Earlier Contract Case Now Bars Invalidity DJ

Posted on | February 2, 2010 | 4 Comments

2010-1134 Cummins v. TAS Distribution
CD/CA 09-cv-1096
Judge Joe Billy McDade

Cummins appeals from the summary judgment of Judge McDade finding its declaratory judgment action for patent invalidity, misuse, and contract termination barred under the doctrine of claim preclusion (f/k/a res judicata). 

This is the third lawsuit between the parties since 2003, and all derive from a 1997 License Agreement from TAS to Cummins which included a license to TAS's 5,072,703 and 5,222,469 patents.

Background:  TAS first sued Cummins in 2003 alleging that Cummins had breached the License by failing to adequately market the technologies as required; Cummins counterclaimed, alleging that its obligation to pay royalties under the License Agreement expired on March 31, 2003.  This case ("TAS I") ended with the granting of summary judgment on some claims, ultimately affirmed by the Seventh Circuit.

TAS filed another suit in 2007 alleging that Cummins had failed to pay certain royalties due under the License, and had also breached the License by using a competing technology in its products instead of the patented technology.  TAS II is pending in the CD/IL.

The present action was filed by Cummins in early 2009, seeking to: (1) dismiss TAS II, (2) declare the ‘703 and ‘469 patents invalid, (3) declare the License Agreement void for patent misuse, (4) declare that TAS engaged in patent misuse, (5) declare the ‘703 and ‘469 patents unenforceable based on inequitable conduct, and (6) rescind the License.

Analysis: The Court found that all of the contract and patent claims asserted by Cummins were barred under claim preclusion by TAS I.  Saying that it was "sitting in diversity," the Court applied Illinois law:

Illinois requires that three requirements be met in order for res judicata to
bar a subsequent suit: “(1) there was a final judgment on the merits rendered by a court of competent jurisdiction, (2) there is an identity of cause of action, and (3) there is an identity of parties or their privies.”

Order, p. 7.  Noting that the first and third elements were clearly met, the Court elaborated in the second:

In order to determine whether the two suits involve the same cause of action, Illinois applies a transactional test. This test views a claim “in ‘factual terms’ and considered ‘coterminous with the transaction, regardless of the number of substantive theories, or variant forms of relief flowing from those theories, that maybe available to the plaintiff;…and regardless of the variations in the evidence needed to support the theories or rights.’” Id. at 892 (quoting REST. 2D JUDG. § 24, cmt. a (1982)) (alteration in original). “[S]eparate claims will be 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 893 (citing Rodgers v. St. Mary's Hosp. of Decatur, 597 N.E.2d 616, 621 (Ill. 1992)). The res judicata “bar extends to what was actually decided in the first action, as well as those matters that could have been decided in that suit.”

* * *

Res judicata binds both parties to the earlier suit. Fuller Family Holdings v. Northern Trust Co., 863 N.E.2d 743, 755-56 (Ill. App. 2007); Corcoran Hakala, 840 N.E. at 520. Even the party who was the defendant in the prior suit is barred from later bringing a claim against the former plaintiff if the later suit is “based on facts that would have constituted a counterclaim or defense in the earlier proceeding where successful prosecution of the later action would either nullify the earlier judgment or impair the rights established in the earlier action.”

Order, pp. 8-9.  

Addressing first Cummins' contract claims, the Court found that the operative facts alleged by Cummins to void the contract existed at the time of TAS I and could have been brought at that time.  Further, the Court found challenging the validity of the License and alleging a breach thereof "arose from a single group of operative facts," and therefore res judicata applied.   Id. at 9-15.

Turning to the patent claims, the Court found that the invalidity/misuse claims also arose out of the same group of facts needed for the TAS I contract claims:

If Cummins had argued in TAS I that the Agreements were void because they are based on invalid patents, or that the Agreements were fraudulently induced, it would have had to prove that these patents were indeed invalid or unenforceable, either because of the three allegedly patent-defeating facts or because of inequitable conduct before the U.S. Patent Office, in order to make that case. Under its own theory, all of Cummins’ contract claims are based on the patent allegations; there are no contract claims without the patent claims. Therefore, in order to make any of its contract claims as a defense or counterclaim in TAS I, Cummins would have had to show that the patents were invalid or unenforceable; the showing that the patents were invalid would be a necessary part of a finding that the Agreements were unenforceable. Thus, Cummins’ patent-based claims are also barred by res judicata.

Order, p. 15-16.

The Court then reviewed–and rejected–a number of exceptions to res judicata.  First is a so-called "declaratory judgment exception" where preclusion does not apply to a later case in which "the only relief sought in the first suit is a declaratory judgment.”  Id. at 18.  The court found no such exception under Illinois law, but further noted that TAS I involved a claim for contract damages and was thus not a only a DJ action.

The Court also rejected a fraud/misrepresentation exception where the claim was omitted from the first action as a result of the defendant's fraud or misrepresentation.  The fraud or misrepresentation has to be the reason that the claim was omitted, and the Court found no such fraud or misrepresentation present.  Id. at 19-28.

Finally, the Court rejected a policy argument [the last refuge of the desperate] that Federal policy favored determining validity on the merits and therefore res judicata would not apply.  While acknowledging an interest in weeding out invalid patents, the Court found that the policy did not trump the policy of conserving judicial resources and avoiding piecemeal litigation.  Id at 28-31.

NOTE: The Court applied Illinois state law for issue preclusion, writing "a federal court sitting in diversity is governed by 'federal common law,' which provides for the application of the law of the state in which the federal court sits."  Opinion, p. 7.  However, with Cummins' patent claims the district court had federal subject matter jurisdiction, not just "diversity" jurisdiction.  The Federal Circuit says that the law to be applied to claim preclusion in patent cases is the regional law of the circuit, in this case the Seventh Circuit.  See, e.g., Pactiv Corp. v. Dow Chem. Co., 449 F.3d 1227, 1230 (Fed.Cir.2006) (applying regional circuit law to dismissal on the grounds of claim preclusion).  I am not sure an analysis under Seventh Circuit law would yield a different result though.

2010-1134 SJ Mem

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