Allan Block Corp. v. County Materials Corp.

• Decision Date: 14 January 2008
• Docket Number: No. 07-2020.,No. 07-2210.,07-2020.,07-2210.
• Citation: 512 F.3d 912
• Parties: ALLAN BLOCK CORPORATION, Plaintiff-Appellee, Cross-Appellant, v. COUNTY MATERIALS CORPORATION, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

512 F.3d 912

ALLAN BLOCK CORPORATION, Plaintiff-Appellee, Cross-Appellant, v. COUNTY MATERIALS CORPORATION, Defendant-Appellant, Cross-Appellee.

No. 07-2020.

No. 07-2210.

United States Court of Appeals, Seventh Circuit.

Argued November 5, 2007.

Decided January 14, 2008.

Emily M. Feinstein, Quarles & Brady, Madison, WI, Kurt J. Niederluecke (argued), Fredrikson & Byron, Minneapolis, MN, for Plaintiff-Appellee, Cross-Appellant.

John C. Scheller, Michael Best & Friedrich, Madison; WI, Gary A. Ahrens (argued), Michael Best & Friedrich, Milwaukee, WI, for Defendant-Appellant, Cross-Appellee.

Before POSNER, EVANS, and SYKES, Circuit Judges.

POSNER, Circuit Judge.

In two contracts, one in 1993 and the other in 1997, Allan Block licensed County Materials to manufacture Allan Block's patented concrete blocks. The contracts forbade County. Materials to manufacture competing concrete blocks (with certain exceptions) for as long as the contract was in effect and for 18 months after it was terminated. But when the licenses were terminated (both at the same time), County Materials decided not to honor the 18-month post-termination covenants not to compete. Its excuse was that enforcement would be patent misuse, and it filed a suit in a federal district court in Wisconsin, basing federal jurisdiction on diversity of citizenship, for a declaration to that effect. Recently another panel of this court held that there was no patent misuse, and so affirmed judgment for Allan Block. County Materials Corp. v. Allan Mock Corp., 502 F.3d 730 (7th Cir.2007). Meanwhile, however, Allan Block had filed a mirror-image suit, also basing jurisdiction on diversity, against County Materials, charging breach of both the 1993 and 1997 licensing contracts. That case—the one giving rise to the present appeal—went to trial, and a jury awarded Allan Block $290,000 in damages, and other relief. County Materials appeals. Allan Block cross-appeals, seeking additional relief.

Federal law is agreed to cover the issue of res judicata, Minnesota law the contract issues. As an original matter, Wisconsin law rather than federal law should govern the issue of res judicata because the judgment that is claimed to operate as res judicata in this suit was rendered in a diversity suit. The Supreme Court held in Semtek International Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001), that while federal common law determines the preclusive effect of a judgment in a federal suit, even if it is a diversity suit and thus based on a claim under state law, the federal court should in a diversity case adopt as the federal common law rule of res judicata the rule of the state in which the court is located, which in this case is Wisconsin. It is true that the dispositive issue in the previous diversity suit was federal (patent misuse), but it was a defense to a claim of breach of a patent licensing agreement (County Materials' license to manufacture Allan Block's patented blocks), a claim that arose under state law. It would complicate matters unduly to base the rule of preclusion on the existence of a federal defense (the defense of patent misuse that County Materials was trying to establish by seeking declaratory relief, in order to prevent Allan Block from enforcing the post-termination covenants). In any event, parties are free to choose (within reason) whatever body of law they want to govern a litigation.

County Materials' main argument is that Allan Block's claim of breach of contract is a compulsory counterclaim to the claim of patent misuse and therefore had to be filed as a counterclaim in the declaratory judgment suit or be forever forfeited. It is indeed (for the most part— a qualification explained later) a compulsory counterclaim, defined in Fed.R.Civ.P. 13(a) as "any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim." Both County Materials' claim of patent misuse and Allan Block's claim of breach of contract arose out of the same transaction, namely County Materials' refusal to honor the post-termination covenants not to compete.

Failing to file a compulsory counterclaim does normally preclude its being made the subject of another lawsuit. The doctrine of res judicata bars a person from splitting his claim between two suits, Restatement (Second) of Judgments §§ 24, 25 and comment b (1982), and Allan Block's claim that the covenants not to compete are enforceable and that County Materials has therefore broken them is the same claim whether it is interposed as a defense in a suit by the covenanter or made the basis of a separate suit for breach of the covenants. Charles Alan Wright, "Estoppel by Rule: The Compulsory Counterclaim Under Modern Pleading," 39 Iowa L.Rev. 255, 281-83 (1953). And the fact that the earlier suit (County Materials') involved only one of the two contracts and the later suit both would not allow Allan Block to sue even on the 1997 contract (assuming the judgment in the first suit had res judicata effect), given its intimate connection to the first contract and the identity of the covenants not to compete in both contracts. The two contracts were parts of the same commercial relation, properly classified as a single "transaction" for purposes of res judicata in order to prevent piecemeal litigation. Petromanagement Corp. v. Acme-Thomas Joint Venture, 835 F.2d 1329, 1336 (10th Cir.1988); Weston Funding Corp. v. Lafayette Towers, Inc., 550 F.2d 710, 712 (2d Cir.1977). Even more clearly, the post-termination covenants, though separable from the license contracts because effective only upon termination of the latter, are parts of the commercial relation established by them.

But there is an exception to res judicata for cases in which the only relief sought in the first suit is a declaratory judgment. E.g., Stericycle, Inc. v. City of Delavan, 120 F.3d 657, 658-60 (7th Cir. 1997) (Wisconsin law); Smith v. City of Chicago, 820 F.2d 916, 919 (7th Cir.1987); Harborside Refrigerated Services, Inc. v. Vogel, 959 F.2d 368, 372-73 (2d Cir.1992); Horn & Hardart Co. v. National Rail Passenger Corp., 843 F.2d 546, 549 (D.C.Cir.1988); Restatement, supra, § 33 and comment c. Giving such a judgment preclusive effect would stymie a plaintiff who, having obtained a declaratory judgment, later sought—because the defendant thumbed his nose at the declaration—injunctive relief, an authorized and common sequel to a declaratory judgment. See Declaratory Judgment Act, 28 U.S.C. § 2202; Stericycle, Inc. v. City of Delavan, supra, 120 F.3d at 658-659. Prudence would therefore require him (if a declaratory judgment had preclusive effect) to ask for injunctive relief in his first suit, rather than just for declaratory relief—which would usually make obtaining declaratory relief pointless. Of course if specific issues are resolved in the declaratory judgment action, their resolution will bind the plaintiff by virtue of the doctrine of collateral estoppel should he later seek an injunction or damages. 18A Charles A. Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure § 4446, pp. 318-20 (2d ed.1990). But that is not a factor in this litigation.

This concern that we have just articulated with giving res judicata effect to a declaratory judgment is absent when the question is whether the defendant in the declaratory judgment action who fails to file a counterclaim that arises from the same transaction is barred by res judicata from filing a separate suit, because a defendant would not be wanting to reserve the right to seek further relief. Nevertheless, he is not barred. Harborside Refrigerated Services, Inc. v. Vogel, supra, 959 F.2d at 373; Restatement, supra, § 33, comment c. The reason is practical: if the defendant had to bring his claims against the plaintiff as counterclaims in the declaratory judgment action, declaratory judgments would become devices for thwarting the choice of forum by the defendant, even though, in many declaratory judgment suits, including the one brought by County Materials, the plaintiff is seeking declaratory relief in order to defeat preemptively a claim by the defendant.

County Materials acknowledges the declaratory judgment exception to res judicata, but considers it a "judge-made" rule that must yield to Rule 13(a), the compulsory-counterclaim rule. But Rule 13(a) is not independent of the "judge-made" doctrine of res judicata. It is in effect a procedural implementation of that doctrine. Wright, supra; Kevin M. Clermont, "Common-Law Compulsory Counterclaim Rule: Creating Effective and Elegant Res Judicata Doctrine," 79 Notre Dame L.Rev. 1745 (2004); see Hartford Accident & Indemnity Co. v. Sullivan, 846 F.2d 377, 382 (7th Cir.1988); Libbey-Owens-Ford Glass Co. v. Sylvania Industrial Corp., 154 F.2d 814, 818 (2d Cir.1946) (Frank, J., dissenting). All Rule 13(a) does is command that certain claims be pleaded as counterclaims. It does not specify the consequences of failing to do so. Those consequences are given by the doctrine of res judicata, including its exceptions. To invoke Rule 13(a) as a bar to basing a suit on a claim that might be thought a compulsory counterclaim in a declaratory judgment action would bring about what refusing to apply res judicata to defendants in such actions is designed to prevent: forcing the defendant's claims to be litigated as counterclaims in such an action.

Against this conclusion, however, can be cited Polymer Industrial Products Co. v. Bridgestone/Firestone, Inc., 347 F.3d 935 (Fed.Cir.2003), which holds that the defendant in a suit to declare his patent invalid must counterclaim for damages for infringement of the patent or lose his claim for such damages. The opinion relies on a literal interpretation of Rule 13(a): the claim for infringement arises out of the same...