Gamewell Mfg., Inc. v. HVAC Supply, Inc.

• Decision Date: 14 September 1983
• Docket Number: No. 82-1533,82-1533
• Citation: 715 F.2d 112
• Parties: 1983-2 Trade Cases P 65,548 GAMEWELL MANUFACTURING, INC., a corporation, Appellant, v. HVAC SUPPLY, INC., and Aeronca, Inc., Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 112

715 F.2d 112

1983-2 Trade Cases P 65,548

GAMEWELL MANUFACTURING, INC., a corporation, Appellant, v. HVAC SUPPLY, INC., and Aeronca, Inc., Appellees.

No. 82-1533.

United States Court of Appeals, Fourth Circuit.

Argued Jan. 11, 1983.

Decided Aug. 9, 1983.

Rehearing Denied Sept. 14, 1983.

C. Robert Wartell, Southfield, Mich. (J. Laevin Weiner, Weiner, Hauser, Wartell & Roth, Southfield, Mich., on brief), for appellant.

James D. Myers, Charlotte, N.C. (Charles P. Elderkin, John J. Barnhardt, III, Bell, Seltzer, Park & Gibson, Charlotte, N.C., on brief), for appellees.

Before PHILLIPS and CHAPMAN, Circuit Judges, and FIELD, Senior Circuit Judge.

JAMES DICKSON PHILLIPS, Circuit Judge:

After filing suit against HVAC Supply, Inc., and Aeronca, Inc., for patent infringement, Gamewell Manufacturing, Inc. (Gamewell), entered into a settlement agreement with the defendants which it now seeks to avoid on the basis of unilateral mistake. The district court, applying state law, held that unilateral mistake was not a basis for rescission of the agreement and entered an order enforcing the settlement as stipulated by the parties. Because we find that the district court erred by not applying federal law, which recognizes unilateral mistake as a grounds for rescission in limited circumstances, we reverse and remand for further proceedings.

I

Gamewell holds a patent on an air-handling unit used in the filtration of foreign particles from the air in industrial facilities. It filed suit against HVAC Supply and Aeronca for infringement of that patent, seeking injunctive relief and money damages. During discovery, Gamewell apparently became concerned whether its patent would withstand challenge during the infringement suit, and had an independent-testing laboratory conduct tests in February 1982 comparing its patented product with the pre-patent technology. The test results, which showed little difference between the pre-patent and patented filter systems, evidently were sufficiently discouraging that Gamewell opted to pursue settlement of the lawsuit. ¹

The case was docketed for non-jury trial the week of February 15, 1982. On February 14, Gamewell's counsel indicated to counsel for defendants that Gamewell was willing to accept a settlement offer proposed by defendants on February 12. After preparing a written agreement for formal execution, the parties informed the district court, on the morning of February 16, that they had reached a settlement.

On that same day, however, Gamewell discovered errors in the testing that had precipitated the settlement agreement. In providing the testing laboratory with the samples upon which the comparative tests were to be run, Gamewell had mistakenly supplied two samples of its own patented technology--rather than one pre-patent system and one of its patented air-handling mechanisms. Thus, the test results that impelled Gamewell to seek settlement were essentially meaningless. Upon discovery of the error, Gamewell reran the tests with the proper samples; the new results indicated a substantial difference (and improvement) between the patented and pre-patent technology. Gamewell then informed defendants, on Thursday, February 18, that it would not proceed with settlement, and sought by telephone to have the case reinstated on the district court docket.

That same day, defendants filed with the district court a motion for judgment on the settlement agreement. Finding, after a hearing, that the settlement agreement was a binding contract, the court granted the motion and ordered the parties to perform their respective obligations. The court rejected Gamewell's attempt to rescind the settlement agreement due to the alleged mistake in testing, holding, under principles of North Carolina law which it found controlling, that unilateral mistake is not a basis for avoiding a contractual agreement. Gamewell appeals from the district court order entering judgment on the settlement agreement. ²

II

The preliminary question on this appeal--a vexed one upon which a welter of cases have reached divergent if not flatly inconsistent results ³--is whether state law should be adopted as the federal rule of decision to govern the enforceability of settlement agreements such as that here in issue. ⁴ The specific choice-of-law problem does not appear to have been directly addressed in this circuit--though implicit choices may be found--so that we address it here as essentially a question of first impression.

In deciding open questions incident to the adjudication of federal statutory claims federal courts are competent, absent an explicit congressional directive, to formulate a federal rule of decision that either incorporates "borrowed" state law or that represents an independently derived federal rule. ⁵ See United States v. Kimbell Foods, Inc., 440 U.S. 715, 726-27, 99 S.Ct. 1448, 1457-58, 59 L.Ed.2d 711 (1979); United States v. Little Lake Misere Land Co., 412 U.S. 580, 592-95, 93 S.Ct. 2389, 2396-98, 37 L.Ed.2d 187 (1973); Mishkin, The Variousness of "Federal Law": Competence and Discretion in the Choice of National and State Rules for Decision, 105 U.Pa.L.Rev. 797, 799-803 (1957). With competence to make such a choice accepted, inquiry turns to the principles properly governing choice in the instant case.

In a variety of situations federal courts have frequently declined to borrow state law to determine the enforceability of releases of federal causes of action, opting instead for application of a uniform federal rule. See, e.g., Parker v. DeKalb Chrysler Plymouth, 673 F.2d 1178, 1180 (11th Cir.1982); Fulgence v. J. Ray McDermott & Co., 662 F.2d 1207, 1208-09 (5th Cir.1981); Jones v. Taber, 648 F.2d 1201, 1203 (9th Cir.1981); Ott v. Midland-Ross Corp., 523 F.2d 1367, 1368-69 (6th Cir.1975). Drawing on the rationale of Dice v. Akron, Canton & Youngstown Railroad, 342 U.S. 359, 361, 72 S.Ct. 312, 314, 96 L.Ed. 398 (1952), and Garrett v. Moore-McCormack Co., 317 U.S. 239, 243-48, 63 S.Ct. 246, 249-52, 87 L.Ed. 239 (1942), these decisions have as their unifying thread a concern that federal remedial legislation, and individual rights thereunder, should not be subject to the vagaries of local law. But these cases also share a common feature that may not be shared as fully by the instant case. They involve federal statutory schemes--such as Title VII (Fulgence ), ⁶ 42 U.S.C. § 1983 (Jones ), ⁷ the Truth in Lending Act (Parker- ), the Age Discrimination in Employment Act (Ott ), the Federal Employers' Liability Act (Dice ), and the Jones Act (Garrett )--aimed at rectifying historical inequalities in bargaining power between parties. In these a uniform federal rule of decision to govern the release or settlement of the federal cause of action has been deemed essential. ⁸ See Dice, 342 U.S. at 361, 372 S.Ct. at 314.

This remedial-purpose rationale for applying a uniform federal common law standard, rather than borrowing state law as the rule of decision, might well be thought not applicable--at least with equal force--in federal patent infringement litigation. Though obviously imbued with a national interest, federal patent law simply does not reflect the special solicitude for unequally positioned claimants that is reflected in legislation such as the FELA and comparable "remedial" legislation. Cf. Three Rivers Motors Co. v. Ford Motor Co., 522 F.2d 885, 890-92 (3d Cir.1975) (no need for uniform rule to govern the release of federal antitrust claims); Virginia Impression Products Co. v. SCM Corp., 448 F.2d 262, 265-66 (4th Cir.1971) (applying state law of parties' choice to construe the release of a federal antitrust claim), cert. denied, 405 U.S. 936, 92 S.Ct. 945, 30 L.Ed.2d 811 (1972).

But we can reserve the question whether the patent law may nonetheless be sufficiently "remedial" to justify, for that reason alone, application of a uniform federal rule of decision respecting settlement and release of claims. There exists another compelling reason for applying an independently derived federal rule in cases such as the instant one where the settlement occurs in pending litigation.

Settlements and releases assertedly entered into in respect of federal litigation already in progress implicate federal procedural interests distinct from the underlying substantive interests of the parties. Once a claim--whatever its jurisdictional basis--is initiated in the federal courts, we believe that the standards by which that litigation may be settled, and hence resolved short of adjudication on the merits, are preeminently a matter for resolution by federal common law principles, independently derived. ⁹ Cf. Hester v. New Amsterdam Casualty Co., 268 F.Supp. 623, 627 (D.S.C.1967) (comparing the standards by which parties may be relieved from an executory agreement made in connection with an ongoing lawsuit to Fed.R.Civ.P. 60(b) standards for obtaining relief from a judgment based upon an executed settlement). In such situations it can fairly be said that "jurisdiction over the settlement agreement only exists as a derivative of the original federal action," United States v. Orr Construction Co., 560 F.2d 765, 769 (7th Cir.1977). See also Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002, 1007 (2d Cir.1966) (Friendly, J.) (recognizing "federal interest" in means by which patent infringement claims in litigation may be released). ¹⁰

We therefore believe it proper to apply an independently derived federal standard to govern resolution of the settlement issues raised in this case.

III

We seek the appropriate federal rule in the usual sources--the best-reasoned decisions in the general common law development of the subject. See D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 469, 62 S.Ct. 676, 685, 86 L.Ed. 956 (1942) (Jackson, J., concurring). From these sources we find and hold the federal rule of decision to be--at odds with the district court's holding based upon state law ¹¹--that in appropriate...