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SUNBEAM PRODUCTS, INC. v. WING SHING PRODUCTS

June 29, 2004.

SUNBEAM PRODUCTS, INC., Appellant-Cross-Appellee,
v.
WING SHING PRODUCTS (BVI) LTD., Appellee-Cross-Appellant.



The opinion of the court was delivered by: RICHARD HOLWELL, District Judge

MEMORANDUM OPINION AND ORDER

This matter comes before the Court as an appeal from a memorandum decision of the Bankruptcy Court dismissing the claims of Appellant-Cross-Appellee Sunbeam Products, Inc. ("Sunbeam") and permanently enjoining Sunbeam from infringing U.S. Patent No. D348, 585 ("Patent"). Appellee-Cross-Appellant Wing Shing Products (BVI) Ltd. ("Wing Shing") opposes cross-appeals to reverse certain parts of the Bankruptcy Court decision, including the Bankruptcy Court's calculation of damages.*fn1 For the reasons stated herein, the Bankruptcy Court's memorandum decision is affirmed in part and reversed in part.

FACTS

  This litigation revolves around a design patent for a coffeemaker. The following facts are based on the record designated by the parties and the findings of the Bankruptcy Court after trial, see In re AI Realty Marketing of N.Y., Inc., 293 B.R. 586 (Bankr. S.D.N.Y. 2003). In June 1991, John Sham, the president of Wing Shing, contacted Mr. Coffee, Inc. ("Mr. Coffee") to inquire whether Mr. Coffee might be interested in contracting with Wing Shing to manufacture coffeemakers.*fn2 (See In re AI Realty Marketing of N.Y., Inc., 293 B.R. at 595 (hereinafter "Op."); D29.)*fn3 Sham stated that Wing Shing had been in business for 28 years and was now one of the largest Hong Kong manufacturers of household appliances. (See D29.) Sham provided Jeffrey Blackwell, then Vice President of Operations at Mr. Coffee, with sketches of a proposed coffeemaker design. (See Op. at 595.)

  Mr. Coffee produced and marketed exclusively coffeemakers. (See D12, Ex. 10.) At the time Sham contacted Mr. Coffee, Mr. Coffee was interested in marketing a series of European-styled coffeemakers. (See D82 at 100:19-102:16.) European-styled coffeemakers had softer edges and were more circular, less angular than other coffeemakers. (See D82 at 102:7-102:16.)

  Through a series of correspondences beginning in August 1991 and lasting through early 1992, Mr. Coffee suggested a number of changes to the coffeemaker design proposed by Wing Shing. (See Op. at 595-96; D34; D36; D39; D40; D44; D47; D49; D69.) The changes included (1) eliminating grooves on the brew basket so that the basket was smooth, (2) eliminating ridges on the reservoir cover so that the cover was smooth, (3) moving the power switch from the base of the coffeemaker to the left side, (4) making the brew basket open from left to right instead of right to left, (5) moving the water level gauge from the right side of the coffeemaker to the left side, (6) inserting a metal plate on the bottom of the coffeemaker, and (7) adding a shroud to the power switch. (See Op. at 595-96; D34; D35; D37; D38; D39.) On November 8, 1991, while the parties were still discussing changes to the proposed coffeemaker design, Mr. Coffee provided Wing Shing with a draft supply agreement. (See Op. at 596; D12, Ex. 6.) The parties proceeded to negotiate the terms of the contract as the coffeemaker design was being finalized. (See Op. at 596.) Mr. Coffee agreed to allow Wing Shing to use certain Mr. Coffee patents for coffeemakers Wing Shing manufactured for Mr. Coffee. (See D12, Ex. 10; D81 at 37:7-37:16.)

  In early July 1992, Wing Shing and Mr. Coffee executed an agreement ("Agreement") by which Wing Shing would manufacture a coffeemaker to be sold by Mr. Coffee, namely the coffeemaker ("AD10") originally proposed by Wing Shing and incorporating certain changes suggested by Mr. Coffee. (See Op. at 596; D55.) The term of the Agreement began on January 7, 1992, and extended through December 31, 1994. (See Op. at 596; D55 (¶ 4).) The Agreement granted Mr. Coffee an exclusive license to sell the AD10 in North America. (See Op. at 596.) The Agreement stated that "[a]ny and all existing patent rights for the [coffeemaker] units or any of its component parts shall be the sole and exclusive property and/or responsibility of Mr. Coffee. In the event that Mr. Coffee and [Wing Shing] jointly develop a patentable item both parties agree to negotiate patent rights prior to applying for the patent." (See Op. at 596; D55 (¶ 16).) The Agreement also stated that the "tooling [for the coffeemaker], and drawings related thereto, is property of Mr. Coffee." (See Op. at 596; D55 (¶ 9).) The Agreement further stated that disputes regarding the Agreement would be "governed by the laws of the State of Ohio." (D55 (¶ 23(f)).)

  Shortly after executing the Agreement and without informing Mr. Coffee, Sham filed a patent application for the AD10 design. (See Op. at 596; D70; D71; D81 at 37:2-37:6, 127:11-129:3.) Sham's application listed himself as the sole inventor.*fn4 (See Op. at 596; D71; D81 at 127:7-127:10.) The Patent issued in July 1994, though Wing Shing neither informed Mr. Coffee nor included notice of the Patent on the AD10 or its packaging. (See Op. at 596; D70; D81 at 37:2-37:6.)

  In November 1994, Mr. Coffee informed Wing Shing that Simatelex Manufactory Co., Ltd. ("Simatelex") would be manufacturing some AD10 coffeemakers for Mr. Coffee. (See Op. at 596; D58; D81 at 44:14-44:22.) Wing Shing did not object at that time. (See Op. at 596.) However, in a March 9, 1995, fax to Dan Kubis, then an employee of Mr. Coffee, Wing Shing stated that, although Mr. Coffee owned the tooling, "we [Wing Shing] have the product design patent of AD10 and was being filed. That means, we can sell and we will sell the same product to other customers in the same market. It will definitely create business conflicts between us." (See Op. at 596-97; D59.)

  In January 1996, Sham attended a houseware show in Chicago, Illinois, and noticed that the AD10 on display at Mr. Coffee's booth had not been manufactured by Wing Shing. (See Op. at 597.) Sham claims that he discussed this with Kubis at the show. (See Op. at 597.)

  Around the time of the houseware show, Kubis sent a letter to Wing Shing complaining about companies other than Sunbeam selling AD10 coffeemakers manufactured by Wing Shing. (See Op. at 597.) The letter indicated that Mr. Coffee was considering production of a different model coffeemaker, the AD12, and offered to allow Wing Shing to manufacture the AD12 as a "reward" should AD10 business decrease. (See Op. at 597.) Wing Shing responded that it would provide a price quote for manufacturing the AD12 and that, at Mr. Coffee's request, Wing Shing would cease manufacturing the AD10 for other companies. (See Op. at 597.)

  In the fall of 1998, Sunbeam, which had by then acquired Mr. Coffee, considered shifting manufacturing of the AD10 away from Wing Shing to Simatelex. (See Op. at 597; CD141 at 26:14-27:8.) In an email exchange on October 1, 1998, Sunbeam employee David Buck concluded that Wing Shing "owns the tooling and design [for the AD10], even though 4 or 5 years ago we [Mr. Coffee] made the decision to tool the same design at Simatelex. They [Wing Shing] either don't realize this fact . . . or have kept quiet about it because our business was increasing with them. It likely WILL be an issue if we part ways". (See Op. at 597; CD113.) Armed with this information, Sunbeam employee Paul Warfel stated, in another email exchange, that the design of the AD10 "may change slightly to avoid patent issues. TBD."*fn5 (See Op. at 597; CD114.)

  In 2000, Mr. Coffee executed a formal supply agreement with Simatelex. (See CD120; CD121.) By the end of 2000, Sunbeam's volume of purchases from Wing Shing decreased by 50 percent. (See Op. at 597.)

  On February 9, 2001, Wing Shing initiated a patent infringement action against Simatelex.*fn6 (See Op. at 597-98.) On February 23, 2001, Sunbeam commenced an Adversary Proceeding against Wing Shing in Bankruptcy Court. (See Op. at 598.) The Bankruptcy Court held a trial on this matter and issued its ruling on June 3, 2003. The Bankruptcy Court ruled that Wing Shing was not equitably estopped from asserting an infringement claim against Sunbeam because Wing Shing did not mislead Sunbeam into thinking that Wing Shing would not enforce its patent. (See Op. at 599-600.) However, the Bankruptcy Court determined that Wing Shing failed to provide notice of the infringement and that the doctrine of laches applied, thereby limiting Wing Shing's damages to the period after suit against Simatelex was initiated. (See Op. at 603.)

  With respect to the contractual issues in dispute, the Bankruptcy Court found that the parties' use of the term "existing patent rights" did not include the right to apply for a patent and, thus, the assignment of "[a]ny and all existing patent rights" to Mr. Coffee did not include the idea or unfiled application for the Patent. (See Op. at 607.) The Bankruptcy Court further found that, according to the terms of the contract, Sunbeam did not have an exclusive license to use the Patent such that Wing Shing's infringement claim was barred. (See Op. at 610.) The Bankruptcy Court did hold that, assuming that the Patent was jointly developed and that Wing Shing was contractually obligated to negotiate the rights for the Patent, Wing Shing breached this obligation by filing the patent application. (See Op. at 607-08.) However, the statute of limitations had run on Sunbeam's possible claim for this breach of contract. (See Op. at 608.)

  Finally, the Bankruptcy Court ruled that Sunbeam was not a joint inventor of the Patent. (See Op. at 614.) The Bankruptcy Court concluded that Sunbeam's contributions to the Patent were all either well-known concepts in the design of coffeemakers or functional changes. (See id.) The Bankruptcy Court also concluded that, even if the changes were all ornamental, the contribution to the overall appearance was not significant enough to achieve co-inventor status. (See id.)

  Turning to the issue of damages, the Court reasoned that, since Sunbeam could have designed around the Patent at a cost of between $32,000 and $173,000, a reasonable royalty would have to fall in between those two sums. (See Op. at 617.) The Bankruptcy Court also reasoned that a prime rate of interest should apply to the damages. (See id.) The Bankruptcy Court declined to award treble damages or attorneys fees to Wing Shing; however, the Bankruptcy Court reasoned that damages in an amount equal to Sunbeam's profits from the sale of infringing coffeemakers produced by Simatelex could be applicable. (See Op. at 618-19.) The Bankruptcy Court ultimately decided that Wing Shing should be awarded the greater of its lost royalties or Sunbeam's total profits and directed the parties to submit further evidence to determine the exact damages. (See Op. at 620.) On March 11, 2004, the Bankruptcy Court issued a final judgment against Sunbeam in the amount of $2,304,403. (See D96.)

  Both Sunbeam and Wing Shing have appealed from the Bankruptcy Court ruling and final judgment. Sunbeam seeks review of the following issues: (i) whether the Bankruptcy Court erred in finding that Mr. Coffee employees are not co-inventors of the Patent; (ii) whether the Bankruptcy Court erred in finding that Wing Shing's infringement claim is not barred by the doctrine of equitable estoppel; (iii) whether the Bankruptcy Court erred in interpreting the terms of the Agreement; and (iv) whether the Bankruptcy Court erred in not finding that the Patent is unenforceable due to inequitable conduct. (See Sunbeam Br. at 4.) Wing Shing, for its part, seeks review of the following issues: (i) whether the Bankruptcy Court erred in holding that Wing Shing failed to provide notice of infringement and that the doctrine of laches applied to Wing Shing's claim; and (ii) whether the Bankruptcy Court erred in calculating damages. (See Wing Shing Br. at 1-2.)

  DISCUSSION

  A district court reviews the findings of fact of a bankruptcy court under a "clearly erroneous" standard, while conclusions of law are reviewed de novo. See In re Ionosphere Clubs, Inc., 922 F.2d 984, 988 (2d Cir. 1990). When there are mixed questions of law and fact, district courts should review legal conclusions de novo while giving deference to the bankruptcy court's factual determinations unless they are clearly erroneous. See Underwriters at Lloyd's of London v. 150 Nassau St. Billiards, Inc., No. 03 Civ. 1420, 2003 WL 22999464, at *4 (S.D.N.Y. Dec. 22, 2003).

  I. Joint Inventorship of the Patent

  The first issue for the Court is whether Sunbeam is a joint inventor of the Patent. The Bankruptcy Court concluded that Sunbeam is not a joint inventor. (See Op. at 614.) Sunbeam argues that the Bankruptcy Court committed four errors in arriving at that conclusion. First, Sunbeam argues that the Bankruptcy Court should have found Sunbeam to be a joint inventor because Wing Shing did not seek to exclude from the Patent the alterations suggested by Mr. Coffee. (See Br. of Appellant Sunbeam at 20-21 (hereinafter "Sunbeam Br.").) Second, Sunbeam argues that the Bankruptcy Court did not apply the proper test for evaluating Mr. Coffee's contributions, that the Bankruptcy Court should have determined whether the overall appearance of the design was dictated by functional considerations. (See id. at 21-24.) Third, Sunbeam argues that the Bankruptcy Court should have found that Mr. Coffee's suggested elimination of ridges and grooves, which were undisputedly ornamental, made Sunbeam a co-inventor. (See id. at 24-25.) Fourth, Sunbeam argues that the changes to the power switch, brew basket, water level gauge, and coffeemaker bottom should not have been deemed functional changes. (See id. at 26-30.)

  The Court begins by addressing Sunbeam's second argument — the test for evaluating Mr. Coffee's contributions — because resolution of that argument is in fact dispositive as to all four arguments. Design patents may be obtained by "[w]hoever invents any new, original and ornamental design for an article of manufacture." 35 U.S.C. § 171 (1994). An inventor under the patent laws is the person or persons who conceived the patented invention, and their legal status as inventor does not change simply because the inventor uses the services, ideas, and aid of others in the process of perfecting their invention. See Hoop v. Hoop, 279 F.3d 1004, 1007 (Fed. Cir. 2002). "One may not qualify as a joint inventor . . . by merely assisting the actual inventor after conception of the claimed invention." Id. (emphasis in original) (quotations omitted).

  It is undisputed that Wing Shing originated a coffeemaker design and that this design eventually became the basis for the Patent. The question is whether Sunbeam's input along the way — the changes from the original proposal to the final patented design — caused enough of an alteration from the original design to raise Sunbeam to the level of co-inventor.

  To qualify as a joint inventor, the differences between the original design and the improved design must be significant — the improved design must contain an inventive concept. See id. "The ultimate test for design-patent inventorship, like the test for anticipation and infringement, is whether the [improved] invention is `substantially similar' to the [original]." Id. This essentially means that, if the improved design could not be found to infringe the ...


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