Failure to Raise an Invalidity Defense in Breach-of-Contract Suit Could Bar Later Invalidity Challenges to Licensed Patents

Authored by D. Brian Kacedon, John C. Paul, and Robert D. Wells

In Cummins, Inc. v. TAS Distributing Co.,¹ the Federal Circuit held that claims for declaratory relief of invalidity or unenforceability of a licensed patent were barred under the doctrine of res judicata where they were not raised as a defense or counterclaim to an earlier claim for breach of contract. A 1997 license agreement between Cummins and TAS obligated Cummins to maximize royalty payments to TAS through "all reasonable efforts to market and sell" products practicing the licensed TAS patents. Alleging that Cummins had failed to make those efforts, TAS sued in 2003 for breach of contract, claiming damages and demanding specific performance of Cummins's obligations under the "all reasonable efforts" clause (TAS I). The district court rejected the claim for damages, finding that TAS lacked evidence of how many sales would result from Cummins making "all reasonable efforts." The district court also declined to order specific performance of Cummins obligation to market and sell TAS's technology but found that Cummins did have a contractual duty to make royalty payments for ongoing sales of products using the patented technology. On appeal, the Seventh Circuit affirmed the district court's decision in TAS I.

In 2007, TAS sued Cummins for breach of contract again—this time alleging that Cummins failed to make royalty payments for the sale of products incorporating the patented technology (TAS II). During a deposition in that litigation, the inventor testified about sales and marketing efforts of the technology before the critical date of the patents. Cummins sought permission to challenge the validity and enforceability of the licensed patents—and, by implication, the license agreement—as a result of this pre-patenting activity. But the district court prevented Cummins from amending the complaint to add those challenges, reasoning that the claims were barred by the doctrine of res judicata—also known as "claim preclusion." Stated otherwise, under Illinois state law, Cummins could have, and should have, raised the patent defenses and counterclaims during TAS I.

Cummins brought a third case (TAS III) in 2009, seeking dismissal of TAS II, a declaration of invalidity and unenforceability of the licensed TAS patents, a declaration that TAS engaged in patent misuse by improperly enforcing the patents, and rescission of the license agreement. But once again the trial court found that Cummins's claims were barred by res judicata. Cummins appealed.

The Federal Circuit affirmed the trial court's ruling, holding that Illinois state law governing res judicata applied to the case, that Cummins could have raised—but did not raise—claims that the licensed patents were invalid or unenforceable during TAS I, and that Cummins's claims for declaratory relief in TAS III would, if granted, nullify or impair the TAS I ruling that Cummins had a duty to make royalty payments under the license agreement.

First, the Federal Circuit found that Illinois state law governing res judicata applied to the case. Under Illinois law, the Court found, counterclaims and affirmative defenses are barred by res judicata if they could have been raised during a previous litigation.

Next, the Federal Circuit addressed Cummins's argument that claims of patent misuse are not barred by res judicata under the Supreme Court precedent in Mercoid Corp. v. Mid-Continent Investment Co. The Federal Circuit held that Mercoid was narrowly tailored to preclude claims for enforcement of a patent through an injunction—not to claims for declaratory relief from obligations to pay royalties held to be valid in previous litigation.

The Court then found that Cummins could have, and should have, properly raised the invalidity and unenforceability defenses during TAS I. According to the district court, Cummins was aware of TAS's earlier sales and marketing efforts during TAS I. If Cummins had raised the invalidity defenses then—and if it had won—they would have served as a complete bar against TAS's claims in TAS I.

Finally, Cummins argued, allowing its claims would not impair the TAS I ruling because it—not TAS—prevailed in that litigation. The Federal Circuit disagreed. The Court noted that Cummins's recent claims of patent invalidity, if successful, would nullify the ruling in TAS I that Cummins had a duty to make royalty payments under the valid license agreement.

Strategy and Conclusion

The Cummins decision illustrates that patent claims or defenses may be barred by prior litigation relating to the same patents, even if the earlier litigation does not directly implicate traditional patent issues—a breach-of-contract case in this instance. Whether these claims are barred by res judicata depends on the law governing res judicata in the state where the case was first brought. In cases like this that are brought in Illinois, the court will determine the applicability of res judicata under Illinois law, determining whether the defenses or invalidity claims could have been raised during the previous litigation and whether a successful claim would impair a prior ruling.

Endnotes

¹ The Cummins opinion can be found here.

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