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PENTECH INT'L, INC. v. LEON HAYDUCHOK

July 30, 1996

PENTECH INTERNATIONAL, INC., Plaintiff, against LEON HAYDUCHOK, ALL-MARK CORPORATION, INC., and PARADISE CREATIONS, INC., Defendants. ALL-MARK CORPORATION, INC. and PARADISE CREATIONS, INC., Counterclaim-Plaintiffs, --against-- PENTECH INTERNATIONAL, INC. and NORMAN MELNICK, Counterclaim-Defendants.


The opinion of the court was delivered by: DUFFY

 KEVIN THOMAS DUFFY, D.J.:

 In November 1990, Judge Pierre N. Leval, then a District Judge, determined after a bench trial that Counterclaim-Defendant Pentech International, Inc. ("Pentech") had literally infringed United States Patent Number 4,681,471 ("the patent"), which was licensed exclusively to Counterclaim-Plaintiff Paradise Creations, Inc. ("Paradise"). *fn1" When Judge Leval assumed the bench on the Court of Appeals for the Second Circuit, the issue of damages remained to be tried. That trial was held by me on March 20, 27, and 28, 1996, and this Opinion resolves the remaining issues. *fn2"

 The patent at issue is directed generally to a kit consisting of (a) a plurality of ink dispensers containing water-based inks, the inks containing at least red, yellow, and blue dyes, and (b) a dispenser of ink-eradicating fluid including a reducing agent which works to eradicate marks made by the water-based inks and a common carrier of defined formulation in the marker and eradicating fluid. The kit consists of the ink and eradicating dispensers in a common package. Judge Leval's Opinion explained the infringement issue as follows:

 
Plaintiff continues to use the yellow dye specified in defendant's patent, and relies on the eradicability of that dye to permit erasure of the hybrid inks containing yellow. Plaintiff's product thus uses all of the teachings of defendant's patent.

 (Opinion and Order dated November 12, 1990, at p. 31-32).

 Thus, Judge Leval's decision depended upon whether Pentech's marker kit, which had orange and green markers, but no yellow, could infringe the patent. Pentech argued at trial that Claim 1 covered only marker kits having a blue marker, a red marker, and a yellow marker. Paradise argued that the patent covered Pentech's product because an orange marker has a combination of dyes of the colors red and yellow. According to Paradise, the absence of a yellow marker did not preclude infringement.

 Judge Leval accepted Paradise's interpretation of the patent, and the Court of Appeals for the Federal Circuit affirmed. Judge Lourie filed a dissenting opinion, arguing that the removal of the yellow marker was sufficient to avoid infringing the patent.

 The issue of damages having been tried before me, I make the following findings of fact and conclusions of law.

 FINDINGS OF FACT

 On August 3, 1983, Leon Hayduchok and Leopold Strauss filed a patent application for an invention involving erasable marker kits. In September 1983, Hayduchok began a series of meetings with an investor group including David Melnick, Norman Melnick, and Richard Kalin, Esq., now all of Pentech. Hayduchok showed them a copy of his pending patent application and discussed with Norman Melnick the prospect of Melnick's financing the sale of erasable marker kits covered by the patent application.

 David Melnick, Norman Melnick, and Richard Kalin decided not to do business with Hayduchok. Instead, they formed Pentech and made arrangements to purchase similar erasable marker kits from various Italian manufacturers. Pentech's marker kits contained markers capable of making colored marks including colors having red, yellow, and blue dyes, with water based ink and an eradicator capable of removing the marks made by the markers in the kit. Pentech marketed its kits as ERASABLES.

 In September, 1984, Hayduchok assigned his patent rights to his company, All-Mark Corporation, Inc. ("All-Mark"). On April 17, 1986, All-Mark entered into an agreement with Paradise, whereby Paradise became the exclusive licensee of the suit patent.

 Paradise marketed the erasable marker kits and sold to mass marketers such as Kmart. They participated in toy fairs and back-to-school shows in 1986 through 1988. (Tr. 94-95). The erasable marker kits were sold to stationery and toy buyers. (Tr. 92-93). These were Paradise's best selling items, and were affected the most by infringing products. Paradise made suspected infringers aware of its intention to enforce the patent once it issued.

 By letter dated February 24, 1986, Mr. Kalin, on behalf of Pentech, filed with the U.S. Patent and Trademark Office ("PTO") a protest against Hayduchok's pending patent application. As early as March 9, 1987, Pentech became aware that Paradise had received a Notice of Allowance for the patent and would enforce its patent rights. On July 21, 1987, United States Patent Number 4,681,471 issued.

 Upon the issuance of the patent, Pentech's patent counsel, John J. Kane, Esq., sent a copy of the patent to Mr. David Melnick. (Kane Tr. 309). Mr. Melnick telephoned Mr. Kane and asked him "to do an analysis of the patent." (Id. at 310). Pentech continued selling ERASABLES while awaiting the advice of counsel.

 
if you were to omit one of the three primary colors from your kit it would be our opinion that if suit were brought a Court would hold that your kit would not infringe Claim 1 nor any claims dependent thereon. As to Claim 32 there was not a great deal of prosecution concerning that claim therefore it would be easiest to formulate a kit outside of the limits for specific components set forth in that claim. If you can formulate your product such as to avoid Claims 1 and 32 then you will be avoiding infringement of any of the claims of this patent.
 
In summary it could be interpreted that the kit as you now sell does indeed infringe Claims 1 through 33 . . . .

 (Sept. 4, 1987 Letter) (emphasis added). The letter did not address the validity of the patent in any meaningful way.

 Moreover, Mr. Kane made Pentech aware that a finding of infringement was likely, given the configuration of the product at that time. Therefore, I find that, as of September 4, 1987, Pentech knew that the ERASABLES infringed the patent. Yet, Pentech continued selling its product and never advised its customers that the product infringed the patent.

 Mr. Kane testified that Mr. Melnick called him after reading the opinion letter and asked whether the removal of yellow would avoid infringement. (Tr. 311). Mr. Kane answered yes, and then sent a follow-up letter on September 29, 1987. The follow-up letter stated "a judge would hold that there is no infringement of claims 1 through 31 and 33 if the kit which you sell does not include any yellow markers." Apparently, however, Melnick failed to tell Kane that Pentech continued selling the ERASABLES containing a yellow marker. The follow-up letter stated "it is our opinion that your product as now currently sold is not an infringement of any claims in U.S. Patent No. 4,681,471." (Emphasis added). Mr. Kane's opinion apparently was based upon the assumption or misunderstanding that Pentech had ceased selling kits having a yellow marker. That clearly was not the case.

 In light of all of the evidence, I find that Pentech continued to sell ERASABLES kits having yellow markers--i.e. known infringing products--as late as June 1989. Pentech argues that the change was made as early as December 1987. Melnick stated at trial that, in September 1987, he called Pentech's purchaser, Derek Harris, "and told him to pull the yellow from all the packages of ERASABLES." (Melnick Tr. at 212-13). Pentech admits that it did not immediately cease selling the kits having a yellow marker, but made a "running change" in its product. (Melnick Tr. 174). Pentech's running change means that Pentech continued selling its supply of the known infringing products until the supply was depleted, and then Pentech began selling the newly manufactured products. According to Mr. Melnick, Pentech made a running change because "it was the easiest thing for us to do." (Tr. at 193). Pentech's supply of known infringing products lasted about three months. Id. at 174. Therefore, Pentech admits selling the known infringing marker kits for at least the first five months after the patent issued.

 At trial, David Melnick, one of the founders of Pentech and the president of Pentech during the course of this litigation, testified that Pentech ceased manufacturing kits having yellow markers beginning in September 1987. (Tr. 168-71). However, Pentech gave the following answer to an interrogatory: "Effective June 1989, Pentech modified product nos. 55012 (fineline markers) and 66012 (broadline markers) to delete yellow or yellow-derivative markers such as green from these sets." (Melnick Tr. 168-71). The interrogatory answer failed to state when the change was allegedly made in Pentech's other erasable marker sets (i.e. 66006, 55022, 55446, and 50612). Mr. Melnick stated at a deposition that the answer to the interrogatory was correct (i.e. that the change was made in June 1989) and that he remembered the date because he himself directed that the changes be made. (Melnick Tr. 175). Furthermore, invoices of one of Pentech's suppliers indicate that the supplier did not receive instructions to delete the yellow marker until January, 1989. (Def. Exh. BAH). Moreover, Pentech's 1988 catalog continued to display marker sets having a yellow marker, despite other changes in the catalog's artwork. (Melnick Tr. 178).

 Given the contradictory statements by Melnick and in light of his demeanor, I do not credit his testimony. I find that Pentech continued selling known-infringing marker kits (i.e. those having yellow markers) until June 1989. There is no dispute that Pentech did not remove the orange and green markers from its marker kits prior to February 1991.

 Sometime before October 8, 1987, Pentech contacted Lewis H. Eslinger, Esq., a patent attorney to handle the patent litigation that would ensue. On October 8, 1987, Mr. Eslinger filed, on behalf of Pentech, a declaratory judgment action against Paradise, seeking a declaration of invalidity and non-infringement. Paradise filed a counterclaim alleging that, even after Pentech removed the yellow markers from its ERASABLES kit the kits infringed the patent.

 Mr. Eslinger testified before me that, at some point, he told Pentech "that if they proceeded without an opinion, . . . there could be a charge of willful infringement." (Tr. 268). Pentech then allegedly requested an opinion from Mr. Eslinger. (Id.). Mr. Eslinger testified that he told Pentech orally that their marker kits would not infringe the patent if the yellow marker was removed from the kits. Mr. Eslinger testified that he believed Pentech then removed the yellow markers from their kits. (Id. at 268-69). Mr. Eslinger testified that Mr. Kalin, Pentech's Secretary and general counsel, told him Pentech did not want Eslinger's opinion to be put in writing. (Id. at 265). Mr. Eslinger submitted an invoice to Pentech for the month of December 1987, which purports to charge for a "study of the client's new product." There is no further evidence regarding the basis for, or content of, Mr. Eslinger's opinion.

 After a trial on the issues of patent validity and infringement, Judge Leval issued an Opinion and Order, dated November 12, 1990, in which he upheld the validity of the patent and found that Pentech's ERASABLES marker kits infringed Claim 1 of the patent under the doctrine of equivalents. In a subsequent Memorandum and Order, Judge Leval found that there was literal infringement of the patent. *fn3"

 After Judge Leval issued his opinion, Pentech continued selling the ERASABLES marker sets. Mr. Eslinger testified before me that he advised Pentech that they could continue selling the ERASABLES marker sets, because he would get Judge Leval's decision reversed on appeal. Mr. Eslinger's astounding testimony is set forth below:

 
Q. [ON DIRECT EXAMINATION] In November of '90 Judge Leval issued an order, correct?
 
A. That's correct, an opinion.
 
Q. An opinion, and did you have any discussion with Pentech on or around November of 1990 in which you directed Pentech or advised Pentech to stop selling the product at that time?
 
A. Well, there are several things that I advised them at that time. I first advised them --
 
THE COURT: He asked you specifically about that. Let me ask you, did you tell them specifically that? Did you tell them to stop selling?
 
THE WITNESS: I told them they did not have to stop selling, your Honor, because there was no injunction in effect at that time.
 
THE COURT: Judge Leval issued an opinion which was contrary to your opinion, therefore they could go ahead and sell. Interesting.
 
THE WITNESS: Well, at that point I was of the opinion that I would be able to reverse Judge Leval's holding of ...

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