Seiko Epson v. Nu-Kote

• Decision Date: 08 September 1999
• Docket Number: NU-KOTE
• Citation: 52 USPQ2d 1011,190 F.3d 1360
• Parties: (Fed. Cir. 1999) SEIKO EPSON CORPORATION and EPSON AMERICA, INC., Plaintiffs-Appellants, v.INTERNATIONAL, INC. and PELIKAN PRODUKTIONS, A.G., Defendants-Cross Appellants. 97-1313,-1548,-1566,-1567,-1588,98-1015 DECIDED:
• Court: U.S. Court of Appeals — Federal Circuit

Page 1360

190 F.3d 1360 (Fed. Cir. 1999)

SEIKO EPSON CORPORATION and EPSON AMERICA, INC., Plaintiffs-Appellants, v. NU-KOTE INTERNATIONAL, INC. and PELIKAN PRODUKTIONS, A.G., Defendants-Cross Appellants.

97-1313,-1548,-1566,-1567,-1588,98-1015

United States Court of Appeals for the Federal Circuit

DECIDED: September 8, 1999

Rehearing Denied; Suggestion for Rehearing En Banc Declined: October 19, 1999

Appealed from: United States District Court for the Central District of California

[Copyrighted Material Omitted]

Judge Terry J. Hatter, Jr.

William J. Robinson, Graham & James LLP, of Los Angeles, California, argued for the plaintiffs-appellants. With him on the brief were Brian M. Berliner and David B. Abel.

David Schnapf, Coudert Brothers, of San Francisco, California, argued for the defendants-cross appellants. With him on the brief was Ronald S. Katzy. Of counsel were Robert D. Becker and Eric N. Hoover.

Before NEWMAN, PLAGER, and BRYSON, Circuit Judges.

NEWMAN, Circuit Judge.

Seiko Epson Corporation and Epson America, Inc. (together "Epson") sued Nu-Kote International in the United States District Court for the Central District of California, charging Nu-Kote with patent infringement, unfair competition, false advertising, and trademark infringement, all with respect to certain ink cartridges manufactured by Nu-Kote. The district court granted, on November 30, 1995, a preliminary injunction on, inter alia, the patent infringement issue. On appeal of this aspect, we affirmed the action of the district court. Seiko Epson Corp. v. Nu-Kote Int'l, Inc., 104 F.3d 375 (Fed. Cir. 1996) (Table). While the appeal of the preliminary injunction was pending Epson amended its complaint to add counts of infringement of three additional patents, viz. United States Patents No. 5,156,472 and 5,488,401 and Design Patent No. 365,596, and to join Pelikan Produktions A.G., Nu-Kote's manufacturing affiliate, as a defendant.

On March 5, 1997 the district court held that Epson's United States Patents No. 5,158,377, 5,221,148, 5,421,658, and 5,156,472 (together "the Suzuki patents") were unenforceable based on inequitable conduct during prosecution in the Patent and Trademark Office. On August 11, 1997 the district court held that Epson's United States Design Patent No. 351,190 ("the D'190 patent") was invalid. The district court refused to expand the injunction to include United States Design Patent No. 365,596 ("the D'596 patent"), ruling that Seiko was "not likely to succeed on the merits." The court in various orders dissolved the portions of the injunction that related to the eliminated patents, issued findings of fact and conclusions of law that there was infringement of the 401 patent, and issued an amended preliminary injunction based on the 401 patent and on trademark, trade dress, and unfair competition issues.

Epson appeals the adverse holdings of patent unenforceability and invalidity and certain procedural issues.¹ We conclude that the district court based its holdings of patent unenforceability and invalidity on erroneous legal principles; these rulings are reversed.

Epson then charged the defendants with violating the preliminary injunction. After hearings, the district court issued various orders holding the defendants in contempt.² Nu-Kote and Pelikan cross-appealed the contempt order and its accompanying sanctions in the form of Epson's lost profits and attorney fees. We conclude that the sanctions for contempt must be modified.

I NU-KOTE'S SUGGESTION OF BANKRUPTCY

This appeal was argued on November 2, 1998. On November 6, 1998 Nu-Kote filed a voluntary petition pursuant to Chapter 11 of the United States Bankruptcy Code. Various motion papers have since been filed in this court. The defendants state that the bankruptcy statute, which stays legal actions against a debtor while under the protection of the bankruptcy court, requires that no further action be taken on this appeal. Epson responds that whether or not the action against Nu-Kote is stayed, co-defendant Pelikan has not suggested bankruptcy. The parties dispute whether a statutory stay as to Nu-Kote effects a stay as to Pelikan.

The stay of legal action against a debtor who has sought protection in bankruptcy is provided in 11 U.S.C. §362(a)(1):

§362 Automatic stay

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of--

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

The defendants state that Nu-Kote's bankruptcy filing automatically stayed all proceedings, and that the only avenue by which this appeal can continue is by permission of the bankruptcy court. The defendants advise that Epson filed such a motion, entitled Emergency Motion for Relief From the Stay, with the bankruptcy court, and assert that this filing represents Epson's agreement with this interpretation of the stay statute.

On Feb. 10, 1999 the bankruptcy court scheduled the final hearing on Epson's Emergency Motion to be held within twenty days after completion of the presentation of evidence in litigation between Nu-Kote and Hewlett Packard Co. in the Northern District of California. Although Epson had requested immediate disposition of its motion, the bankruptcy court found that Epson's numerous requests for continuances belied the asserted emergency, and could interfere with Nu-Kote's presentation of its case in the Hewlett Packard litigation. The court declined to expedite ruling on Epson's motion. In re Nu-Kote Holding, Inc., No. 398-10600 (Bankr. M.D. Tenn. Feb. 10, 1999). Thus the defendants argue that since the bankruptcy court has not held a final hearing on Epson's motion, the stay is in effect as to both defendants. That view is not correct, for in all events Pelikan is not entitled to the benefits of 11 U.S.C. §362(a)(1).

The automatic stay provision of the Bankruptcy Act is designed to shield the debtor from the burdens of litigation during the processes of bankruptcy. See Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1330 (10th Cir. 1984) (the two purposes underlying the automatic stay are "to permit the debtor to organize his or her affairs without creditor harassment and to allow orderly resolution of all claims.") However, proceedings that do not threaten to deplete the assets of the debtor need not be stayed. Nor is violation by the debtor of previously issued orders authorized upon stay of the appeal of those orders. Thus the statutory stay of proceedings as to Nu-Kote did not free Nu-Kote of the contempt orders and the injunctions upon which the contempt was based, all of which were entered before Nu-Kote suggested bankruptcy.

In cases involving multiple parties or multiple claims, the courts have "disaggregated" the proceedings so that claims against co-defendants who are not under the protection of the bankruptcy court may go forward, as well as claims for which stay is unnecessary to protect the debtor. See In re Chugach Forest Prods., Inc., 23 F.3d 241, 246 (9th Cir. 1994):

As a general rule, "[t]he automatic stay of section 362(a) protects only the debtor, property of the debtor or property of the estate. It does not protect non-debtor parties or their property. Thus, section 362(a) does not stay actions against guarantors, sureties, corporate affiliates, or other non-debtor parties liable on the debts of the debtor."

(quoting Advanced Ribbons & Office Prods. v. U.S. Interstate Distributors, 125 B.R. 259, 263 (Bankr. 9th Cir. 1991)). See also, e.g., In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litigation, 140 B.R. 969, 23 USPQ2d 1903 (N.D. Ill. 1992).

It is clearly established that the automatic stay does not apply to non-bankrupt co-defendants of a debtor "even if they are in a similar legal or factual nexus with the debtor." Maritime Elect. Co. v. United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir. 1991). See also, e.g., Teachers Ins. & Annuity Ass'n v. Butler, 803 F.2d 61, 65 (2d Cir. 1986) ("It is well-established that stays pursuant to §362(a) are limited to debtors and do not encompass non-bankrupt co-defendants."); Marcus, Stowell & Beye Government Securities, Inc. v. Jefferson Investment Corp., 797 F.2d 227, 230 n.4 (5th Cir. 1986) ("The well established rule is that an automatic stay of judicial proceedings against one defendant does not apply to proceedings against co-defendants."). The rule also permits claims by the debtor, and counterclaims, to proceed. See, e.g., Maritime Electric, 959 F.2d at 1204-05 ("[W]ithin one case, actions against a debtor will be suspended even though closely related claims asserted by the debtor may continue.").

These principles apply equally to appeals that were pending when the bankruptcy stay was invoked. See, e.g., Austin v. Unarco Industries, Inc., 705 F.2d 1 (1st Cir. 1983) (when one defendant filed for bankruptcy after plaintiff filed appeal but before argument, court heard and decided appeal on the merits as to the non-bankrupt defendants); Clay v. Johns-Manville Sales Corp., 722 F.2d 1289, 1290-91 (6th Cir. 1983) (staying appeal as to the bankrupt appellee, proceeding to the merits as to the issues concerning the non-bankrupt defendant). Thus it is in accordance with law and precedent that this appeal proceed as to the defendant Pelikan. As illustrated in precedent, the disaggregation of a non-bankrupt party from a debtor protected by §362 does not require action of the bankruptcy court, for the non-bankrupt party is not under the protection of that c...