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Presentation of False Evidence Alone Does Not Prevent Application of Res Judicata

05-1260
June 05, 2006

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Last Month at the Federal Circuit - July 2006

Judges: Michel, Bryson, Dyk (author)

In Pactiv Corp. v. Dow Chemical Co., No. 05-1260 (Fed. Cir. June 5, 2006), the Federal Circuit affirmed the district court’s holding that res judicata precluded the claims of Pactiv Corporation (“Pactiv”) in its DJ action for noninfringement, invalidity, and unenforceability of U.S. Patent Nos. 5,424,016 (“the ’016 patent”) and 5,586,058 (“the ’058 patent”).

In 1995, Dow Chemical Company (“Dow”) sued Pactiv for infringement of the ’016 and ’058 patents, and Pactiv asserted counterclaims of invalidity and unenforceability. The 1995 litigation was dismissed with prejudice pursuant to a joint stipulation based on settlement and license agreements. Pactiv paid royalties to Dow as required under the agreement until late 2002, when it ceased payments. In response, in early November 2003, Dow communicated to Pactiv that it was in material breach of the agreement. Pactiv responded that it would no longer pay royalties because the patents were invalid and filed a DJ action in late December 2003. Dow moved for dismissal of the DJ action under Fed. R. Civ. P. 12(b)(6), arguing that the suit was barred by res judicata (claim preclusion). The district court held that the DJ action was barred by the prior adjudication and the settlement, and that the license agreement did not preserve Pactiv’s right to future litigation. Therefore, the district court dismissed the DJ action.

On appeal, Pactiv argued (1) that an exception to the general application of claim preclusion applies because Pactiv reserved the right to challenge the ’016 and ’058 patents in the joint settlement and license agreements, and (2) that Pactiv was denied a full and fair opportunity to litigate the patents as a result of Dow’s fraudulent misrepresentations in the earlier litigation.

Applying the law of the regional circuit (the Second Circuit), the Federal Circuit affirmed the district court’s finding that the settlement and license agreements did not expressly reserve Pactiv’s right to participate in future litigation regarding the ’016 and ’058 patents. While the Federal Circuit recognized the ability of parties to make agreements that allow for the litigation of claims that would otherwise be barred by res judicata, the Court stressed that such reservation of right must be express. The Federal Circuit determined that a section of the license agreement that limited Pactiv’s obligation to pay royalties if the ’016 or ’058 patents were found invalid through any proceeding was not a reservation, let alone an express reservation, of Pactiv’s right to litigate, nor did a later agreement define such a right. The Court concluded, therefore, that the agreement did not expressly reserve the right to litigate.

With respect to Pactiv’s argument that it was denied a full and fair opportunity to litigate the patents in the previous litigation because Dow filed an expert report, which allegedly relied on fabricated data, the Federal Circuit determined that there was no denial of a full and fair opportunity to litigate. According to the Federal Circuit, in the context of res judicata, the mere presentation of false evidence did not rise to the level of denying a full and fair opportunity to litigate. Relying on Supreme Court precedent, the Federal Circuit explained that for collateral estoppel (issue preclusion) a showing of unfairness or inadequacy in the prior proceeding could prevent later preclusion, but res judicata was precluded only where there was a denial of due process in the prior litigation. The Court noted that if Pactiv wanted to set aside the previous judgment based on fraud, its recourse would have been to file a Rule 60(b) motion in the original proceeding.

Accordingly, the Federal Circuit affirmed the decision of the district court dismissing the DJ suit.