Eastman Kodak Company v. Apple Inc. et al
Filing
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MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 12-1720A, 12-B-10202 (ALG).Document filed by Apple Inc.. (Attachments: # 1 Exhibit 1 - Part 1, # 2 Exhibit 1 - Part 2)(bkar)
James H.M. Sprayregen, P.C.
Gregory S. Arovas, P.C.
Paul M. Basta, P.C.
Brian S. Lennon
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, New York 10022
Telephone:
(212) 446-4800
Facsimile:
(212) 446-4900
- and David R. Seligman P.C.
Marcus E. Sernel, P.C.
KIRKLAND & ELLIS LLP
300 North LaSalle
Chicago, Illinois 60654
Telephone
(312) 862-2000
Facsimile:
(312) 862-2200
Counsel to Apple Inc.
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
EASTMAN KODAK COMPANY, et al.,
Debtors.
EASTMAN KODAK COMPANY,
Plaintiff,
v.
APPLE INC. and FLASHPOINT
TECHNOLOGIES, INC,
Defendants.
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Chapter 11
Case No. 12-10202 (ALG)
(Jointly Administered)
Adversary No. 12-01720
APPLE INC.’S MOTION TO WITHDRAW THE REFERENCE
OF THE ABOVE-CAPTIONED ADVERSARY PROCEEDING
INTRODUCTION
Through an adversary proceeding filed with the Bankruptcy Court, Eastman Kodak
Company (“Kodak”) is attempting to strip Apple Inc. (“Apple”) of its rights under federal patent
and state law in ten U.S. patents relating to technology developed by Apple. The patents in
question derive from work done by Apple in the early 1990s and shared with Kodak as part of
collaborations between the companies in that timeframe. To facilitate their sale (along with over a
thousand other patents) as part of its Bankruptcy proceedings, Kodak seeks to quickly extinguish
Apple’s interests in the disputed patents, without a fair process and in a tribunal lacking experience
with patent disputes. While Apple is amenable to a reasonably-expedited proceeding to resolve
this dispute, it is entitled to have these issues properly adjudicated in an appropriate forum—and
indeed it has been trying to have them adjudicated in a court of competent jurisdiction, most
recently the United States District Court for the Western District of New York, for nearly two
years, only to have been repeatedly blocked from doing so by Kodak. The Bankruptcy Court is
neither legally permitted nor practically equipped to deal with the complex patent law and related
issues implicated by these disputes, and thus withdrawal of Kodak’s adversary proceeding to the
District Court is required.
First, the dispute between Apple and Kodak turns on complex issues of non-bankruptcy
federal law that the Bankruptcy Court does not have the authority or necessary expertise to decide.
As Kodak recognizes in its complaint, the dispute involves complex federal patent law questions
concerning inventorship, claim construction and the relative significance of technical features.
Apple agrees, and plans to seek correction of inventorship with respect to these patents at issue
pursuant to section 256 of the federal patent statute. 35 U.S.C. § 256. Withdrawal of the reference
is mandatory where (as here) a case implicates, and requires the application of, complex issues of
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non-bankruptcy federal law like patent law. See, e.g., In re Singer Co., N.V., No. 01 Civ. 0165
(WHP), 2002 WL 243779 (S.D.N.Y. Feb. 20, 2002) (withdrawing reference with respect to
dispute over sewing needle patent).
Second, because this litigation began two years before Kodak’s bankruptcy and relates to
Apple’s rights in and to the disputed patents, this dispute is undeniably a non-core, “private rights”
lawsuit on which the Bankruptcy Court is constitutionally forbidden to enter a final order. The
only connection between this dispute and Kodak’s bankruptcy is that, if Kodak wins, its estate may
arguably have more value. As courts (including the Supreme Court) have repeatedly held, this is
not enough to bring a case within the Bankruptcy Court’s limited sphere of final adjudictive
authority.
Third, this case will require a trial by jury on, among other claims, Apple’s counterclaim
seeking damages for breach of contract. Kodak is contractually obligated to assign the disputed
patents to Apple and is liable to Apple for damages, including but not limited to the licensing fees
it obtained from third parties, for its failure to do so. It is well established that contract and
damages claims require trial by jury, and it is similarly settled that a bankruptcy court cannot
conduct jury trials without consent. Since Apple does not consent to a jury trial in the Bankruptcy
Court, a federal district court would have to conduct the trial and enter judgment.
Kodak not only seeks to deprive Apple of its right to a non-bankruptcy federal forum, but
wants the Bankruptcy Court to rule on its claims in a matter of weeks based on a self-imposed,
artificially-accelerated sale process. In a proposed scheduling order, Kodak had requested a rapid
hearing on a summary judgment motion that has yet to be filed—before any discovery—with
Apple only having the ability to take discovery (if at all) after a summary judgment ruling. Kodak
has it backwards; that is not how federal law or civil procedure works. While Kodak may believe
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it is better off with a truncated proceeding with little (or, if it has its way, no) discovery and without
either a jury or a judge experienced with patent matters, no law or policy permits giving Apple’s
intellectual property rights such short shrift. Well-settled law requires the withdrawal of the
reference so that this private rights dispute can be resolved at the district court level.
I.
BACKGROUND
A.
Apple Discloses Its Technology To Kodak
The ten patents at issue cover particular features for digital cameras. (Exs. 1-10, Patents.)
Apple originated the technology underlying these patents in the early 1990s in connection with its
research and development work on a novel computerized digital camera. (Ex. 11, 8/25/10, Apple
Complaint, ¶ 12.) To further develop and commercialize its technology, Apple sought help with
camera hardware, such as lenses and image sensors. (Id., ¶ 15.)
Apple therefore collaborated with Kodak, with the goal of developing and
commercializing Apple’s innovative technology.
During the course of several years of
collaboration, Apple made numerous disclosures to Kodak regarding Apple’s technology for
innovative digital camera features.
(Id., ¶ 16-21.)
These disclosures were protected by
confidentiality agreements, as well as a contract requiring Kodak to disclose and irrevocably
assign to Apple any patents related to Apple’s technology. (Id., ¶ 24-25.)
B.
Kodak Patents Apple’s Technology And Sues Apple
Kodak terminated the parties’ collaboration in mid-1996. Only later did Apple learn that
Kodak had secretly been filing patent applications relating to technology that Apple disclosed to
Kodak in the course of the parties’ joint work. (Id., ¶ 23.) These applications led to at least ten
patents. Apple’s assertion of rights and the ten patents to which these assertions relate are
summarized in a letter provided to Kodak. (Ex. 12, 3/16/12 Sernel Letter.) Kodak’s adversary
proceeding seeks a judgment declaring that Apple has no interest in the disputed patents, including
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patents based on Apple’s technology, as well as a wide-ranging injunction barring Apple from
asserting any claim to ownership of the patents, apparently with no restrictions on time, forum or
manner of making such assertions.
As described in Kodak’s complaint, Kodak has sued numerous companies for allegedly
infringing its patents, and has negotiated licensing agreements with many parties since 2001.1 (Ex.
16, Dkt. No. 1408, Compl. at ¶2.)
In early 2010, Kodak accused Apple of patent
infringement—including infringement of the “’218” patent—in actions filed with the U.S. District
Court for the Western District of New York and the International Trade Commission (“ITC”). In
the course of investigating Kodak’s infringement claims, Apple discovered that the asserted
patents, as well as many other Kodak patents, are based on technology that Apple confidentially
disclosed to Kodak years earlier. (Ex. 11, 8/25/10, Apple Complaint, ¶ 11.)
Apple subsequently sued Kodak in California in 2010, asserting several causes of action
based on Kodak’s misappropriation of Apple’s technology and breach of its contractual obligation
to assign patents based on Apple’s technology to Apple. (Id., ¶ 37-62.) Kodak moved to dismiss,
or alternatively to transfer, on the grounds that disputes regarding Apple’s rights to particular
patents must be litigated as part and parcel of Kodak’s previously-filed Western District of New
York lawsuit. (Ex. 17, 11/15/10 Kodak Mot. at 3, 15-17.) Apple’s claims were subsequently
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With the deterioration of its film and camera businesses, Kodak has increasingly relied on patent litigation as a
source of income. For example, in a recent “Business Segment Review” presentation available on its website,
Kodak identifies “Intellectual Property” as a source of “Continued Income and Cash Generation” and says it
earned $1.9 billion in patent-related revenue between 2008 and 2010. (Ex. 13, Kodak Presentation at 31.) As
Kodak explained in its third-quarter earnings release last year, a goal of its intellectual property strategy is to “to
generate income and cash” and “[i]n recent years, in keeping with that strategy, the company has actively
monetized its intellectual property … as a way to fund its digital transformation.” (Ex. 14, 11/3/11 Kodak Press
Release.) Kodak, which announced on February 9, 2012 that it will soon stop making digital cameras, is instead
using litigation to extract settlements and licensing fees from companies that are making them. (Ex. 15, 2/9/12
Kodak Press Release.)
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transferred to and consolidated with the Western District of New York lawsuit. Apple also raised
certain aspects of its assertion of rights in the ’218 patent as defenses in the ITC.
The ITC conducted proceedings on Kodak’s patent infringement claims and, despite
Kodak’s characterization of the proceedings in its complaint (Compl. at ¶¶ 21-22) its rulings have
been overwhelmingly in Apple’s favor. After a trial on the merits, Administrative Law Judge
Luckern issued an Initial Determination on January 24, 2011 finding that: (1) Apple did not
infringe the ’218 patent, and (2) the ’218 patent was invalid because it was obvious in view of the
prior art. (Ex. 18, 1/24/11 Notice) These rulings in Apple’s favor rendered moot any need for the
ITC to carefully consider defenses relating to Apple’s rights in the ’218 patent.2
The ITC subsequently reversed several of ALJ Luckern’s underlying claim construction
rulings, broadening the claims in certain respects. It also remanded to ALJ Pender (after ALJ
Luckern’s retirement) for a determination of the impact of the new claim constructions on
non-infringement and invalidity. On May 21, 2012, ALJ Pender issued an Initial Determination
confirming that: (1) Apple’s current products do not infringe the ’218 patent, and (2) the ’218
patent is invalid. (Ex. 19, 5/21/12 Notice) This ruling was described in the press as a “setback” for
Kodak and a “psychological blow to potential bidders, who may now call the patent’s value into
question.”3 On the ropes in the other forums that it initially selected, Kodak now wants to litigate
this dispute in the Bankruptcy Court instead.
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The ITC did address Apple’s separate assertion that Apple’s digital camera work was anticipatory prior art to the
’218 patent, and found that the presence of several claim limitations had not been established. The only mention
in the ITC ruling of Apple’s ownership-related assertions is a cursory footnote statement that the contract-related
assertion was not established. In any event, the ITC’s analysis has no preclusive effect on a district court even if
the issues were the same, which they are not. See Texas Instruments Inc. v. Cypress Semi-conductor Corp., 90
F.3d 1558, 1569 (Fed. Cir. 1996). And the other nine patents that Kodak wants the Bankruptcy Court to “declare”
Apple’s lack of interest in were not even at issue in the ITC proceeding. Kodak would have the Bankruptcy Court
believe that the ownership of the disputed patents has already been effectively determined by the ITC. This is not
true.
Dana Mattioli and Nathalie Tadena, “Kodak Patent Tossed by Judge,” Wall Street Journal, May 21, 2012.
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C.
Kodak Uses Bankruptcy To Short-Circuit Its Prior Lawsuits
In the adversary complaint filed June 18, 2012, Kodak asks the Bankruptcy Court to
declare that Apple has no interest in the disputed patents—not only the ’218 patent but nine other
patents that have never been litigated between Apple and Kodak. (Compl. at ¶ 18, 32-35) Arguing
that the “[m]onetization” of these patents is required by its loan agreements, Kodak asks the
Bankruptcy Court to nullify Apple’s interest in them through a truncated proceeding that includes
no discovery until after the Bankruptcy Court rules on Kodak’s yet-to-be-filed summary judgment
motion. (Compl. at ¶ 1; Ex. 20 (Proposed Scheduling Order at 2)
Instead of litigating its claims against Apple in an appropriate forum, Kodak is trying to
strip Apple of its rights in the disputed patents through a rushed proceeding in the Bankruptcy
Court that would afford Apple much less in the way of discovery and due process. To make
matters worse, Kodak is trying to enjoin Apple from asserting any claim to ownership of the
disputed patents, lest this “create uncertainty” that would discourage potential bidders. (Compl. at
¶ 38) In an extraordinary request, Kodak wants both to strip Apple of its rights in the disputed
patents and to legally bar Apple from even claiming rights in these patents.
Apple has done everything in its power to protect against a gambit like this. On February
14, 2012, Apple filed a motion to lift the automatic bankruptcy stay so that the parties’ disputes
regarding Apple’s rights in Kodak patents could be litigated in the Western District of New York,
where Kodak previously insisted that these issues should be litigated, or transferred to the
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Southern District of New York.4 (Dkt. Nos. 344, 500.) Apple argued that these issues would have
to be addressed at some point and it would be best to address these issues immediately. Kodak
opposed this motion, arguing that it was premature. (Dkt. No. 468.) Although the Bankruptcy
Court did not lift the stay,5 it directed that “some procedures should be agreed to by the parties for
a quick resolution of the critical issues . . . without waiver of any jury trial right, without waiver of
Apple’s claim that these are issues that a district court judge would withdraw.” (Ex. 21, 3/8/12
Hr’g Tr. at 65:5-9.) Despite Apple’s efforts, Kodak has been unwilling to negotiate any such
procedure that protects Apple’s rights, as directed by the Bankruptcy Court.
Instead of working with Apple on an appropriate procedure, and after complete silence for
approximately two months, Kodak filed a “motion” asking the Bankruptcy Court to “order” that
Apple lacks any rights in the disputed patents. (Dkt. No. 1184) When the Bankruptcy Court
rejected this tactic as improper, Kodak filed the current adversary complaint, which seeks even
more sweeping relief based on essentially the same inadequate procedures. Based on the timing of
these events and the procedural mechanism of Kodak’s request, Kodak’s strategy is obvious: to
deny Apple a full and fair opportunity to litigate these issues, to prevent a court of appropriate
jurisdiction from carefully scrutinizing the parties’ respective claims to the patents, and to
eliminate Apple’s right to trial by jury. The law requires otherwise.
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Although Kodak suggests in its complaint that Apple “voluntarily appeared” in the bankruptcy proceeding
(Compl. at ¶ 3) it neglects to mention that Apple has never filed a claim against the bankruptcy estate. Thus, this
is not a dispute between the debtor and a creditor over the validity of a bankruptcy claim.
Indeed, during a prior Bankruptcy Court hearing, Apple’s counsel previously exposed Kodak’s strategy and
predicted the course of events that have come to pass:
Your Honor knows and has seen it many times before, a debtor comes with a sales procedures
motion, maybe has a stalking horse. The deal’s got to get done. There’s tremendous pressure to get
the deal done and we don’t want to be in a situation where we’re in June and somebody says, you
know, what this issue is a very important issue. It’s got to be decided. You know, let’s have a trial
and we’ll give you, you know, two days because that’s all we have. (Ex. 21, 3/8/12 Hr’g Tr. at
36:22-37:4.)
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II.
LAW APPLICABLE TO THIS MOTION
A.
Withdrawal Is Mandatory Where Non-Bankruptcy Federal Law Is At Issue
The District Court is required to withdraw a proceeding from the Bankruptcy Court “if the
court determines that resolution of the proceeding requires consideration of both title 11 and other
laws of the United States regulating organizations or activities affecting interstate commerce.” 28
U.S.C. § 157(d). This adversary proceeding is a paradigm for mandatory withdrawal. Indeed,
patent cases are often mandatorily withdrawn under section 157(d) because they typically involve
complex issues of federal non-bankruptcy law. In re Singer Co., N.V., No. 01 Civ. 0165 (WHP),
2002 WL 243779 (S.D.N.Y. Feb. 20, 2002) (dispute over sewing needle patent); In re Nat’l
Gypsum Co., 145 B.R. 539 (N.D. Tex. 1992) (dispute over patent on “lightweight joint
compound”); see also Weiss ex rel. Fibercore, Inc. v. OFS Fitel, LLC, 361 B.R. 315, 317 (D. Mass.
2007) (“the predominance of federal law in the pending patent infringement action … strongly
implicates non-core federal bankruptcy law, which the district court is best equipped to apply”).
B.
Withdrawal “For Cause” Is Common In Non-Core Cases
Even where withdrawal is not mandatory, “[t]he district court may withdraw, in whole or
in part, any case or proceeding … for cause shown.” 28 U.S.C. § 157(d). This is known as
“permissive withdrawal” and it is common in disputes that, while related to a bankruptcy, predate
the debtor’s bankruptcy filing and do not arise under bankruptcy law. Courts in the Second Circuit
consider three factors to determine whether permissive withdrawal is warranted: (1) whether the
proceeding is “core” or “non-core”; (2) whether the proceeding is legal or equitable; and (3)
“considerations of efficiency, prevention of forum shopping, and uniformity in the administration
of bankruptcy law.” In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993). The primary
consideration is whether the proceeding is core or non-core, because conclusions about efficiency
and judicial economy will often follow from there. Id. For example, because a bankruptcy court
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can only “submit proposed findings of fact and conclusions of law to the district court” in a
non-core proceeding (28 U.S.C. § 157(c)(1)), it is often more efficient to conduct a non-core
proceeding entirely in the district court. In re Orion, 4 F.3d at 1101 (“unnecessary costs could be
avoided by a single proceeding in the district court”).6
A core proceeding is one that could only arise in a bankruptcy case. See In re Leco Ent.,
Inc., 144 B.R. 244, 249 (S.D.N.Y. 1992) (quoting In re Wood, 825 F.2d 90, 97 (5th Cir. 1987) (“If
the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one
that could exist outside of bankruptcy it is not a core proceeding.”)) “To be a core proceeding, an
action must have as its foundation the creation, recognition, or adjudication of rights which would
not exist independent of a bankruptcy environment although of necessity there may be a peripheral
state law involvement.” Acolyte Elec. Corp. v. City of New York, 69 B.R. 155, 173 (Bankr.
E.D.N.Y. 1986). Claims that “are independent of bankruptcy and involve facts wholly antecedent
to the bankruptcy” are not core claims. In re Fairfield Sentry Ltd. Litig., 458 B.R. 665, 685
(S.D.N.Y. 2011). Where a debtor “could have pursued the same claims … and continued about
[its] ordinary business without ever having filed for bankruptcy,” its claims are not core. Id.
Similarly, “pre-petition common law actions for a claim requiring adjudication of factual disputes
unrelated to the bankruptcy are not core claims.” Id. at 688.
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While recent decisions in the Southern District have cast doubt on the primacy of the core/non-core distinction
among the Orion factors (suggesting that after the Supreme Court’s decision in Stern v. Marshall, 131 S.Ct. 2594
(2011) the key inquiry is whether the bankruptcy court has “final adjudicative authority” over the matter), this
does not change the fact that non-core proceedings are often subject to withdrawal because, as these decisions
recognize, “the bankruptcy court may not enter final judgment … on any non-core claims.” In re Lyondell
Chemical Co., --- B.R. ----, 2012 WL 1038749 at *6, *9 (S.D.N.Y. March 29, 2012); see also In re Extended Stay,
Inc., 466 B.R. 188, 204 (S.D.N.Y. 2011) (“the core/non-core distinction is still a relevant consideration in
permissive withdrawal analysis, except to the extent Stern holds that Congress’s classification of a claim as ‘core’
exceeds the boundaries of Article III.”). As discussed below, the effect of Stern is to expand the group of matters
subject to permissive withdrawal, since even core matters may now be withdrawn if the district court determines
that the bankruptcy court lacks final adjudicative authority over them.
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An action filed by the debtor prior to bankruptcy does not become “core” simply because a
win for the debtor might increase the funds available to the estate or improve the debtor’s chances
of successfully reorganizing. Acolyte Elec., 69 B.R. at 175; see also In re McCrory Corp., 160
B.R. 502, 506 (S.D.N.Y. 1993) (trademark dispute that “goes to the heart of the debtor’s
reorganization plans” was not core proceeding because “the dispute would exist independent of a
bankruptcy environment”). “An action involving a debtor and a non-creditor in which ‘the only
relationship … to the bankruptcy proceeding [is] that determination of the action would affect the
ultimate size of the estate’ is not a core proceeding.” Little Rest Twelve, Inc. v. Visan, 458 B.R. 44,
55 (S.D.N.Y. 2011) (quoting In re Best Prods. Co., 68 F.3d 26, 32 (2d Cir. 1995)). In other words,
a case is not a core proceeding just because it may be important to the debtor’s reorganization.
C.
Withdrawal Is Required Where The Bankruptcy Court Would Have To
Adjudicate “Private Rights”
Because bankruptcy courts are not Article III courts, their decision making authority is
limited by the Constitution and they may not “exercise jurisdiction over all matters related to those
arising under the bankruptcy laws.” Northern Pipeline Const. Co. v. Marathon Pipeline Co., 458
U.S. 50, 76 (1982). While bankruptcy courts may adjust debtor-creditor relationships as provided
for under the bankruptcy code, they may not adjudicate “private rights” originating elsewhere in
the law. Id. at 71 (“the restructuring of debtor-creditor relations, which is at the core of the federal
bankruptcy power, must be distinguished from the adjudication of state-created private rights,
such as the right to recover contract damages”).
Among other things, state law contract and tort claims cannot be decided by a bankruptcy
court. Id. (breach of contract); Stern v. Marshall, 131 S.Ct. 2594 (2011) (tortious interference).
This is true even of statutory “core” proceedings, such as a counterclaim by the estate against a
creditor that has filed a claim against the estate. In Stern, the Supreme Court held that although the
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estate’s counterclaim against a creditor for tortious interference was “a ‘core proceeding’ under the
plain text of § 157(b)(2)(C),” the bankruptcy court could not rule on that claim because it arose
under non-bankruptcy law. Id. at 2604, 2608. “If the claim involves private rights, Congress
cannot vest final adjudicative power over it in the Bankruptcy Court consistent with Article III,
whether the claim is ‘core’ or ‘non-core’.” Development Specialists, Inc. v. Akin Gump Strauss
Hauer & Feld, LLP, 462 B.R. 457, 467 (S.D.N.Y. 2011).
Just as a proceeding is not “core” because it would add funds to the estate or smooth the
debtor’s path to reorganization, “the fact that the debtor’s recovery would augment the estate [is]
insufficient to convert the right being vindicated from private to public.” In re Coudert Bros. LLP,
App. Case No. 11–2785 (CM), 2011 WL 5593147 at *7 (S.D.N.Y. Sept. 23, 2011). The Supreme
Court has confirmed this result on multiple occasions. See Northern Pipeline, 458 U.S. at 72
(“Northern’s right to recover contract damages to augment its estate is one of private right, that is,
of the liability of one individual to another under the law as defined.”) (quotation omitted);
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 (1989) (contrasting “claims brought by a
bankrupt corporation to augment the bankruptcy estate,” which are matters of private right, with
“creditors’ hierarchically ordered claims to a pro rata share of the bankruptcy res”). Thus, under
both the pre-Stern rubric of core and non-core proceedings and the post-Stern rubric of public and
private rights, the rule is the same—the bankruptcy court does not have authority to rule on a
matter simply because the outcome is important to the debtor’s reorganization.
D.
Withdrawal Is Warranted Where A Jury Trial Is Required
Bankruptcy courts cannot conduct jury trials without the consent of both parties. 28 U.S.C.
157(e); In re Orion, 4 F.3d at 1101 (“the constitution prohibits bankruptcy courts from holding
jury trials in non-core matters”); In re Extended Stay, 466 B.R. at 197 (“Even if the proceeding is
determined to be core in nature and a jury trial is demanded, a bankruptcy court may only conduct
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a jury trial if ‘specially designated to exercise such jurisdiction by the district court and with the
express consent of all the parties.’”); see also Granfinanciera, 492 U.S. at 42 (“Congress cannot
eliminate a party’s Seventh Amendment right to a jury trial merely by relabeling the cause of
action to which it attaches and placing exclusive jurisdiction in an administrative agency or a
specialized court of equity.”). Apple has counterclaims against Kodak requiring trial by jury and
has not consented to a jury trial in the Bankruptcy Court.
Whether a jury trial right exists depends largely on whether the claim is legal or equitable
in nature. Granfinanciera, 492 U.S. at 42. For example, a breach of contract claim seeking money
damages is inherently legal. Brown v. Sandimo Materials, 250 F.3d 120, 126 (2d Cir. 2001) (“[A]
claim for breach of contract ... has historically been uniformly treated as a legal claim.”); Dairy
Queen, Inc. v. Wood, 369 U.S. 469, 477 (1962) (“we think it plain that [plaintiff’s] claim for a
money judgment is a claim wholly legal in its nature however the complaint is construed”). And
this right to trial by jury applies equally in patent litigation—indeed, where both legal and
equitable claims are present in a patent dispute, the right to trial by jury applies to both of them.
See, e.g., Shum v. Intel, 499 F.3d 1272, 1279 (Fed. Cir. 2007) (plaintiff was entitled to jury
determination of inventorship in patent dispute, given factual overlap with fraud claim); Cabinet
Vision v. Cabnetware, 129 F.3d 595, 600 (Fed. Cir. 1997) (jury’s fact findings on legal claim were
binding on judge in related equitable claim). Further, when conducting the analysis, “all doubts
must be resolved in favor the party seeking a jury trial.” Design Strategies, Inc. v. Davis, 367 F.
Supp. 2d 630, 638 (S.D.N.Y. 2005).
III.
ARGUMENT
The parties’ disputes raise complex issues of federal patent law, have no substantive
relationship to Kodak’s bankruptcy proceeding, and implicate Apple’s right to jury trial. A
bankruptcy court is neither legally permitted nor practically equipped to resolve these
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disputes—particularly in the form of a hasty ruling on a summary judgment motion, as proposed
by Kodak. Under well-settled law, the reference of this dispute must be withdrawn.
A.
This Case Involves Complex Issues Of Non-Bankruptcy Federal Law
Triggering Mandatory Withdrawal
Withdrawal is mandatory in this case because the issues raised by Kodak’s adversary
proceeding require consideration of complex issues of federal patent law. 28 U.S.C. § 157(d)
(withdrawal is required “if the court determines that resolution of the proceeding requires
consideration of both title 11 and other laws of the United States regulating organizations or
activities affecting interstate commerce”); In re Singer, 2002 WL 243779; In re Nat’l Gypsum, 145
B.R. 539; Weiss ex rel. Fibercore, 361 B.R. at 317. For example, among other things, Apple plans
to seek correction of inventorship with respect to all 10 patents pursuant to section 256 of the
federal patent statute. 35 U.S.C. § 256. Under federal patent law, a person is an inventor “if he
contributes to the conception of the claimed invention.” Eli Lilly and Co. v. Aradigm Corp., 376
F.3d 1352, 1358-59 (Fed. Cir. 2004). While Apple believes the evidence in this case easily meets
this test, Kodak’s arguments to the contrary will likely implicate complex issues of patent law.
Indeed, the Federal Circuit has noted that “[t]he line between actual contributions to conception
and the remaining, more prosaic contributions to the inventive process that do not render the
contributor a co-inventor is sometimes a difficult one to draw.” Id. at 1359.
The “difficult” task of assessing technical contributions for inventorship purposes will also
require interpretation of federal patent law regarding conception. See, e.g., Burroughs Wellcome
Co. v. Barr Labs., Inc., 40 F.3d 1223, 1227-28 (Fed. Cir. 1994) (explaining that “[c]onception is
the touchstone of inventorship, the completion of the mental part of invention”). This inquiry
further requires evaluating whether the contribution in question is “insignificant in quality, when
that contribution is measured against the dimension of the full invention.” Eli Lilly, 376 F.3d at
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1359. These complex legal standards will need to be interpreted and applied in view of a technical
analysis of multiple claims from the ten patents at issue as well as documentary evidence of
technology developed by Apple.1
The federal law inventorship analysis will also require defining the patent scope through
claim construction. Id. at 1360 (explaining that an “inventorship analysis, like an infringement or
invalidity analysis, begins as a first step with a construction of each asserted claim to determine the
subject matter encompassed thereby”). Claim construction typically involves a detailed review of
extensive technical subject matter from the patent specification, patent prosecution history, and
potentially extrinsic sources—under a long line of Federal Circuit precedent regarding relevant
legal principles. See, e.g., Phillips v. AWH Corp., 415 F.3d 1303, 1315-17 (Fed. Cir. 2005) (en
banc). These complex issues of federal law implicate mandatory withdrawal. In re Singer Co.,
2002 WL 243779 at *3 (“claim construction, and infringement analysis” constituted “substantial
and material consideration of patent law” requiring mandatory withdrawal).
Claim construction under federal patent law will also be required for Apple’s state law
counterclaims. For example, Apple’s breach of contract counterclaim is based on contract
provisions regarding the relationship of particular patents to technology disclosed to Kodak by
Apple. (Ex. 11, 8/25/10 Apple Compl., ¶ 24-25.) Assessing the relationship in the subject matter
of each patent and the technology disclosed by Apple will require a determination of the scope of
the relevant patents through claim construction. While the ’218 patent has already been subject to
7
Apple has already provided examples in earlier briefing of pre-discovery evidence that the subject matter of each
of the Disputed Patents was disclosed to Kodak by Apple. In response, Kodak did not deny that Apple made these
disclosures, nor that the disclosures related to the subject matter of the Disputed Patents. Instead, Kodak argued
that Apple’s contributions should be classied as “broad objectives” rather than specific contributions to
conception. (Ex. 22, 6/11/12 Kodak Reply) Thus, this dispute centers on the most complex part of inventorship
law.
15
claim construction (which may still need to be revisited) in the ITC investigation, the parties have
not yet had an opportunity to address claim construction issues for the other nine patents.
A further issue of federal law arises in connection with Kodak’s argument that Apple’s
federal and state assertions are time-barred by laches and the statute of limitations, respectively. In
particular, Kodak argues that Apple was allegedly on “constructive” notice from the time of
issuance of these patents. (Compl. at ¶ 4) The Eastern District of New York has noted that “the
applicability of the principle of constructive notice of a patent, if it exists at all, is inextricably
intertwined with the specific policy objectives fundamental to the underlying substantive federal
patent law.” St. John’s Univ. v. Bolton, 757 F. Supp. 2d 144, 190 (E.D.N.Y. 2010). Kodak’s
“constructive notice” argument has been squarely rejected by the Federal Circuit. Advanced
Cardiovascular Sys. v. Scimed Life Sys., Inc., 988 F.2d 1157, 1162 (Fed. Cir. 1993) (“measuring []
delay from the date of issuance of the patent, in the absence of proof that [claimant] knew or
should have known that the patent had issued and that he was omitted as a joint inventor” is
erroneous as a matter of law). Nevertheless, to the extent Kodak apparently intends to pursue this
discredited argument, additional complex issues of federal law are implicated.
B.
Permissive Withdrawal Is Warranted Because The Bankruptcy Court Cannot
Adjudicate This Matter
Permissive withdrawal is also called for because the Bankruptcy Court will not be able to
render a final judgment on the merits of the dispute. Therefore, it would be most efficient for the
District Court to hear the matter from the beginning.
1.
This Is A Non-Core Matter
As discussed above, a core matter is one that could only arise in a bankruptcy. See, e.g., In
re Leco Enterprises, Inc., 144 B.R. at 249. The dispute that Kodak wants the Bankruptcy Court to
resolve arises under federal patent law and California contract law, and it began with actions filed
16
by Kodak in two different fora nearly two years before Kodak’s bankruptcy. As litigation relating
to these issues began well before Kodak’s bankruptcy and all relevant events occurred long before
then, this dispute arose outside the bankruptcy context and is inherently non-core. Fairfield
Sentry, 458 B.R. at 685 (claims that “are independent of bankruptcy and involve facts wholly
antecedent to the bankruptcy” are not core); see also Little Rest Twelve, 458 B.R. at 55 (lawsuits
filed years before bankruptcy were not core proceedings).
The only link between this patent dispute and Kodak’s bankruptcy is that, if Kodak
prevails, the patents may fetch a higher price and the estate may receive more money. This does
not confer “core” status on a lawsuit, particularly one brought by the debtor against a party that has
not filed a claim in the bankruptcy. See McCrory, 160 B.R. at 506 (“While McCrory obviously
seeks to prevail in the adversary proceeding in order to reorganize, it also seeks to cancel
[defendant’s] trademarks and enjoin defendant from protecting its registered marks. As a result,
the proceeding is not one which could arise only in the context of a bankruptcy case.”); Little Rest
Twelve, 458 B.R. at 55 (action between debtor and non-creditor is non-core where sole connection
to bankruptcy is that “determination of the action would affect the ultimate size of the estate.”); In
re Best Prods. Co., 68 F.3d at 32 (contrasting dispute over “priority rights of creditors who have
filed claims against the estate” with “a proceeding that simply seeks to augment the estate”).
Indeed, the Bankruptcy Code’s definition of “core” specifically excludes “orders approving the
sale of property … resulting from claims brought by the estate against persons who have not filed
claims against the estate.” 28 U.S.C. 157(b)(2)(n).
In sum, a dispute that has been pending for years prior to Kodak’s bankruptcy filing is not
and cannot be dressed up as “core” to suit Kodak’s purposes. Because this dispute is a non-core
proceeding, the most the Bankruptcy Court could do with respect to Kodak’s case is submit
17
proposed findings of fact and conclusions of law to the District Court. 28 U.S.C. § 157(c)(1).
Only the District Court can enter a final order or judgment on the matter, and then only after
considering the bankruptcy judge’s proposed findings and conclusions and reviewing de novo
those matters to which any party may timely and specifically object. Id. As discussed below, these
limitations on the Bankruptcy Court’s authority favor immediate withdrawal.
2.
This Matter Relates To Private Rights
Kodak’s adversary complaint seeks to negate core defenses asserted by Apple in
currently-pending patent litigation brought by Kodak. It also seeks to enjoin Apple from ever
asserting ownership of the disputed patents in the future. These are exactly the type of “private
rights” actions that the Supreme Court forbids bankruptcy courts from ruling on:
[T]he restructuring of debtor-creditor relations, which is at the core
of the federal bankruptcy power, must be distinguished from the
adjudication of state-created private rights, such as the right to
recover contract damages that is at issue in this case. The former
may well be a “public right,” but the latter obviously is not.
Northern Pipeline, 458 U.S. at 71; see also Granfinanciera, 492 U.S. at 55 (claim to recover
fraudulent conveyance was “more accurately characterized as a private rather than a public right”);
Stern, 131 S. Ct. 2594 (tortious interference claim raised issue of private right).
The fact that a win for Kodak might enrich the bankruptcy estate does not change the
private nature of the rights being asserted by Apple. See, e.g., In re Coudert Bros., 2011 WL
5593147 at *7; Northern Pipeline, 458 U.S. at 72. Because Apple’s defenses and counterclaims
depend on private rights arising in non-bankruptcy law, the Bankruptcy Court cannot issue final
judgments on them.
And, because this limitation on the Bankruptcy Court’s power is
constitutional, it would prevent the Bankruptcy Court from ruling on a final basis on Kodak’s
adversary complaint even if this dispute was held to be a “core” proceeding under 28 U.S.C. § 157.
As the matter is not “core,” and because Kodak’s complaint seeks to alter Apple’s intellectual
18
property rights under both federal patent law and state law, permissive withdrawal would be
appropriate even if withdrawal were not mandatory in this case.
C.
Apple Is Entitled To Trial By Jury
An additional, independent basis for withdrawal is that the Bankruptcy Court cannot
conduct a jury trial on Apple’s assertions of rights in the patents at issue. Several of Apple’s
counterclaims against Kodak, including Apple’s contract counterclaim, are inherently legal and
seek the legal remedy of money damages. Brown, 250 F.3d at 126; Dairy Queen, 396 U.S. at
476-77. Apple is therefore entitled to a jury trial. Granfinanciera, 492 U.S. at 42. The
Bankruptcy Court cannot conduct a jury trial without consent of the parties. 28 U.S.C. § 157(e); In
re Orion, 4 F.3d at 1101; In re Levine, No. 11 Civ. 9101 (PAE), 2012 WL 310944, *3 (S.D.N.Y.
Feb. 1, 2012). Apple does not consent to a jury trial by the Bankruptcy Court. Therefore,
withdrawal is required.
D.
Efficiency, Judicial Economy, And Prevention Of Forum Shopping Require
Immediate Withdrawal
Kodak is not merely trying to destroy Apple’s intellectual property rights through a rushed
adversary proceeding—it is also engaging in forum shopping. Kodak previously resisted Apple’s
attempts to litigate the parties’ patent-related disputes in any forum other than the Western District
of New York. (Ex. 17, 11/15/10 Kodak Mot.) Yet, several months ago, Kodak opposed Apple’s
motion to lift the automatic bankruptcy stay to allow the litigation to proceed in the Western
District. Now Kodak seeks to have the Bankruptcy Court resolve this complex intellectual
property dispute by way of a hurried adversary proceeding. Kodak presumably believes that the
Bankruptcy Court will be sympathetic to an argument (express or implied) that Apple’s interest in
the disputed patents should be sacrificed to the demands of Kodak’s restructuring, but this does not
justify denying Apple the legal process to which it is entitled. In any event, the Bankruptcy Court
19
would have little opportunity to scrutinize Kodak’s claims through the truncated procedure
(without any discovery) that Kodak seeks to impose upon Apple.
That Kodak is seeking a summary judgment ruling as early as July 10 with no discovery
beforehand weighs in favor of immediate withdrawal. Although district courts sometimes allow
the bankruptcy court to manage certain preliminary pretrial proceedings before withdrawal, there
would be no benefit to doing so in this case. Kodak does not want discovery and does not want
managed pretrial proceedings—Kodak wants an immediate ruling in its favor. As a result of the
procedure chosen by Kodak, there is no efficiency to leaving this case in the Bankruptcy Court.
Finally, because the issues in this case are complex, it would be most efficient to have a
single district judge manage pretrial proceedings, conduct a trial, and issue a final judgment. Even
if the Bankruptcy Court were to conduct non-jury portions of this case itself, it would be a
significant undertaking for a District Court to understand and evaluate the Bankruptcy Court’s
proposed findings and conclusions. And, because the Bankruptcy Court has conducted no
substantive proceedings on the parties’ patent-related disputes, the bankruptcy judge has no
particular familiarity with the issues and there are no efforts on his part that would go to waste if
the District Court were to withdraw the reference now.
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CONCLUSION
For the foregoing reasons, Apple respectfully requests that the Court withdraw the
reference with respect to the above-captioned adversary proceeding.
Date: June 21, 2012
Respectfully submitted,
/s/ Brian S. Lennon
James H.M. Sprayregen P.C.
Gregory S. Arovas, P.C.
Paul M. Basta
Brian S. Lennon
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, New York 10022
Telephone:
(212) 446-4800
Facsimile:
(212) 446-4900
- and David R. Seligman, P.C.
Marcus E. Sernel, P.C.
KIRKLAND & ELLIS LLP
300 North LaSalle
Chicago, Illinois 60654
Telephone:
(312) 862-2000
Facsimile:
(312) 862-2200
Counsel for Apple Inc.
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