Patent Watch: Cummins, Inc. v. TAS Distrib. Co.

by BakerHostetler
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[R]es judicata [may attach where] the present matter relates to patent invalidity, misuse, and unenforceability [and] the prior case dealt only with enforcing the "all reasonable efforts to market and sell" under [a license agreement].

On December 5, 2012, in Cummins, Inc. v. TAS Distrib. Co., the U.S. Court of Appeals for the Federal Circuit (Newman, Bryson, Reyna*) affirmed the district court's summary judgment that claim preclusion barred Cummins' action seeking a declaration that U.S. Patents No. 5,072,703 and No. 5,222,469, which related to devices that automatically turned a diesel engine on or off under certain circumstances, were invalid. With reference to the instant case as TAS III and a prior litigation as TAS I, the Federal Circuit stated:

Res judicata, also known as "claim preclusion," operates in Illinois to prevent a party from bringing suit to resolve claims that were or could have been decided in a prior action. Three conditions must pertain before Illinois state courts will bar a later suit based on res judicata: a court of competent jurisdiction must have rendered a final judgment on the merits in an earlier suit; the earlier and later suits must involve the same causes of action; and the two suits must involve the same parties or their privies. The doctrine of res judicata "extends to what was actually decided in the first action, as well as those matters that could have been decided in that suit." Illinois courts have consistently held that the bar of res judicata extends not only to questions actually decided, but also to all defenses and counterclaims, which might have been presented in the prior litigation. . . .

Illinois has adopted a three-prong test to determine the applicability of res judicata. Cummins concedes that "[t]here is no dispute as to identity of parties, nor that TAS I represents a final judgment on the merits." Thus, the first and third prong of the Illinois res judicata test -- requiring a final judgment on the merits and two suits involving the same parties or their privies -- are satisfied. The gravamen of Cummins' appeal centers on the second prong of the res judicata test -- whether the causes of action in TAS I and TAS III are the same. Cummins asserts that they are not thereby precluding any res judicata effect.

To determine whether causes of action are the same for preclusion purposes, the Illinois Supreme Court adopted the "transactional test" articulated in the Restatement (Second) of Judgments. Under the transactional test, "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." [A] claim is extinguished under these principles, "even though the plaintiff is prepared in the second action (1) [t]o present evidence or grounds or theories of the case not presented in the first action, or (2) [t]o seek remedies or forms of relief not demanded in the first action."

Cummins asserts that the operative facts in TAS III are too dissimilar to those at issue in TAS I to have preclusive effect. Cummins argues that res judicata cannot apply because the present matter relates to patent invalidity, misuse, and unenforceability, whereas the prior case dealt only with enforcing the "all reasonable efforts to market and sell" under the Master License Agreement. [But] "different kinds or theories of relief still constitute[] a single cause of action if a single group of operative facts give rise to the assertion of relief." Hence, "operative facts" are not just those supporting the first judgment, but all "facts that give rise to plaintiffs' right to relief."

The district court in TAS III found that the validity of the Master Agreement was, though implicitly, an operative fact in TAS I and that Cummins could have contested, either as a defense or counterclaim, the validity of the Master Agreement and the patents that it asserts underlie the agreement in TAS I. If successful, Cummins' claims would have defeated TAS's suit in TAS I.

Further, Cummins' claims of invalidity and unenforceability of the TAS patents, if proven, would impair the judgment in TAS I that Cummins has a continuing obligation to pay ongoing royalties under the License Agreement after March 2003. . . .

The risk of inconsistent decisions is a longstanding concern of the judiciary. Courts routinely refuse under Illinois law to "either nullify the earlier judgment or impair the rights established in the earlier action." . . . Here, the district court found the potential nullification of the TAS I judgment a sufficient basis for applying res judicata, noting that it had found the contract valid. We need not decide whether Cummins' allegations would nullify the district court's judgment because those claims rely on the predicate determination that the patents are invalid or unenforceable, a holding which would impair the judgment from TAS I that established TAS's continuing right to receive royalties. The district court explained that a defendant who may assert a counterclaim, but fails to do so, is precluded from bringing a subsequent action based on that counterclaim if nullification were to result. Here it is clear that the claims asserted by Cummins were proper defenses to the claims litigated in TAS I. Additionally, Cummins' invalidity and unenforceability claims, if proven, would impair the rights TAS received in TAS I, which obligated Cummins to make ongoing royalty payments under the License Agreement. As a result, such claims are barred under res judicata.

If you have questions about the material presented above, please contact Dr. Lawrence M. Sung ( lsung@bakerlaw.com or 202.861.1537) or any member of our Intellectual Property Team.

See information regarding BakerHostetler's Patent Litigation and IP Prosecution and Portfolio Management practices.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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