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Under Illinois Law, Failure to Assert Patent-Based Defenses in Contract Cases May Have Preclusive Effect in Later Related Actions

December 05, 2012
Kudravetz, Michael E.

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Last Month at the Federal Circuit - January 2013

Judges: Newman, Bryson, Reyna (author)

[Appealed from: C.D. Ill., Judge McDade]

In Cummins, Inc. v. TAS Distributing Co., No. 10-1134 (Fed. Cir. Dec. 5, 2012), the Federal Circuit, applying Illinois law, held that res judicata bars invalidity and unenforceability defenses under 35 U.S.C. §§ 102 and 103 when those defenses could have been raised in prior litigation featuring the same parties, arising from the same group of operative facts, and resulting in a final resolution on the merits.

The appeal resulted from the third of three litigations between TAS Distributing Company, Inc. (“TAS”) and Cummins, Inc. (“Cummins”) over a 1997 Master License Agreement (“the Agreement”). The Agreement granted Cummins the coexclusive right to use technology owned or licensed by TAS relating to “Temp-A-Start” and “Temp-A-Stop” systems for automatically turning a diesel engine on or off, including U.S. Patent Nos. 5,072,703 (“the ’703 patent”) and 5,222,469 (“the ’469 patent”) (collectively “the TAS patents”).

First, TAS filed a DJ action against Cummins (then known as Cummins Engine Company, Inc.) in the Central District of Illinois in 2003 (“TAS I”), alleging that Cummins breached the Agreement by failing to make all reasonable efforts to market and sell the TAS technology and requesting specific performance. Cummins counterclaimed that its obligation to pay royalties under the Agreement was set to expire the following month. The district court ruled on SJ that TAS failed to present any proof of damages and declined to order specific performance of Cummins’s obligations. The district court also ruled that Cummins had a continuing contractual obligation to make royalty payments for sales beyond the expiration date of the Agreement. On appeal, the Seventh Circuit affirmed the district court’s TAS I decision.

TAS filed a second suit against Cummins in Illinois in 2007 (“TAS II”), claiming that Cummins breached the Agreement by failing to pay royalties on all of Cummins’s products that incorporated the TAS technology. During discovery, the inventor of the TAS patents admitted that a version of TAS’s
Temp-A-Start system was sold to another manufacturer in the mid-1980s, prior to the critical dates of the TAS patents, and that the prior sales and marketing efforts had not been disclosed to the PTO during prosecution of the TAS patents. Cummins sought leave to amend its Answer to include patent-based affirmative defenses and counterclaims related to the prior sales of the TAS technology, but the district court denied Cummins’s motion. The district court ruled that such claims were barred by res judicata, because Cummins should have and could have brought them in TAS I.

In 2009, Cummins initiated TAS III, seeking to have the trial court (1) dismiss TAS’s suit in TAS II; (2) declare the TAS patents invalid under §§ 102 and 103; (3) declare the Agreement void for patent misuse; (4) declare that TAS engaged in patent misuse for improperly enforcing the TAS patents; (5) declare the TAS patents unenforceable due to inequitable conduct; and (6) rescind the Agreement in its entirety. The district court granted SJ for TAS, effectively barring all of Cummins’s claims for declaratory relief on the basis of res judicata. The district court rejected Cummins’s claim of an equitable exception to res judicata, finding that TAS had not made misrepresentations that prevented Cummins from asserting its patent invalidity claim in TAS I.

On appeal, the Federal Circuit applied Illinois state law in addressing each of Cummins’s three arguments: (1) whether the trial court’s basis for jurisdiction in TAS I was such that its judgment could have preclusive effect over subsequent patent-based defenses; (2) whether TAS I and TAS III were based on the same set of transactional facts; and (3) whether exceptions to the application of res judicata were available to Cummins.

First, the Federal Circuit rejected Cummins’s argument that res judicata could not apply because the district court in TAS I lacked subject matter jurisdiction under the DJ Act, 28 U.S.C. § 2201(a), to hear issues of patent invalidity and unenforceability. The Federal Circuit reasoned that there was no jurisdictional bar preventing Cummins from asserting its patent-based defenses in TAS I, notwithstanding that Cummins continued making royalty payments. “In addition, regardless of whether Cummins could have sought affirmative relief in TAS I in the form of a declaratory judgment counterclaim, it plainly could have raised its patent-based defense in response to TAS’s contract claims, but it did not do so.” Slip op. at 12.

Second, the Federal Circuit rejected Cummins’s argument that res judicata did not apply because the causes of action in TAS I and TAS III were not the same. The Court applied the “transactional test” adopted by the Illinois Supreme Court where “separate claims [are] considered the same cause of action for purposes of res judicata if they arise from a single group of operative facts, regardless of whether they assert different theories of relief.” Id. at 12-13 (alteration in original) (quoting River Park, Inc. v. City of Highland Park, 703 N.E.2d 883, 893 (Ill. 1998)).

The Court rejected Cummins’s argument that res judicata could not apply because TAS III related to patent invalidity, misuse, and unenforceability, while TAS I related to enforcing a specific provision of the Agreement. The Court explained that under Illinois law, “‘operative facts’ are not just those supporting the first judgment, but all ‘facts that give rise to plaintiffs’ right to relief.’” Id. at 13 (quoting River Park, 703 N.E.2d at 892). “The onus was on Cummins under Illinois state law to raise the defenses at [the time of TAS I] or forfeit their use at a later time.” Id. at 14. “Illinois courts have determined not to engage in ‘piecemeal presentation of defenses,’ and we give deference to this sound policy.” Id. (quoting Henry v. Farmer City State Bank, 808 F.2d 1228, 1234 (7th Cir. 1986)).

The Federal Circuit also rejected Cummins’s argument that the district court erred in concluding that allowing Cummins to assert invalidity defenses would risk nullification of the TAS I judgment. The Court reasoned that the risk of inconsistent decisions is a long-standing concern of the judiciary and that Cummins’s invalidity and unenforceability claims would impair the judgment from TAS I that established TAS’s continuing right to receive royalties.

Third, the Federal Circuit rejected Cummins’s argument that DJ and misrepresentation exceptions to res judicata applied. The Court reasoned that the DJ exception did not apply under Illinois law. Regarding the misrepresentation exception, the Court found no error in the district court’s conclusion that Cummins was aware of the basis for the invalidity and unenforceability claims during the course of the TAS I discovery. The Federal Circuit thus affirmed the district court’s grant of SJ in favor of TAS that Cummins’s claims in TAS III were barred by the doctrine of res judicata.

Summary authored by Michael E. Kudravetz, Esq.