USM Corp. v. SPS Technologies, Inc.

• Decision Date: 03 December 1982
• Docket Number: Nos. 78-2307,81-1878 and 81-1908,s. 78-2307
• Citation: 694 F.2d 505,216 USPQ 959
• Parties: , 1982-83 Trade Cases 65,077 USM CORPORATION, Plaintiff-Appellant, v. SPS TECHNOLOGIES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 505

694 F.2d 505

216 U.S.P.Q. 959, 1982-83 Trade Cases 65,077

USM CORPORATION, Plaintiff-Appellant, v. SPS TECHNOLOGIES, INC., Defendant-Appellee.

Nos. 78-2307, 81-1878 and 81-1908.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 26, 1982.

Decided Dec. 3, 1982.

Gerald L. Hosier, Hosier, Niro & Daleiden, Ltd., Chicago, Ill., for plaintiff-appellant.

Leonard J. Santisi, Curtis, Morris & Safford, New York City, for defendant-appellee.

Before PELL, Circuit Judge, STEWART, Associate Justice (Retired), and POSNER, Circuit Judge. ^*

POSNER, Circuit Judge.

These consolidated appeals bring up to us several rulings, made in 1978 and 1981, disposing of various aspects of a patent suit. See 453 F.Supp. 743 (N.D.Ill.1978); 514 F.Supp. 213 (N.D.Ill.1981). The district court has certified these rulings for immediate appeal under Fed.R.Civ.P. 54(b). The rulings involve the res judicata effect of patent consent decrees, fraud as a defense to res judicata, and the lawfulness of differential patent royalties under antitrust and patent-misuse principles.

SPS, a manufacturer of industrial fasteners, owned a patent, issued in 1963, on a patch-type self-locking industrial fastener. In 1969 it sued USM, a competing manufacturer of fasteners, for infringement. After a trial on the issue whether USM had a valid license under the patent by virtue of a grant-back clause in a licensing agreement between the parties, the district court held that USM did not have a valid license. Standard Pressed Steel Co. v. Coral Corp., 168 U.S.P.Q. 741 (N.D.Ill.1971). The parties then settled the case by entry of a consent judgment in which USM acknowledged that the patent was valid and had been infringed. As part of the settlement SPS granted USM a license which allowed USM to continue using the patent but required it to pay royalties to SPS.

In 1974, three years after SPS's suit had been settled, USM brought the present suit, seeking to invalidate SPS's patent and get back the royalties it had paid since the settlement. For the first time USM alleged that SPS had procured the patent by a fraud on the Patent Office, and alleged that SPS had concealed this fraud from the district court in the previous suit and by so doing had committed a fraud on the court as well. The district court held after a bench trial that SPS had committed a fraud on the Patent Office, but not on the court, and that USM was entitled to have the patent declared void as of the date the second suit had been filed and to get back the royalties it had paid since then, plus attorneys' fees. The court declined to reconsider a ruling in its 1978 opinion that res judicata prevented USM from getting back any of the royalties it had paid before the second suit was filed--that is, between 1971, the date of the license agreement, and 1974.

In these cross-appeals, USM challenges the district court's conclusion that there was no fraud on the court in the first suit and argues that in any event a consent judgment in a patent case should have no res judicata effect, while SPS challenges the district court's conclusion that it committed a fraud on the Patent Office and argues that in any event res judicata bars USM from any relief based on that fraud. If SPS's res judicata argument is correct, we need not consider whether the district court correctly found fraud on the Patent Office; so it is with the res judicata issue that we begin. We cannot end there, though. USM's suit not only challenges the validity of the patent but also alleges that certain terms that first appeared in the license agreement entered into at the termination of the first suit constitute patent misuse. As these terms could not have been challenged in the first suit, USM's challenge to them cannot be barred by res judicata. The district court granted summary judgment for SPS on this aspect of the case in 1978, and USM's appeal brings this ruling up to us along with the rulings on fraud and res judicata.

American Equipment Corp. v. Wikomi Mfg. Co., 630 F.2d 544 (7th Cir.1980), is the authoritative decision in this circuit on the issue of the res judicata effect of consent decrees in patent suits. American had sued Wikomi for patent infringement and the case had been settled--just as SPS's suit against USM was settled--by the entry of a consent decree that recited validity and infringement. Also as in this case, the infringer, Wikomi, had received a license to continue using the patent. Wikomi's successor corporation refused to pay the royalties due under the license, and American sued. We held that American was entitled to summary judgment because a patent consent decree which recites both validity and infringement is res judicata in any subsequent proceeding between the parties (or those in privity of contract with them) over the validity or infringement of the patent. This holding is supported by other recent decisions and by scholarly commentary. See, e.g., Interdynamics, Inc. v. Firma Wolf, 653 F.2d 93, 96-98 (3d Cir.1981); Vulcan, Inc. v. Fordees Corp., 658 F.2d 1106, 1111 (6th Cir.1981); Note, "To Bind or Not to Bind": Bar and Merger Treatment of Consent Decrees in Patent Infringement Litigation, 74 Colum.L.Rev. 1322 (1974). We decline USM's invitation to reexamine it.

Unless the district court's finding that SPS did not commit fraud on the court that approved the consent decree is overturned a matter to which we shall turn shortly, Wikomi requires us to reject the district court's Solomonic approach of giving the consent decree some but not complete res judicata effect--that is, up to the date on which the second suit was filed. Wikomi held that the second suit was barred in its entirety by the consent judgment in the first. True, the consent judgment in Wikomi included an injunction against infringement and the one here did not, but that makes no difference; it is the fact that a cause of action has been adjudicated rather than the specific relief granted the prevailing party that brings res judicata into play. Lambert v. Conrad, 536 F.2d 1183, 1185 (7th Cir.1976); 1 Restatement (Second) of Judgments Sec. 25(2) (1982).

We are asked to create an exception to Wikomi for cases where the patent is alleged not merely to be invalid but to have been procured by fraud on the Patent Office. (The Wikomi opinion does not indicate the basis on which Wikomi's successor attacked the validity of the patent in the second action.) But such an exception, rather than deterring patent fraud, would reduce the incentive of an infringer to prove fraud when first sued; he would have nothing to lose by biding his time until the terms of the settlement became onerous to him. True, res judicata, like any other threshold defense, may immunize some patent frauds--the one alleged in this case, for example--from challenge by some licensees. But the immunity will be incomplete, since res judicata can be invoked only against a party to a previous litigation and those in privity with that party--against USM and those in privity with it, but not against SPS's other licensees (there are some, as we shall see), or the Department of Justice, which can sue to cancel a patent procured by fraud. United States v. Saf-T-Boom Corp., 431 F.2d 737 (8th Cir.1970) (per curiam).

As we are not persuaded that patent fraud will on balance be less common if there is an exception to res judicata for cases in which such fraud is alleged, the general policy in favor of finality of litigation leads us to reject the exception. And since it is immaterial that in this case fraud was not alleged in the earlier suit--fraud is just another ground for contesting the validity of a patent, and res judicata prevents the litigation of any ground that could have been advanced in the earlier suit in support of the claim (patent invalidity) made there, e.g., Diaz v. Indian Head, Inc., 686 F.2d 558, 562 (7th Cir.1982); 1 Restatement, supra, Sec. 25(1)--all that remains to be considered on the issue of patent validity is whether the consent decree, as distinct from the patent, was procured fraudulently. SPS concedes that if it was, it has no res judicata effect.

Illustrative of SPS's allegedly fraudulent conduct is its counsel's refusal, in the course of pretrial discovery in the first suit, to turn over to USM a patent application that the inventor of the patented device in issue, Mr. Villo, had submitted to the Patent Office some years before that patent was applied for but that he had later withdrawn. SPS's failure to draw this application to the Patent Office's attention was one of the acts that the court below deemed a fraud on the Patent Office. If this was fraud, and if SPS fraudulently withheld the application from opposing counsel in the first lawsuit, a strong argument can be made that SPS obtained the consent decree confirming the validity of its patent by fraud also.

At his deposition, Villo mentioned having filed an earlier patent application. USM's counsel asked SPS's counsel "if we could see a copy of that application." SPS's counsel refused, saying that Villo had been describing "an earlier form of the invention .... It isn't the form of invention that is presently disclosed and claimed. I don't think that application is relevant, if there was one at that time." USM dropped the matter. The district court found that USM knew enough about the application from this and other stray bits of information that if it had "elected to make further discovery inquiries" it would have obtained the contents of the application itself and any other information it needed to prove a fraud on the Patent Office.

At first glance this finding may seem to import into a fraud inquiry, where it normally would not belong, a concept of contributory negligence: if USM had been more diligent, it would not have been fooled. Contributory negligence is a defense only to unintentional torts, and fraud is an intentional tort. See, e.g., Cenco Inc. v. Seidman & Seidman...