occur; 11) inserting a “slider” to allow film to be reloaded with its back cover closed; 12) inserting a small rod to prevent errant pictures from being taken during refurbishing; 13) inserting a film winding shaft into the film roll chamber; 14) unwinding the film out of the film cartridge and into the film roll; 15) disconnecting the film winding shaft; 16) closing the film access door and applying black tape thereto; 17) applying additional black tape to areas where potential light leakage may occur; 18) testing the film advance and flash; and 19) placing the outer cardboard packaging onto the LFFP.
474 F.3d at 1288 n. 3.
Fuji, obviously disquieted by the very thought of repair being permissible, would have every variant from the
Appeal I
eight-step process struck down. In
Appeal III,
for example, Fuji argued “that Kodak LFFPs that received
partial new backs
and LFFPs that were refurbished
without spools
should have been found to be infringing.” 474 F.3d at 1289 (emphasis added). ITC II rejected these propositions. In fact, the Federal Circuit went considerably further than the ITC in expanding the scope of permissible repair.
Appeal III
provided a significant benchmark along the repair-reconstruction spectrum by accepting the concept of “spent parts” for certain full camera backs. ITC
*87
II had ruled that full-back replacement (as distinguished from partial new backs) was reconstruction;
Appeal III
reversed that finding.
38
474 F.3d at 1295-98. In addressing the spent parts issue, the Federal Circuit drove home the point that there is a range of permitted repair activities:
[C]ontrary to Fuji’s assertion, our original decision in
[Appeal
7] did not limit the scope of permissible repair to the eight common steps it considered; rather we did not reach the question of what other activities constituted permissible repair.... On appeal in this case, the Commission and Benun agree that the eight step refurbishment discussed in
[Appeal
/] and the nineteen step refurbishment described in the Commission order here both involve permissible repair. The question then [answered by the Court in the negative] is whether one additional action by Jazz, the addition of a new plastic back cover, converts the activity into impermissible reconstruction.
474 F.3d at 1295-96 (footnote omitted).
Scouring
Appeal I
for examples of nonconforming refurbishing processes is unavailing: the only clearly specified offending respondent in ITC I (noted by the Federal Circuit at a key point in its opinion summary), had not refurbished at all, but rather had admitted “building new LFFP cameras in China.” 264 F.3d at 1109 n. 3.
Appeal I’s
reluctance to provide guidance as to when processes might transcend “repair” and morph into “reconstruction” was explained.
The Commission’s ruling of reconstruction was based on the acknowledged general activities of the remanufactur-ers, and thus did not require evidence of whether any specific additional procedures were performed, for such evidence would not have affected the Commission’s ruling. However, a ruling of repair can not be open-ended, for there is undoubtedly a stage at which permissible repair becomes prohibited reconstruction. We can not exculpate unknown processes from the charge of infringing reconstruction.
264 F.3d at 1109 (footnote 3 omitted, but referenced immediately above herein). However,
Appeal I
is not without clues (notwithstanding its resistance to specifying any set of factors to consider in assessing permissible repair).
The Court has cautioned against reliance on any specific set of “factors” in distinguishing permissible from prohibited activities, stating in
Aro Manufacturing
that “While there is language in some lower court opinions indicating that ‘repair’ or ‘reconstruction’ depends on a number of factors, it is significant that each of the three cases of this Court, cited for that proposition, holds that a license to use a patented combination includes the right ‘to preserve its fitness for use....’” 365 U.S. at 345, 81 S.Ct. 599 , 5 L.Ed.2d 592 . Indeed, this
*88
criterion is the common thread in precedent, requiring consideration of the remaining useful capacity of the article, and the nature and role of the replaced parts in achieving that useful capacity. The appellants stress that all of the original components of the LFFP except the film and battery have a useful remaining life, and are reused.
The appellants state that but for the exposed roll of film and its container, any portion of the case that was broken by the photo processor, and the winding wheel in certain cameras, the refurbished LFFP is substantially the original camera, for which the patent right has been exhausted.
264 F.3d at 1106 (emphasis added).
Appeal III’s,
reliance on the “spent parts” concept for the subject broken camera backs (partial and full) was thus consistent with
Appeal I.
In summing up the state of permitted and impermissible LFFP remanufacturing processing to this point, the following appear to be established:
(i) The
methodology
by which LFFP shells are dissembled, refilled with new film and battery in place of the obviously spent original film and battery, is broadly permitted (whether in eight or nineteen steps or other variations of
obvious and commonsensical
techniques
39
);
(ii) Building
new cameras
(presumably by assembling all, or perhaps substantially all or major newly molded piece parts) is plainly outside repair and the permitted repair defense;
(in)
Replacing certain piece parts
(presumably with newly molded components, as well as salvaged parts) is permitted at least where the concept of “spent parts” applies
40
; and
(iv) Replacement of spent parts (e.g., partial or full back LFFP covers), even if they are “essential” or “distinguishing”
41
nonpatented components of a patentable assembly, remains within the ambit of permissible repair (at least where “the extent of the refurbishment is [not] disproportionate to the overall value of the parts ... not replaced.”
42
).
2.
Proof Required to Establish “Permissible Repair” Process.
Giving only inklings of substance,
Appeal I
foretells the future for potential case-by-case (i.e., process-by-process) hearings.
*89
Thus our reversal of the Commission’s decision does not apply to LFFPs from those remanufacturing facilities for which discovery was refused or where the evidence offered was found incomplete or not credible by the ALJ. For those respondents’ activities that were shown to be limited to those steps considered by the ALJ ... we conclude that these activities constitute permissible repair. For those respondents who refused to provide discovery or access, or proffered incomplete or “bench” evidence (a partial display created for litigation purposes), or presented testimony that the ALJ found to be not credible or inadequate, it can not be determined from the record whether their remanu-facturing activities are limited to those considered by the ALJ and on which our ruling of permissible repair is based. For those respondents, the record contains insufficient basis on which to reverse the Commission’s rulings.
264 F.3d at 1109.
This same passage is quoted in ITC II as a precursor to concluding that there was a “lack of complete and credible information
verifying
the LFFP refurbishing processes at many of Jazz’s supplier factories.” Ex. P-118A at 78-79 (emphasis added).
43
Unanswered (and starkly so, now with the benefit of history), is the question: what in the reloading process would be other than “permissible repair”?
As processes for permissible repair have been reviewed by the Federal Circuit in
Appeals I, II,
and
III
and the
CIT Appeal,
the acceptability of a broad range of refurbishing has developed (see Point IV.B.l
supra).
Fuji-driven concepts (some accepted by the ITC), including: no repair permitted at all; no repair permitted beyond the orthodoxy of a precise eight-step process; and no remolding of spent parts (such as partial or full camera backs),
have all been debunked.
Short of completely remolding the entire camera or at a minimum, the camera shell, or, as hinted by the Federal Circuit, adding spent parts of such cost or value as to exceed the worth of the parts not replaced, or
perhaps
add
*90
ing or replacing “unspent” parts (an alternative that, at least on its face, makes little commercial sense), it becomes increasingly difficult to conceive of
impermissible
repair processes. Correspondingly,
proof
of
permissible
repair becomes less difficult as accepted concepts of that repair broaden and break away from the Fuji construct. More specifically,
if
a refurbisher were to provide
credible
testimony of a witness who swore to a straightforward process, that could well carry the burden of going-forward with the processing aspect of the permissible repair affirmative defense. Likewise, videotapes as direct, corroborative or illustrative proofs could support the burden of going forward with the affirmative defense, and could serve to carry the ultimate burden of persuasion if left unre-butted. Of course, videotapes are not
required
as evidence.
See Appeal III,
474 F.3d at 1295. And, it is clear that the Federal Circuit has not been limiting the
mode
of proving permissible repair. Examination of refurbished LFFPs, for example, could well be probative. This is especially so when such simple, low-technology processes and products are involved.
LFFP reloading presents no engineering or developmental mystery. “Permissible repair” of LFFPs has now extended acceptable processing to a point short only of remolding the shells or replacing major and expensive components of the LFFP’s works. This extension is a
substantive
countercurrent to the concept of any embellished proof standard advocated by Fuji, i.e., imposition of a “verification” additive to the norm of trial court evaluation of evidence’s probativity.
See, e.g., District Court I,
249 F.Supp.2d at 447-48;
CIT Trial,
353 F.Supp.2d at 1348. A preponderance of the evidence remains the requirement to establish the affirmative defense, and embellishments of “complete,” “credible,” and “verifiable” would simply go to the usual evaluation and weighting of proofs as presented.
3.
Determination as to Processing.
The declarations of witnesses Szeto, Za-wodny and Benun support Jazz’s Tranche II period compliance with Federal Circuit refurbishment requirements,
44
as those requirements have been clarified to date.
This is especially the case, given that no magic formula for such processing is required, “spent parts” (such as partial and full camera backs) may be replaced, with newly molded parts, and the reloading process is
obvious.
Szeto, Jazz Hong Kong’s managing officer, declared fully and comprehensively that supply factories in the Tranche II period complied with Federal Circuit processing requirements. Her declarations (Exs. D-C and Y) include, in part and by way of example, the following:
Prior to the Federal Circuit Opinion, I visited many repair factories that were supplying refurbished single-use cameras to Jazz H.K., including, but not limited to, Vastfame, Ginfax, which was referred to as Leader Peak, Boshi and Company, Ltd., and Penji Jiarui Photoe-lectricity Company Limited, which was often referred to as Peji, and observed the production processes at those factories. In fact, the general practice for Jazz H.K. was to visit the vendor’s facto
*91
ry and observe the refurbishment processes before committing to the purchase. Between 1995 and 2000, I paid regular visits to each of the repair factories at least four (4) or five (5) times per year. (Ex. D-C ¶ 11.)
In fact, based upon my observations while visiting the repair factories, I was advised that I was going to testify at trial at the patent infringement action brought against Jazz, Jazz H.K. and Jack Benun by Fuji in the United States District Court for the District of New Jersey. I was present at trial and prepared to testify but was never called to testify by Jazz’s counsel. (Ex. D-C ¶ 12.)
Subsequent to the Federal Circuit Opinion, at the direction of Jazz and Jack Benun, Jazz H.K. limited its single-use camera purchases to fewer repair factories. I was advised that this was done to ensure that Jazz could monitor and control all of the repair factories from which it acquired single-use cameras, to ensure that the repair factories permissibly repaired the single-use cameras. (Ex. D-C ¶ 13.)
... [Ajfter August 2001, I began to personally inspect the repair factories on a more frequent basis to ensure compliance with the processes outlined in the Federal Circuit Opinion. I am fully familiar with these processes, which I observed at the repair factories on a regular basis. I also sent Jazz H.K. employees to visit the repair factories on a constant basis to review and approve their processes. (Ex. D-C ¶ 20.)
Beginning in late 2001, Jazz also had certain of its employees spend significant amounts of time at the repair factories to observe the repair processes. I recall that at some point beginning in 2002 or 2003, Eli Shoer and Michal Za-wodny, Jazz employees, began to visit certain of the repair factories on a regular basis. (Ex. D-C ¶ 22.)
... [A]fter the United States Court of Appeals for the Federal Circuit issued its opinion in August 2001 (the “Federal Circuit Opinion”), I began to communicate with and personally inspect the Repair Factories on a more frequent basis to ensure compliance with the repair processes outlined in the Federal Circuit Opinion. I am fully familiar with these repair processes, which I observed at the Repair Factories many times. After August 2001, I also sent Jazz H.K. employees to visit the Repair Factories on a constant basis to review and approve the Repair Factories’ repair processes. (Ex. D-Y ¶ 4.)
Although the repair processes at the different Repair Factories differed slightly, I personally observed workers employed at all of the Repair Factories that ultimately supplied Jazz with refurbished single-use cameras utilizing some or all of the following processes:
a. removing the existing sticker and/or existing -wrapper if still attached;
b. opening the plastic shell casing;
c. cleaning the camera shell and camera lens;
d. replacement of the winding wheel for certain single-use cameras;
e. replacement of the battery for flash single-use cameras;
f. testing the camera functionality;
g. resetting the counter;
h. inserting new film into the camera shell and unwinding the film;
i. closing the back cover and resealing the outer case, usually with black light-tight tape; and
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j. a. adding a new cardboard wrapper. (Ex. D-Y ¶ 5.)
During my visits to the Repair Factories, I never observed the refurbishment and reloading of Jazz’s single-use camera shells that included any replacement of internal components of camera shells, such as capacitors, circuit boards, shutters, main bodies or flash tubes. (Ex. D-Y ¶ 7.)
Ms. Szeto’s testimony as to her personal observations of the factory work in China, and processing requirements generally, supported her declarations and is credible.
See, e.g.,
3/27/07 Tr. 8:19-18:15; 3/28/07 Tr. 71:24-73:19. Fuji’s efforts to impeach this witness on this subject, in part veering off into Fuji’s allegation that it was allowed to visit only certain Jazz suppliers, more presses its verification thesis than directly contests Szeto’s declarations and testimony. Moreover, Fuji’s heavily relied upon and long-serving expert witness, Mr. Bellows,
45
did not effectively put in issue either the Szeto testimony regarding process,
nor (most critically) Jazz’s permissible repair of LFFPs.
In fact, notwithstanding Bellows’ protracted testimony commenting on videos and sample cameras, he did not in any respect opine that Jazz’s product (other than the Sesame Street™ order) included newly molded shells, newly made major components, nor that any video showed a process that was an
impermissible
repair (i.e., “reconstruction”).
46
Likewise, this court’s observation of all physical exhibits and every video, whether presented in defense or offered by Fuji to discredit Benun’s affirmative defense, failed to disclose any evidence of impermissible processing, other than as to newly molded Sesame
Street™
shells.
47
All
*93
such evidence universally illustrated a common theme of LFFP reloading in the Tranche II period which, though subject to variation, was in principle simple “repair.”
Zawodny, the Jazz quality control manager, supported repair processing via declarations (Exs. D-G and W). The following declaration statements evidence that support:
While employed at Jazz [1999 until March 2005], I oversaw quality control for Jazz. My duties [among fifteen specified functions] were to ... oversee the procedures that the repair factories used to produce single-use cameras for Jazz.... (Ex. D-G ¶ 3.)
Between 1999, when I began working for Jazz, until the end of 2002, I visited many of Jazz’s single-use camera repair factories. During my visits to these repair factories, I observed the repair processes that were used to refurbish the single-use cameras that were purchased by Jazz. (Ex. D-G ¶ 5.)
My visits to the repair factories increased in 2008. (Ex. D-G ¶ 7.)
In early 2003, Jazz began purchasing refurbished single-use cameras from Po-lytech Enterprises, Ltd. (“Polytech”). By early to mid-2003, Jazz had phased out many of its repair factories. During 2003, Everbest, Jinshi and Polytech were the only repair factories that supplied Jazz with its single-use cameras. (Ex. D-G ¶ 8.)
When I visited the Everbest, Jinshi and Polytech repair factories in spring 2003, I videotaped the processes that I observed, which videotapes were later used in the ITC Enforcement Proceeding II litigation with Fuji. (Ex. D-G ¶ 9.)
By late 2003, Jazz had phased out the Everbest and Jinshi repair factories, leaving Polytech as Jazz’s sole source of refurbished single-use cameras. (Ex. D-G ¶ 10.)
I, along with Eli Shoer, were the people at Jazz who were primarily responsible for ensuring that Polytech complied with the repair processes that had been approved by the Court of Appeals for the Federal Circuit (the “Federal Circuit”) in its August 21, 2001 Opinion (the “Federal Circuit Opinion”). (Ex. D-G ¶ 12.)
Beginning in or about February 2003, or shortly before Polytech began to supply Jazz with single-use cameras, Eli Shoer and I began to visit Polytech’s repair factory on a regular basis to instruct and train Polytech’s staff on the repair processes that they were to employ in producing single-use cameras for Jazz. This training continued until May 2003. (Ex. D-G ¶ 13.)
Thereafter, I personally observed Po-lytech’s repair processes on a regular basis to ensure that Polytech complied with the repair processes mandated by the Federal Circuit in the Federal Circuit Opinion. (Ex. D-G ¶ 14.)
The workers employed at all of Jazz’s single-use camera repair factories implemented repair processes between 1999 and December 2003 that I observed in connection with Jazz’s refurbished single-use cameras, which included some or all of the following processes:
a. removing the existing sticker and/or existing wrapper if still attached;
b. opening the plastic shell casing;
c. cleaning the camera shell and camera lens;
*94
d. replacement of the winding wheel for certain single-use cameras;
e. replacement of the battery for flash single-use cameras;
f. testing the camera functionality;
g. resetting the counter;
h. inserting new film into the camera shell and unwinding the film;
i. closing the back cover and resealing the outer case, usually with black light-tight tape; and
j. adding a new cardboard wrapper. (Ex. D-W ¶ 4.)
During my visits to the repair factories, I never witnessed the refurbishment and reloading of Jazz’s single-use camera shells that included any replacement of internal components of camera shells, such as capacitors, circuit boards, shutters, main bodies or flash tubes. (Ex. D-W ¶ 5.)
Mr. Zawodny’s 2003 videos of the Ever-best, Jinshi and Polytech factories support the process aspect of a “permissible repair” defense.
See
Ex. D-28 series.
He plainly (and, in this court’s view, credibly) testified that the repair processes depicted in the Everbest factory video (Ex. D-28C) were “very similar” to those employed in other Jazz supply factories in the Tranche II era.
12/5/06 Tr. 55:22. Again, this series of three videos has solidified this court’s view that LFFP reloading was most commonsensically done at Jazz supply factories in a manner comporting with Federal Circuit “repair” concepts. Though differences in processing persisted, the range of assembly-line techniques emphasized by Fuji through Bellows’ testimony was simply variations on the same repair theme.
48
Benun declared that Jazz was “comforted” by
Appeal I,
and “continued to refurbish and reload Fuji single-use cameras within the eight (8) common steps of repair-” Ex. D-I ¶32. Benun further declared that he personally visited factories in China between August 2001 and late 2004 “to ensure compliance with the Federal Circuit Decision.”
Id.
at ¶ 42. Benun testified consistently with his declaration.
49
Of course, compliance with such a relatively undefined and evolving standard kept everyone guessing about process.
50
Nothing in the testimony of rebuttal witnesses or on cross-examination of Szeto, Zawodny or Benun has, in this court’s
*95
view, tainted or discredited their
process-supporting
statements. To the contrary, these witnesses are found to be credible in their support of repair processing and their testimony satisfies Benun’s burden of going forward with the process aspect of his affirmative defense.
Videos presented (by Benun and Fuji) have not rebutted the Benun position. Rather, the videos have solidified this court’s opinion that reloading LFFPs is a straightforward process (which could have many variations without becoming “reconstruction” of the camera), and, all videos viewed by this court demonstrate “repair.” Similarly, the court has reviewed physical exhibits (including various refurbished LFFPs) both in conjunction with plaintiffs’ witnesses’ testimony and independently, and finds no evidence of a process employed by Jazz in the Tranche II period that would be other than “repair.”
Fuji has not offered any evidence that “reconstruction” occurred in the Tranche II period.
In sum, not a single frame of any video viewed by this court, nor any examination of reloaded “off the shelf’ cameras or used shells, nor any testimony from either side, has even hinted at: (i) any remolding of camera bodies (as was the case with the 1998 Sesame Street™ order); (ii) wholesale replacement of camera mechanisms and electronics; or (iii) actual replacement of more than film, batteries, and some broken camera “entry doors” (partial or full backs). This court’s observation of witnesses, camera shells, refurbished cameras, documents, and videos— as well as careful assessments of counsel’s extended argumentation — leads this court to conclude that the preponderance of the evidence establishes that Jazz’s LFFPs were “repaired,” not “reconstructed” in the Tranche II period.
51
C.
First Sale Requirement.
The first
United States
sale requirement for patent exhaustion in the LFFP repair defense, announced by the Federal Circuit in 2001, was a complete surprise to participants in ITC I and most observers. The camera shells to be reloaded by Jazz must first have been sold in the United States by Fuji or its licensee in order to qualify Jazz for the repair affirmative defense.
Very much after the fact, Benun offers a partial defense of first sale by reviewing the actions of its main shell supplier, Ken Haase (and his various enterprises) in a loosely stated 1999 to 2001 period. In sum, this court finds no convincing evidence that the Haase supply
to Jazz
was comprised in any significant part of shells
derived from cameras
first sold in the United States by Fuji or its licensees. Nor does this court find persuasive the Benun argument that Fuji’s shell exchange with Haase (or Fuji’s licensee’s exchange program with him) resulted in significant
*96
“United States” shells finding their way into Jazz’s inventory, or that the exchange itself constituted a
first sale.
52
The purported proofs are not adequate, Mr. Haase was not produced as a witness, nor was probative documentary evidence presented to this court. (The documents that Benun did provide raised more questions about the Haase supply than they answered.
See, e.g.,
Exs. D-Z and D-AA; 7/28/06 Tr. 54:22-55-2.) In ultimate terms, Benun would wispily reconstruct the Haase supply (as if Benun did not have the burden of
proving
its affirmative defense), thus, to one or another extent, challenging the
District Court I
finding that 90.5% of shells reloaded by Jazz through August 21, 2001 were
not
first sold in the United States.
Jazz and Benun, however, did respond immediately and contemporaneously to the surprise Federal Circuit requirement by adopting and/or regenerating the “Informed Compliance Program” (“ICP”), a tracking system for acquired shells.
53
Through testimony and documentary evidence,
54
the intricacy and breadth of that program were clearly established. This court finds that the ICP was
intended
to satisfy the first sale requirement, was at least at outset
believed
by Benun and others at Jazz to have largely (but not totally) satisfied “first sale,” and was substantially more than a mere formalism adopted to give the aura of compliance (as Fuji would portray it).
The ALJ in ITC II gave the ICP short shrift. He felt it was disorganized and incomplete. Moreover, though it tracked shell
collection
exclusively from United States suppliers, it did not
assure
that first camera
sales
(by Fuji or its licensees) were in the United States. Ex. P-118A 28-35, 114. The
CIT trial
judge, however, credited the ICP as
part
of a post-2003 enhanced system of first sale assurance.
55
This court’s evaluation of the ICP in the Tranche II period gives it mixed reviews.
Conceptually,
and to a certain degree in practice, the ICP had substantially more merit than the ALJ allowed. In its flowchart workings, the ICP embodied the mechanics to track shells from the United States point of collection to shipment to Asia, then to and through supply factories, and back to the United States as reloaded cameras. To the extent that domestic photoprocessors were the source of LFFP shells, there is a common sense connection between the processor and the sale of the disposable camera (at least in the absence of marketplace aberrations). The CIT identified this linkage.
CIT Trial,
353 F.Supp.2d at 1348-49. In an effort to
quantify
this connection, witnesses Leon Silvera and Albert Silvera
56
testified to an 85% factor, i.e., that it was
industry lore
that 85% of LFFP purchasers who bought at retail stores offering film development, went back to those stores for photopro-cessing.
See
7/28/06 Tr. 243:4-246:6; Ex. D-0 ¶ 8.
See also CIT Trial,
353 F.Supp.2d at 1348 n. 7
(citing
Leon Silvera’s testimony “based on his knowledge of
*97
the industry, that 85% of shells are processed at the same store where the original camera was purchased,” while noting that no documentary evidence supported Silvera’s statement);
CIT Appeal,
489 F.3d at 1351;
see also
Ex. D-0 ¶ 8. Leon Silvera also declared
sub judice
that 80% of PRE’s shell purchases came from large store/processors and another 10% to 15% from smaller independent United States photoprocessors. Ex. D-0 ¶¶ 8-10. The balance of PRE’s post-August 2001 shell collections (5%-10%) were said to have come from “collectors.” Ex. D-0 ¶ 10. (This part of Leon Silvera’s declaration is not necessarily supported by PRE’s documentary summary of shell collections.
Compare and contrast
Ex. D-10.)
The ICP, of course, was not a perfect filter. Previously reloaded cameras once again recycled (“reloads of reloads”) were a persisting (and in this court’s view, known) problem,
57
as was the possible (though very limited) contamination of domestic sales by tourist cameras (purchased abroad and brought to the United States for development). Most significantly to this court was the potential post-August 2001 evolving contaminant of market arbitraging in shells (i.e., importing shells based upon the rise in demand and price for ostensibly “domestic” camera bodies
58
). In the
CIT trial,
it was made clear that
after
2003, Jazz instituted an inspection process at the Polytech factory in Hong Kong (by that time it’s sole source of reloading); beginning in 2004 sorting was initiated in which both previously reloaded shells
and
shells with foreign language wrappers were culled out of the Jazz reloading process (at least to the extent that Jazz would market LFFPs in this country). These two enhancements in Jazz shell processing were deemed important by the CIT in its decision that Jazz had, to the extent set forth therein, satisfied the first United States sale requirement. 353 F.Supp.2d at 1348-50 (Parts V.B. and C.). However, neither component of the post-2003 changes by Jazz is present
sub judi-ce
— yet both could have been implemented earlier.
Beyond the merit or lack of merit of the system in concept, the ICP was flawed in practice. There was a degree of disorganization surrounding the program, as well as some deficiency or lag in documentation, all as referenced in ITC II.
See
Ex. P-118A at 28-32; Ex. P-176; Ex. P-222-1; Exs. P-400-423. The purported integrity of the ICP was thus, to a certain extent, undercut by internal documentation glitches. Given the volume of the paper flow required by the ICP, the Fuji demonstration of system file problems did not, in this court’s view, completely discredit the ICP. More telling to this court in terms of absence of documentation of “first sale” was the inability of Benun or Jazz’s primary shell collector, PRE, to produce at trial the
*98
required statements
certifying
that suppliers to PRE had acquired their shells from domestic sources.
59
Compare and contrast
this deficiency with the proofs presented to the CIT. 353 F.Supp.2d at 1342 (Part IV.A.1.8) and 1348 (referencing both L. Silvera’s testimony and “documentary evidence supporting it”). The absence of ICP-required certifications of “first sale” reflects more than a mere paper deficiency on Jazz’s shell purchasing from its collectors.
With the dramatic run up in domestic shell prices (from about 40<t to 70(f) after the August 21, 2001 decision of the Federal Circuit announcing the first sale requirement, “arbitrage” in shells should have been anticipated at some point, notwithstanding full implementation of the ICP. Transshipping of containers of foreign shells (at approximately 4<f per shell, 5/9/07 Tr. 158:1-6) suddenly made economic sense
if
they could be palmed off as derived from domestic cameras. A paper tracking system (even if the documentation were impeccable) by itself could not assure first sale compliance. These market conditions, as well as the reloading of previously reloaded cameras and (probably, most minimally) the tourist camera processing by United States laboratories, would cause “leakage” in the ICP.
Fuji presented
sub judice
much the same sampling-based case regarding first sale as it did in ITC II,
60
beefing up its analysis with additional Japanese manufacture and shipment documentation.
61
The Fuji case development of camera models and markets effectively identified “United States sale” LFFPs and “foreign sale” LFFPs by camera type. Though various conditions or events could render these identified sale markets less than absolutely certain (i.e., a foreign-intended LFFP could conceivably wind up as being sold in the United States), Fuji’s position as to camera types and markets was quite strong. That position was, in this court’s view, essentially unrebutted.
Fuji’s proofs then parlayed the model sale site data with six samples of Jazz shells selected by Fuji employee Field at Fuji recycling sites, along with some unused Jazz LFFPs bought at retail by Fuji’s counsel’s investigators (as well as some units bought by Kodak employees under the direction of witness Strong).
*99
Field evaluated the samples (including the new Jazz cameras) based upon his understanding of United States and foreign LFFP products. Thereafter, the same samples were examined by paralegal Bilka (and his colleague), who were retained by and operated in accordance with direction provided by Fuji’s trial counsel.
Using Fuji samples and data, ITC counsel recommended to the ALJ and the ALJ accepted in ITC II, a 40%
foreign first sale
factor in the Tranche II period.
62
Ex. P-118A at 65. Benun, standing by his reliance on the ICP, leveled various attacks on the sampling testimony.
The selection process for the sampling (by Field) and his evaluation of those samples is, in this court’s view, controversial. And, Bilka’s counsel-programmed “analysis” (in reality, more data entry than analysis) was hotly contested by Benun. Of most concern to this court is the relatively small size of the sampling offered as evidence by Fuji: of some twenty-seven million Jazz LFFPs at issue in the Tranche II period, the 40% factor was derived from the 2003 analysis of only 2,745 Jazz cameras/shells (a number now raised to 2,851 here). Ex. P-VV ¶¶ 2; Ex. P-27; Ex. P-231. Of this number, fewer than 500 new Jazz cameras (as distinguished from Jazz shells hand picked from recycling bins) were evaluated.
See
Ex. P-118A at 60-61. Besides being skeptical about the shell sample size, this court acknowledges that Fuji employees were in a position to skew the shell collection process by making a point of collecting identifiable foreign-made LFFPs. (This, in essence, is a turnabout of the “verification” issue pressed as to processing by Fuji.) However, Field was not shaken on cross-examination with respect to his shell collection, and results of “off-the-shelf’ unused cameras (though in smaller lots), comported with results in the shell evaluation.
Consider, inter alia,
Kodak employee Strong’s declaration and testimony regarding sampling. Ex. P-B ¶¶ 11-16 and 7/26/06 Tr. at 112:23-151:20; 166:21-174:3; 192:12-193:24.
Benun’s objection to Bilka’s testimony is, at root, a concern that Fuji’s counsel “designed” this evidence. In a sense, that is true. Nevertheless, on close inspection, the program created by counsel was an appropriate syllogism which tied together the complex logic of manufacturing, shipping, sales, and sample evaluation. Each step was sufficiently proven out in court, notwithstanding Benun’s assertion that the purported best evidence of first sale (i.e., shipping records of the Fuji Sales Division) was not produced. Again, though complex proofs as adduced by Fuji could have been improved, they certainly were sufficient and credible in making the case against Benun. In particular, the photographs used by Bilka to identify Japanese-made LFFPs were painstakingly (and convincingly) “squared” with actual cameras and sources. Bilka, in his limited capacity as an observer and recorder of data, was a credible witness, fairly programmed for his task.
As explained above, reliance by Benun
solely
on the unenhanced ICP and PRE’s purported sourcing would not be accept
*100
able. However, Benun argues that, given Fuji’s secretive programming of LFFP sales and “earmarking” (if any) with respect to marketing, the best any reloader could have done in terms of identifying first sold United States shells was to equate “sale” with “photoprocessing.” Under this theory, an LFFP would qualify for first sale if its film were processed in the United States.
See
Benun “Proposed Findings of Fact and Conclusions of Law” ¶¶ 244-54. Supporting this theory, as the argument posits, is the 85% “lore factor” and Leon Silvera’s statement to the effect that “after August 2001,” PRE acquired between 90% and 95% of its shells from United States photoprocessors.
See
Exs. D-0 ¶¶ 8 — 10; D-10 (PRE’s shell supply summary for 2002 through 2005). This court is not convinced of the accuracy of the Silvera claim regarding 90% to 95% United States photoprocessor sourcing
as it would be applied to the August 21, 2001 to December 12, 200S period. Benun’s
Ex. D-10, when analyzed (with the benefit of the limited description provided in Ex. DO), does not support the 90% to 95% conclusion. Moreover, Ex. D-10 leaves open to question
the site of sale
of large quantities of shells derived from sources other than the major retailers upon which the 85% lore of return was developed. And, PRE’s 2001 shell supply to Jazz is not part of this “accounting.”
For this court, the essential point is that neither PRE nor Jazz took any steps to sort shells in the Tranche II period so as to cull out those most obvious contaminants (shells with foreign language wrappers and Jazz’s own reloads of reloads).
63
This blatant failure, in the face of the premium being placed on domestic shells, allowed for the possibility that even photo-processors (and more likely other shell collectors) would yield to the temptation of a marketplace pricing aberration by acquiring foreign shells in anticipation of reselling them as United States qualifying parts. PRE’s collection proofs and the 85% convention simply don’t compute as the weight of the evidence to establish first sale given such a marketplace potential
and
in the face of
direct evidence
of foreign shell contamination of Jazz’s inventory.
Fuji’s case against first sale is its survey-developed 40% factor. The 40% factor is based upon small samples taken from a sea of shells (handpicked by Fuji employees), and less than 500 Jazz LFFPs bought in retail establishments. Nevertheless, in the final analysis, this sampling is the
only direct evidence
available to this court which tests the origin of sale of actual Jazz LFFPs. Therefore, (i) in deference to ITC II and in recognition of its persuasive though not preclusive effect as to this issue, and (ii) given that the burden of persuasion (by a preponderance of evidence) weighs on Benun (and he has failed to carry that burden), this court finds that 60% of the shells at issue in Tranche II were first sold by Fuji or one of its licensees in the United States, while 40% could not be established as “first sold” in the United States.
D.
Conclusion as to Infringement.
Jazz infringed Fuji’s patents; Benun, as Jazz’s principal operator, plainly in control
*101
of the entity, induced that infringement.
64
The magnitude of the infringement in Tranche II is 40% of the sales, since 60% qualify for the “permissible repair” defense. That defense was established by a preponderance of evidence to the effect that (i) repair processes were within the acceptable range, and (ii) 60% of the shells refurbished were first sold in the United States.
In terms of numbers and dollars, judgment is rendered at the 56$ unit damage factor developed as a “reasonable royalty” in
District Court
7.
65
From August 21, 2001 through December 31, 2002, ITC II determined that 15,957,730 LFFPs were sold by Jazz. Ex. P-118A at 90-91, n. 65. Another 11,000,000 were estimated to have been sold in 2003 through December 12. Ex. P-118A at 91, n. 67.
Sub judice,
Fuji presented proofs which varied somewhat from the ITC II Jazz sales figures.
See
Exs. P-182, P-183Y, and P-EEE (as amended and entered into evidence May 18, 2007). The August 21, 2001-December 31, 2002 total per Ex. P-EEE (as amended and as employed by this court
66
) was 16,-407,914. Though Benun continues to object to the admission of Ex. P-EEE, both sides cooperated in gathering the data from Ex. P-182 to create Ex. P-EEE as amended. They agree that Ex. P-182 (as well as Ex. P-183Y) are appropriately reflected in Ex. P-EEE. The 450,000 unit increase is attributable to a tabulation of underlying Jazz documents (part of Ex. P-182), rather than reliance on a lesser accurate summary sheet used in ITC II.
Utilizing the
Benun
bankruptcy petition date of July 2, 2003 to determine the pre- and post-petition claims of Fuji against this debtor, this court finds the following: prepetition, Benun induced infringement of the 16,407,914 LFFPs sold in Tranche II through December 31, 2002
plus
5,817,919 units
67
sold to July 2, 2003, for a total of
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22,225,833 units, times the 40% factor for failure to satisfy the first sale requirement, at 56$ per unit, or $4,978,586 of compensatory damages; post-petition, the remainder of 5,182,081 units
times
the 40% factor for failure to satisfy the first sale requirement at the 56$ rate results in $1,160,786 of compensatory damages.
E.
Whether Fuji Established Ben-un’s Willful and Malicious Injury to its Property for Purposes of § 523(a)(6) Exception to Discharge in Tranche II.
1.
Burden of Persuasion.
It is emphasized that, unlike the repair defense burden of persuasion (being on Benun), the “willful” and “malicious” allegations of Fuji must be proven by that plaintiff (and by a preponderance of the evidence).
Compare, Appeal
/, 264 F.3d at 1101-02 with
Grogan,
498 U.S. at 286-91 , 111 S.Ct. 654 . At Point III.A, above, the bankruptcy standard of “willful” and “malicious” injury was described and applied to Tranche I damages; that full exposition is incorporated here as to Tranche II damage allegations.
In sum, (i) exceptions to bankruptcy discharge are narrowly construed, (ii) willful injury requires that
consequences,
not merely
acts,
be intended, (iii) negligent or reckless conduct does not satisfy the § 523(a)(6) standard, (iv) the willfulness standard is either subjective intent to injure, or (on a split of authority) either objectively or subjectively measured belief that the injury is substantially certain to result from debtor’s acts, and (v) the malice element of § 523(a)(6), if not unified with the “willful” component, entails intent to injure
and
the lack of justification or excuse.
2.
Process of Repair.
Since this court has found that repair processes in Tranche II satisfied the repair defense requirements, analyzing Ben-un’s state of mind in conjunction with the factory procedures in China is not necessary. However, Benun’s action relative to repair processing upon learning of the August 21, 2001 Federal Circuit opinion sheds some light on his overall state of mind in the Tranche II time frame.
Benun took what this court finds to be significant remedial and/or cautionary steps in an attempt to comply with (or to demonstrate compliance with) the only vaguely stated
Appeal I
repair procedure requirements. Among these steps were: prompt notice and warning to the repair factories that
only
the eight-step approved process was to be used;
68
an admonition that improperly processed LFFPs would not be purchased by Jazz;
69
factory compliance/commitment letters were sent by Jazz to the factories;
70
provision was made for Fuji inspection of the factory sites;
71
enhanced Jazz quality control visits were instituted;
72
signs were posted in the factories depicting the permitted repair process;
73
certain videotapes of some factory processes were developed;
74
and, control over the factories by Jazz was tightened, first by reducing the number of these contractors, and, ultimately, by cen
*103
tering all production in a single factory, Polytech.
75
To one or another extent, Fuji sought to discredit or demean Benun’s post-August 2001 efforts at the Chinese factories. In this court’s opinion, those efforts only emphasized the disarray wrought by the vagueness of the “repair” standard; here, a relatively small business enterprise was attempting to navigate the uncertain process requirements through “proof’ of compliance. On balance, this court finds that Benun fully intended to have Jazz meet the repair processing requirements of the Federal Circuit, acted in good faith in this regard, and (as previously decided)
did
meet those requirements. Given (i) the Benun/Jazz post-August 2001 efforts to prove its “repair” processing, (ii) the thoroughly vague picture of “permissible repair” in the Tranche II period, and (iii) the obviousness of the reloading process and its use among some or all of at least twenty-six of the respondents in
Appeal I,
it is clear to this court that Benun did not induce Jazz to refurbish LFFP shells in a manner, subjectively intending to have Jazz infringe Fuji’s patent through any LFFP reloading process. Benun’s mental state, developing in the Tranche II period, was to the contrary: this court concludes that
at least as to processing,
Benun sought to avoid further trouble with Fuji, and in furtherance of that effort took reasonable steps (and relatively easy steps)
76
toward processing requirements.
See, e.g.,
5/9/07 Tr. 152:23-153:7. Moreover, Benun did not,
nor would a reasonable reloader of LFFP’s have anticipated with substantial certainty
that the processes in use would be part of an infringing reconstruction of cameras. Indeed, the repair defense was approved by the Federal Circuit as a legal principle
and the reloading process was obvious and nonoffensive.
Excuse (given the vagueness of the developing requirements for LFFP reloading) or outright justification (as this court has found) persisted in the Tranche II era as to process. Therefore, any debt of Benun which would arise from
the process of reloading camera shells,
even if that aspect of the affirmative defense of repair had not been proven by Benun, would not have been for willful and malicious injury to Fuji within the meaning of § 523(a)(6).
3.
First Sale.
Benun implemented (or activated) the Jazz ICP immediately upon learning of the Federal Circuit’s announcement of the first sale (in the United States) requirement for the repair defense. The shell tracking program was detailed, comprehensive, and conceptually logical though not “airtight.” In practice, as described above, there was undue “leakage” and it became something of a failure. Apparently, much of that leakage was remedied
after
2003 by implementation of the sorting process at the Hong Kong factory of Polytech.
77
(a)
Factors Considered.
Should Benun have shorn up and enhanced Jazz’s ICP and shell acquisition in the Tranche II period, such that his inaction (and the corresponding act of inducing Jazz’s refurbishing of camera shells not first sold in the United States) resulted in
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willful and malicious injury to Fuji? In answering this question, the court has considered factors which cut both for and against Benun in this regard. Favoring Benun (i.e., weighing against the willful and malicious conclusion), are the following:
(i) Jazz encountered a certain amount of chaos immediately after the Federal Circuit announced its 2001 decision but, in this court’s view, did make a responsible attempt to purge its inventory and system of foreign shells (stopping shipments of refurbished LFFPs, examining warehoused inventories, air shipping shells from the United States to Hong Kong to keep supply available for the Christmas season, etc.)
(see
7/28/06 Tr. at 58:2-18; 164:13-166:15; 171:4-6; 8/29/06 Tr. at 247:13-252:9; 10/13/06 Tr. at 21:18-24:13); this chaotic state understandably impacted on both the effectiveness of Jazz’s compliance with the new first sale requirement and Benun’s state of mind as he scrambled to readjust the Jazz business;
(ii) Implementation of the ICP required coordination of flow of shells and documentation; flawed as it eventually was shown to be, it obviously absorbed Jazz’s limited management manpower and
generally
could have
initially
led Benun to believe (wrongly, as it turned out) that Jazz was in greatest part meeting the first sale requirement;
(iii) Gaining control of shell supplies involved very large volumes and an enormous worldwide market for LFFPs (Jazz alone was selling on average almost 1,000,000 units per month in the Tranche II period); this market context appears to have led Benun to make a businessman’s rationalizations, including one to the effect that a perfect filtering system was impossible and therefore the ICP and related efforts were “good enough”;
(iv) Similarly, Fuji was most secretive, protecting its product by not providing shell-embedded coding that could be read in the marketplace to aid in discerning first sale; Fuji, never wanting any refurbishing competitor to meet the Federal Circuit requirement of first sale, may well have denied the marketplace an objective readily discernible means of identifying the site of first sale;
78
(v) Shells recycled in this country were subject to various actual or Benun-perceived sourcing which either would or could introduce foreign-made LFFPs into the United States for first sale;
79
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(vi) To the extent that shells were supplied to “PRE” by domestic retailers who did photoprocessing, the conventional wisdom was that 85% of LFFP consumers purchasing from such retailers return their cameras for processing to these domestic sources;
80
and
(vii) To the extent that United States photoprocessing sources (both large retail establishments and others) were the largest proportion of shell sources in the Tranche II period,
81
and there is a logical connection between United States processing and United States sale of LFFPs, Benun’s reliance on PRE’s purchasing (and the use of the ICP) had some merit.
Running contrary to Benun’s position (i.e., favoring a conclusion that injury to Fuji was willful and malicious), are the following:
(i)Benun, knowing that a substantial component of shells refurbished before the first sale requirement was announced in August 2001 would not satisfy first sale, nonetheless made no effort to cull out previously reloaded shells (until the practice of sorting out “reloads” was instituted in 2004);
(ii) Benun knew that first sold United States shells were being sold at premiums after August 2001 (prices nearly doubling, with rises of 30c to 35<t per shell), thus providing an attractive market for shell arbitrage (and the potential for the importing of foreign shells to the United States, to be “palmed off’ as having been first sold here)
82
;
(iii) Benun has not been able to provide any of PRE’s purportedly obtained certifications as to first sale
bona fides
of its purchases on behalf of Jazz;
83
(iv) Benun/Jazz did not follow up with PRE to assure that shells provided by PRE truly qualified as having been first sold in the United States;
(v) Benun had conceded in ITC II that 5% of the refurbished shells failed the first sale test
(see
Ex. P-118A at 39); and
(vi) Benun, having developed a businessman’s rationalization that the ICP and PRE’s purchasing methods were “good enough,” maintained that position for more than two
*106
years following the 2001 Federal Circuit decision (introducing sorting of reloads and foreign language shells only after the December 2003 ITC II hearing).
(b)
Evaluation of Factors.
For patent infringement purposes, of course, this court has already determined that Benun has not proven that Jazz had satisfied first sale through implementation of the Jazz ICP (and reliance on PRE’s purchases). However, in terms of bankruptcy discharge, the introduction of the ICP serves as a strong indication of Benun’s
initial
intention to comply, generally, with Federal Circuit first sale requirements. The ICP and related reliance on PRE also serves, to a certain extent, as the basis for a subjective excuse or an objectively reasonable one under the circumstances in which Benun and Jazz found themselves on August 21, 2001.
84
Nevertheless, Benun should have reflected on the flaws in the ICP and PRE’s purchases, both at outset and as the Tranche II period progressed, notwithstanding that he and Jazz were under siege. Indeed, the
reloads
were at outset a known contaminant to collections; then, as ITC II was initiated, the plainest signal was provided to Benun that strict attention had to be given to the “details” of first sale. Business-based rationalization and a self-serving “good enough” standard were not adequate.
(c)
Findings Regarding Willful and Malicious Injury in Tranche II.
Based on the foregoing, this court finds by a preponderance of the evidence, that:
(i) Benun, upon hearing of the August 2001 decision, at outset
generally intended
to satisfy first sale requirements by having Jazz adopt the ICP and by relying on PRE and its largely photoprocessor-based supply;
(ii) Failures in Jazz’s “in-house” documentation in the ICP were more a function of negligence than willful and malicious conduct; while Benun should have paid more attention to detail, he certainly was not handling the day-to-day minutia of complex shell tracking; however, at some point during the Tranche II period, it would have become apparent to any reasonable business person, and did become apparent to Benun, that PRE’s shell purchases could well have been impacted by the shell arbitrage market;
85
eventually, Ben-un’s apparent failure to enforce PRE’s documentation requirements (the required certifications as to source), and otherwise inspect
*107
PRE’s purchases, was more than mere recklessness;
(iii) Shell sorting at the LFFP production point, implemented in 2004, in conjunction with the ICP, would have improved first sale compliance in the Tranche II period (and probably would have proven the affirmative defense to infringement); failure to sort, though initially negligent or at worst, reckless, became inexcusable as the Tranche II period progressed; more particularly, there came a time
86
beyond which Benun should have directed that shells still wrapped in identifiable foreign language packaging or otherwise reflecting same, be sorted out of the refurbishing process;
87
and
(iv) Benun’s intentions and rationalizations in implementing the ICP, though initially contrary to willful and malicious conduct and injury in the main, could not be applied to one class of shells, i.e., the shells garnered from previously reloaded LFFPs; these shells should have been excluded from collections, at Benun’s direction, immediately upon his digesting of the “first sale” requirement in August 2001.
88
*108
(d)
Summary of Tranche II “Willful and Malicious” Findings.
In sum by a preponderance of the evidence (but not by clear and convincing evidence
89
), this court finds and concludes:
(i) At outset and immediately upon the August 21, 2001 announcement of the first sale rule by the Federal Circuit, Benun
knew
that reloads of those shells
Jazz
(and perhaps others) had previously reloaded, were largely nonqualifying as first United States sales;
(ii) Given that knowledge, Benun’s failure to cause the removal of previously reloaded shells from those Jazz was refurbishing, established either Benun’s intent to violate Fuji’s patent rights to the extent of Jazz’s refurbishing of reloads, or
his
knowledge to a substantial certainty (as would
anyone
situated in Ben-un’s position and having his experience and background), that those reloads would violate Fuji’s patent rights;
(iii) There is no excuse or justification for Benun’s failure to cause the removal of previously reloaded shells from Jazz’s shell inventory or purchases, through a sorting process (actually undertaken in 2004) or otherwise;
(iv) Therefore, from and after August 21, 2001, Benun’s inducement of Jazz’s infringement is found to have been “willful and malicious” injury to Fuji to the extent of Jazz’s refurbishment of previously reloaded LFFPs, and the debt arising therefrom is excepted from Benun’s bankruptcy discharge pursuant to § 523(a)(6);
(v) From and after October 1, 2002 (through December 12, 2003), Benun
knew
that PRE’s shell supply was subject to foreign shell “contamination” arising from market conditions (shell arbitrage and the potential for “palming off’ foreign shells as United States sold);
(vi) Given that knowledge, Benun’s failure to require PRE to sort, or otherwise have Jazz sort out at least the most obvious foreign shells (those with foreign language wrappers or labels) as well as reloads, established either Benun’s intent to violate Fuji’s patent rights to the extent of Jazz’s refurbishment of all nonfirst United States sale shells (after October 1, 2002), or
his
knowledge to a substantial certainty (again, as would
anyone
situated in Benun’s position and having his experience and background) that non-qualifying shells were being refurbished by Jazz in violation of Fuji’s patent rights;
(vii) There is no excuse or justification for Benun’s failure, by October 1, 2002, to cause the removal of foreign language shells from Jazz’s shell inventory or purchases through a sorting process (again, actually undertaken in 2004) or otherwise; and
(viii) Therefore, from and after October 1, 2002, through December 12, 2003, Benun’s inducement of Jazz’s infringement is found to have been “willful and malicious” injury to Fuji to the extent of
all
foreign
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shells deemed to have been refurbished and sold by Jazz, and the debt arising therefrom is excepted from Benun’s bankruptcy discharge pursuant to § 523(a)(6).
4.
Calculation of Portion of Tranche II Judgment Excepted from Discharge.
(a)
Reloads of Reloads.
The variables in calculating the measure of damages excepted from discharge in the Tranche II judgment attributable exclusively to reloads, include: the number of previously reloaded LFFPs, again reloaded and marketed by Jazz in the August 21, 2001-September 30, 2002 period; the percentage of those LFFPs which failed the first sale requirement; and, the damage rate per unit of infringing sales.
Fuji presented no direct evidence of the number of reloads of reloads Jazz sold. However, in its effort to impeach Benun, the subject was quite roundly addressed by Fuji at trial. Benun countered with his own estimates and handwritten exhibits showing certain calculations. In sum, Benun first testified that he estimated the maximum reload sale factor at 2% to 3%.
See
8/31/06 Tr. at 16:19-25, 18:21-25:13. Exhibits D-S and D-T were more specific, with D-S showing a 2002 factor of 2.2% and D-T a 2003 factor of 2.8%. Fuji’s effort to impeach Benun on this point related back to ITC II transcripts and an ALJ determination there that 20% to 30% of Jazz’s LFFP shells were previously reloaded.
See
P-118A at 143. (There, unfortunately, the ALJ cited to the ITC hearing transcript at pp. 1529-31, viewing Benun’s testimony as a “concession”; however, the subject was revisited in the ITC hearing at transcript pp. 1559-60 where Benun explained his 20% reference.)
The subject of Benun’s December 12, 2003 testimony (along with the percentage of reloads of reloads Jazz collected in the Tranche II period) was deeply plumbed on May 9, 2007
sub judice. See
Tr. 5/9/07 at 131:11-144:24. Benun’s testimony was plainly a function of raw estimates — he explained that in the relevant period 3% to 5% of the LFFP market was refurbished cameras. He further explained that Jazz collected 20% to 30%
of these previously reloaded cameras
and that was what he was trying to impart in ITC II when he answered the question relied on by the ALJ there.
This court finds that Benun’s explanation is credible, though not justifying the purported specificity of Exs. D-S and DT. Given the approximations involved in his testimony, the court will accept Ben-un’s 3% to 5% reload
market share
estimate as the best indicator of reloads of reloads in the Jazz collections in the Tranche II period, assigning the lowpoint (3%) to the August 21, 2001 to September 30, 2002 period.
90
Jazz LFFP sales from August 21, 2001 through September 30, 2002 totaled 13,-564,641 units.
91
Four percent of this total
*110
has been determined to be reloads of reloads, i.e., 406,939 units. However, not
all
reloads of reloads failed, on first sale, the United States marketing test. In fact,
District Court I
accepted 9.5% of Jazz’s overall pre-August 21, 2001 sales as satisfying the first United States sale requirement. 249 F.Supp.2d at 452. This court will use that finding, deeming 90.5% of the 406,939 units (or 368,280 units) as infringing and damages associated with those sales as excepted from discharge.
This court considered applying the 40% factor of qualifying “first sales” to the reloads of reloads in the thirteen-month period ending September 30, 2002. That factor was generally applied for patent infringement purposes in Tranche II
(see
IV. C
supra),
a function of deference to the persuasive effect of ITC II. However, the immediate reloads at issue were a special class of Jazz LFFP sales, being marketed in the early part of the Tranche II period and either not benefiting or benefiting only minimally
92
from the ICP and other Jazz efforts at compliance with Federal Circuit requirements after August 21, 2001. Hence, this court opts for the 9.5% compliance figure (90.5% not qualifying) for all Jazz sales pre-August 21, 2001 as established in
District Court I.
Again, the injury to Fuji should be monetized at the 56$ per unit rate utilized in
District Court I.
Therefore, the damages excepted from discharge for sale of reloads of reloads through September 30, 2002 is $206,237. These, of course, are prepetition damages.
(b)
October 1, 2002
— December
12, 2003 period.
The balance of Tranche II period damages incorporates the 40%
93
disqualifying first sale factor and the 56$ per unit damage measure. Jazz sales in this period totaled 13,843,273 units, comprised of 2,843,273 for October 1 through December 31, 2002
(see
P-EEE), and 11,000,000 units (as approximated by Benun in ITC II) for the balance
(see
P-118A at 91). Applying the factors (40%
failure
of first sale and 56$ per unit), damages excepted from discharge are $3,100,893. Of this amount $1,160,786 is post-petition damages (see Point IV.D
supra)
and the balance, $1,940,107, is prepetition damages.
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.
Tranche I exception-to-discharge infringement claims tried
sub judice
pertained to the 1998 sale by Jazz of
newly manufactured
LFFPs under a “Sesame Street™” license. The camera bodies were molded anew; these were
not
reloads.
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In
District Court I,
a judgment issued with regard to the entirety of the 1,290,760 units. Benun was found to have “willfully” induced this infringement. Given the differences in the willfulness definition in patent law (i.e., inclusive of “recklessness”) and § 528(a)(6), and the absence of any malice determination in
District Court I,
Benun’s state of mind as to the “Sesame Street™” cameras remained a trial issue
sub judice.
Both Szeto and Benun testified to the circu

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1542377. Public record. Not legal advice.