Cummins, Inc. v. Tas Distrib. Co.

Decision Date05 December 2012
Docket NumberNo. 2010–1134.,2010–1134.
PartiesCUMMINS, INC., Plaintiff–Appellant, v. TAS DISTRIBUTING COMPANY, INC., Defendant–Appellee.
CourtU.S. Court of Appeals — Federal Circuit

OPINION TEXT STARTS HERE

Jeanne M. Gills, Foley & Lardner, LLP, of Chicago, IL, argued for the plaintiff-appellant. With her on the brief were Jonathan R. Spivey and Aaron J. Weinzierl.

Craig L. Unrath, Heyl, Royster, Voelker & Allen, of Peoria, IL, argued for the defendant-appellee. With him on the brief were Karen L. Kendall and Timothy L. Bertschy. Of counsel was Jacob D. Koering, Freeborn & Peters, LLP, of Chicago, IL.

Before NEWMAN, BRYSON, and REYNA, Circuit Judges.

REYNA, Circuit Judge.

Since 2003, Cummins, Inc. (Cummins) and TAS Distributing Company, Inc. (TAS) have been engaged in three separate actions regarding idle-control technologies for heavy-duty truck engines. In the latest, filed in 2009, Cummins sought a declaratory judgment that claims of TAS's U.S. Patent Nos. 5,072,703 (“the '703 patent”) and 5,222,469 (“the '469 patent”) (collectively “the TAS patents”) are invalid and unenforceable. The present appeal challenges the summary judgment determination of the district court, which found that Cummins' declaratory judgment suit against TAS is barred by the doctrine of res judicata in light of an earlier litigation. Cummins, Inc. v. TAS Distributing Co. (TAS III), 676 F.Supp.2d 701 (C.D.Ill.2009). We agree that Cummins could have pursued claims regarding invalidity and unenforceability of the TAS patents in prior litigation, which featured the same parties, arose from the same group of operative facts, and resulted in a final resolution on the merits. Because res judicata bars Cummins' defenses under 35 U.S.C. §§ 102 and 103 in the present case, we affirm.

I. Background
A. Parties and Technology

TAS, an Illinois corporation headquartered in Peoria, invented, developed, and marketed its patented technology that automatically turns a diesel engine on or off under certain circumstances. The technologies claimed in the '703 patent, entitled “Apparatus for the Automatic Starting, Running, and Stopping of an Internal Combustion Engine,” and the '469 patent, entitled “Apparatus for Monitoring an Internal Combustion Engine of a Vehicle,” were incorporated by TAS into systems called “Temp–A–Start” and “Temp–A–Stop.” Each system came in two varieties: an “ECM” or “One–Box” version incorporated in new engines and a “Retrofit” or “Two–Box” version installed in existing engines.

Cummins, a large Indiana corporation that manufactures truck engines, approached TAS about licensing its TAS system technologies. In 1996, Cummins wrote to TAS forecasting sales of 4,000 TAS systems in the first year, 10,000 systems in the second year, “and beyond.” Joint App'x at 343. Cummins was especially interested in the “Temp–A–Start” system because of its purported ability to automatically start and stop the engine in response to different inputs, for example: oil temperature; engine block temperature; battery condition; electrical signals, such as cabin thermostat; and alerts from accessories, such as electric blankets, battery warmers, and fuel tank heaters. Subsequently, the parties entered into licensing agreements, including the February 1997 Master License Agreement which is the focus of this appeal.

B. Master License Agreement

The dispute in this case has its basis in the February 1997 agreement between the TAS and Cummins (hereinafter “the Master License Agreement”), which granted Cummins the co-exclusive right to use technology owned or licensed by TAS relating to the “Temp–A–Start” and “Temp–A–Stop” systems, including the TAS patents. Cummins agreed under the terms of the Master License Agreement to pay a minimum $1 million royalty over five years, as well as an ongoing royalty of $50 to $125 per unit sold of the licensed products. Cummins could elect to terminate its rights to utilize the TAS technology after the fifth year. In addition, Cummins was required to maximize royalties: “Licensee shall make all reasonable efforts to market and sell [the TAS products] so as to maximize the payment of royalties to Licensor under this License Agreement.” Joint App'x at 99.

With the Master License Agreement in force, Cummins integrated both the “Temp–A–Start” and the “Temp–A–Stop” technologies into its own “ICON” product line. Cummins printed advertising literature and displayed its ICON products at industry trade shows. The “Temp–A–Start” technology, however, purportedly proved unreliable, and sales were lackluster and substantially below the optimistic forecasts Cummins had reported to TAS. Although Cummins averaged annual sales of fewer than 200 ICON products, Cummins paid TAS the full $1,000,000 minimum royalty.

C. TAS I

In February 2003, TAS filed a declaratory judgment action in the United States District Court for the Central District of Illinois, alleging that Cummins had breached the Master License Agreement by failing to make “all reasonable efforts” to market and sell the TAS technology. TAS Distrib. Co. v. Cummins Engine Co. (TAS I), 491 F.3d 625, 630 (7th Cir.2007).1 In total, the complaint in TAS I set forth twelve counts, including claims for breach of contract and a demand for specific performance. Id. at 627. Cummins maintained that it made reasonable efforts. It also filed a counterclaim, alleging that its obligation to pay royalties under the Master License Agreement was set to expire on March 31, 2003. See TAS Distrib. Co. v. Cummins Engine Co., No. 03–1026, slip op. at 4 (C.D.Ill. Jan. 21, 2005), aff'd,491 F.3d 625 (7th Cir.2007).

At the close of discovery, Cummins moved for summary judgment and TAS cross-moved for partial summary judgment. TAS I, 491 F.3d at 627. On January 21, 2005, the trial court granted Cummins' motion for summary judgment. Id. at 629–30. The court found that genuine issues of triable fact existed as to whether Cummins had employed reasonable efforts in selling engines incorporating the TAS technology under the Master License Agreement, but that TAS had failed to present any proof of its damages. Id. at 630. The district court rejected as speculative the pre-contract sales forecasts in which Cummins estimated how many units it could sell on an annual basis and an unverified affidavit from TAS's CEO purporting to show how many units a previous licensee had sold. Id. at 636. The district court also declined to order specific performance of Cummins' obligations under the “all reasonable efforts” clause, finding that TAS would have an adequate remedy should Cummins violate future obligations under the Master License Agreement. Id. at 630. The district court granted TAS's cross-motion for partial summary judgment, ruling that Cummins had a continuing contractual obligation extending beyond March 31, 2003 to make the per-unit royalty payments for ongoing sales. On appeal, the Seventh Circuit affirmed the TAS I decision. See id. at 625, 638.

D. TAS II

On May 31, 2007, TAS filed a second suit in Illinois. See TAS Distrib. Co. v. Cummins Inc. (TAS II), No. 07–cv–1141, 2011 WL 5239193 (C.D.Ill.). In TAS II, TAS claimed that Cummins breached the Master License Agreement by failing to pay royalties on all of Cummins' products that incorporated TAS technology. See TAS III, 676 F.Supp.2d at 704. There was no dispute that Cummins made the minimum payment of $1 million, but TAS alleged that Cummins had not paid royalties on sales of 13,681 Retrofit units from April 1, 1998 to April 30, 2010, which amounted to approximately $1,400,000 in unpaid royalties. TAS claimed that Cummins failed to provide TAS with the monthly reports of sales of products as required under the Master License Agreement. TAS also asserted that Cummins had put its own “ISF Plus System” into its products, rather than TAS's licensed system, and owed royalties under the Master License Agreement for the TAS technology that was substituted.

Discovery in TAS II included issues on the scope of TAS's patented technology. In March 2009, Cummins deposed Mr. Loran Sutton, the sole named inventor of the TAS patents. During his deposition, the inventor admitted that a version of Temp–A–Start had been sold to another manufacturer, Bosch Trucking Company, in the mid–1980s, well before the critical dates of the '469 and ' 703 patents.2See Joint App'x at 133–135. This was consistent with Mr. Sutton's deposition testimony taken in TAS I on February 11, 2004. Joint App'x at 417–418. He also revealed that none of the prior sales or marketing efforts had been disclosed to the Patent and Trademark Office during prosecution of the TAS patents.

Based on the discovery of the prior sales, Cummins decided to challenge the validity and enforceability of the TAS patents licensed under the Master License Agreement. Cummins sought leave to amend its Answer to include patent-based affirmative defenses and counterclaims related to the prior sales of the TAS technology. In an April 9, 2010 order, the district court prevented Cummins from pursuing those claims on the grounds that [s]uch claims are clearly barred by res judicata: the claims should have and could have been brought in TAS I. See TAS II, 2011 WL 5239193, at *2, 2011 U.S. Dist. LEXIS 126349, at *5 (C.D.Ill. Nov. 1, 2011).

E. TAS III

On March 18, 2009, Cummins initiated TAS III. In TAS III, Cummins sought to have the trial court: (1) dismiss TAS's suit in TAS II; (2) declare the '703 and '469 patents invalid under 35 U.S.C. §§ 102 and 103; (3) declare the Master License Agreement void for patent misuse; (4) declare that TAS engaged in patent misuse for improperly enforcing the TAS patents; (5) declare the '703 and '469 patents unenforceable due to inequitable conduct; and (6) rescind the Master License Agreement in its entirety. TAS III, 676 F.Supp.2d at 704; Joint App'x 255–262.

Cummins relied on three main arguments. First, that products embodying Temp–A–Start or Temp–A–Stop technologies were sold as early as 1986, more than...

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