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Settlement Agreement Leaves Preclusion Issue Unanswered

April 09, 2001

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Last Month at the Federal Circuit - May 2001

Judges: Plager (author), Rader, and Schall

In Hallco Manufacturing Co., Inc. v. Foster, No. 99-1458 (Fed. Cir. Apr. 9, 2001), the Federal Circuit vacated a district court judgment which had held that the dismissal with prejudice and settlement of a previous dispute between the parties did not preclude Hallco Manufacturing Co., Inc. and others (collectively “Hallco”) from challenging the validity of U.S. Reissue Patent No. Re 35,022 (“the ‘022 patent”) owned by Raymond Keith Foster. The Court’s vacancy also effected the district court’s judgment of invalidity and noninfringement.

Hallco and Foster compete in the market for reciprocating conveyors, which are built into the floors of trucks to move large loads in and out. The key improvement of the ‘022 patent concerns mounting a drive mechanism directly below the floor members of the truck to reduce the weight of the conveyor and the amount of space it takes up.

The parties have litigated various infringement actions for many years now. In particular, on a previous remand from the Federal Circuit, the district court granted SJ of infringement under a new claim construction, which left Hallco with only its invalidity defenses. The parties then settled, with Hallco taking a nonexclusive, royalty-bearing license. The district court then dismissed the action with prejudice. Hallco then designed its product to avoid infringement, but Foster disagreed. Accordingly, Hallco paid royalties on the redesigned product under protest and filed a DJ action alleging noninfringement and invalidity. The district court determined that Hallco’s invalidity defense was not precluded on this issue.

Foster argued on appeal that the dismissal for prejudice was as much a judgment on the merits as a consent decree and, therefore, operates the same way for preclusion purposes. Hallco argued that absent any admission of validity in the settlement agreement, an attack on validity is not precluded in
subsequent litigation.

The Federal Circuit concluded that because Hallco had not reserved the right to pursue the invalidity defense, in later litigation between the parties, its right to do so would depend upon whether the underlying cause of action is different from the one brought earlier. This question, in turn, depends on whether the redesign devices are essentially the same as the original devices or if any differences between them are merely colorable. If so, the Court concluded, claim preclusion would apply. The Court found the record insufficient to make this determination and remanded for the district court to do so.