A New York judge on Thursday granted permission to bankrupt Eastman Kodak Co. to pursue litigation against Shutterfly Inc. and Tiny Prints Inc., which allegedly infringed on six patents owned by the photography company.
Judge Allan L. Gropper of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan approved Kodak's request to proceed with prepetition litigation. Kodak had filed a complaint against Shutterfly in the U.S. District Court for the District of Delaware on Dec. 10, 2010, alleging that the operator of a personal publishing website infringed on five Kodak patents. Kodak amended the complaint on Nov. 16 to add Tiny Prints Inc. and a sixth patent. The patents included relate to Kodak's digital imaging intellectual property portfolio.
Kodak requested relief from stay to pursue the complaint on May 2, just two days after the court authorized Kodak to sell its online photo service business to Shutterfly.
Redwood City, Calif.-based Shutterfly is poised to acquire 75 million customer accounts and all the images in the U.S. and Canada in Kodak's gallery.
Kodak spokesman Christopher Veronda said the sale and the patent infringement litigation are completely unrelated. He noted that the sale includes no IP and that the patents in question are unrelated to the sold assets.
According to the relief from stay motion, Shutterfly and Tiny Prints answered the district court complaint on Dec. 13 and each separately asserted that they hadn't infringed on the patents and that the patents are invalid. Kodak said the responses constituted an affirmative defense, meaning that the defendants were seeking to justify any alleged infringement.
Meanwhile, Shutterfly had filed its own complaint against Kodak in the district court in Delaware on Jan. 31, 2011, alleging Kodak infringed on seven entirely different patents owned by Shutterfly.
Kodak filed a notice of the automatic bankruptcy stay in the case filed by Shutterfly, but declined to file a notice in the case it initiated because it intended to continue prosecuting Shutterfly and Tiny Prints. Shutterfly and Tiny Prints, however, filed the notice of bankruptcy stay in the Kodak-initiated action on Jan. 30.
Then, on Feb. 14, Shutterfly and Tiny Prints moved the district court to stay the case pending the completion of Kodak's bankruptcy. Kodak responded by asking the court to issue an order ruling that the defendants could use an affirmative defense, or justification for its actions, without risk of sanctions.
According to Kodak, Shutterfly and Tiny Prints rejected the offer, saying they wanted to stay the entire case.
Oral arguments on Shutterfly and Tiny Prints' motion to stay the case were scheduled for Thursday.
Kodak said Shutterfly is seeking to use the bankruptcy stay as a shield against the claims. Kodak asserted that it needs to pursue the litigation to protect the value of its estate and that the litigation could yield about $100 million in damages for the benefit of all stakeholders. Moreover, Kodak said it needs to resolve the IP issues to demonstrate the patents' value because Kodak will offer them for sale in bankruptcy.
Kodak's official committee of unsecured creditors supports pursuing the litigation, documents show.
Shutterfly objected to Kodak's stay relief motion on Wednesday, questioning why the debtor didn't immediately seek relief from stay to pursue the litigation after filing for bankruptcy if the complaint was so important for its estate. Shutterfly also said Kodak has not yet exchanged documents for discovery regarding the complaint and the parties are not ready for trial. Therefore, lifting the stay will not allow the suit to immediately proceed.
Patent infringement litigation has been a dominant issue in Kodak's bankruptcy case. Both Apple Inc. and Fujifilm Corp. had requested relief from the automatic bankruptcy stay to pursue their complaints against Kodak. Gropper, however, shot down Apple's and Fujifilm's requests on March 8 and March 20, respectively. Gropper also approved a motion from Kodak to appoint an examiner to conduct discovery regarding Apple's claims on March 20.
On the other hand, Research In Motion Ltd., which makes BlackBerry smartphones, was granted relief from stay on March 9 to pursue its litigation in the U.S. District Court for the Northern District of Texas and before the International Trade Commission -- a quasi-judicial federal agency. Kodak filed complaints against RIM on Nov. 20, 2008, and Feb. 20, 2010, alleging patent infringement. The parties were set for a March trial in the district court in Texas when Kodak filed for bankruptcy. Documents show that RIM's Feb. 10 relief from stay request was unopposed by the debtor.
Rochester, N.Y.-based Kodak was founded in 1880 by George Eastman and was once the world's leading producer of film and cameras.
Kodak filed for Chapter 11 on Jan. 19 after a long-term transformation and other restructuring moves failed to reverse a protracted decline.
Andrew G. Dietderich, John J. Jerome, Michael H. Torkin and Mark U. Schneiderman at Sullivan & Cromwell LLP and Pauline K. Morgan and Joseph M. Barry at Young Conaway Stargatt & Taylor LLP are debtor counsel. James A. Mesterharm of AlixPartners LLP is Kodak's chief restructuring officer. Matthew J. Hart of Lazard is Kodak's investment banker.
Karel S. Karpe of KarpeLaw represents Shutterfly.
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