American Equipment Corp. v. Wikomi Mfg. Co.

• Decision Date: 22 September 1980
• Docket Number: No. 79-1960,79-1960
• Citation: 630 F.2d 544,208 USPQ 465
• Parties: AMERICAN EQUIPMENT CORPORATION, a corporation, Plaintiff-Appellant, v. WIKOMI MANUFACTURING COMPANY, a corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 544

630 F.2d 544

208 U.S.P.Q. 465

AMERICAN EQUIPMENT CORPORATION, a corporation, Plaintiff-Appellant, v. WIKOMI MANUFACTURING COMPANY, a corporation, Defendant-Appellee.

No. 79-1960.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 12, 1980.

Decided Sept. 22, 1980.

Carter H. Kokjer, Kansas City, Mo., for plaintiff-appellant.

Paul M. Denk, St. Louis, Mo., for defendant-appellee.

Before SPRECHER, BAUER and CUDAHY, Circuit Judges.

CUDAHY, Circuit Judge.

In this suit for patent infringement, plaintiff-appellant American Equipment Corporation ("American") moved for summary judgment against defendant-appellee Wikomi Manufacturing Company ("Wikomi II"), asserting that a prior consent decree between American and an alleged privy of Wikomi II, which adjudged the patent now in issue both valid and infringed, is res judicata on the instant claim. The district court denied American's motion but subsequently certified the issue to this court. We agree with American that the degree should be accorded res judicata effect, and accordingly, we reverse.

I.

American, in an action filed on March 8, 1971, in the United States District Court for the Southern District of Illinois, charged that Wikomi Manufacturing Company ("Wikomi I"), a Delaware corporation, infringed U.S. Patent No. 3,231,246, which granted American the exclusive right to manufacture a tractor-mounted concrete mixer. Wikomi I filed an answer, both sides conducted further discovery, and the court conducted a pre-trial conference and set a trial date; however, the suit was terminated through an order and judgment entered by consent on September 13, 1974. The consent judgment provided that the disputed patent was valid and that Wikomi I had infringed the patent by the manufacture and sale of mixers of the type protected. The judgment also included an injunction against future infringement. American contemporaneously concluded a license agreement with Wikomi I.

Three months after entry of the consent judgment, Wikomi I entered into an agreement with Philip Sams to dispose of its mixer business, including the tools, the designs and the technical information used in manufacturing the disputed mixer. One month later, Sams in turn assigned that agreement and related assets to Wikomi II, a Missouri corporation in which Sams owned all the stock. Under Sams' direction, Wikomi II continued the operation of the mixer business of Wikomi I. Wikomi II retained the general manager, the office manager, and the marketing director of the predecessor company as well as fifteen or twenty line employees. At the time he acquired Wikomi I, Sams was aware of the 1974 consent decree, and his counsel knew about the nature and termination of the prior litigation.

Since the acquisition, Wikomi II has manufactured without alteration the mixer which was the subject of the former suit. However, during this time Wikomi II has neither tendered royalty payments to American as required under the license agreement nor accepted the agreement. As a result, American brought the instant action in the United States District Court for the Central District of Illinois, alleging patent infringement by Wikomi II.

After answer, interrogatories and extensive depositions, American moved for summary judgment, arguing that Wikomi II is barred by the 1974 consent judgment from contesting either validity or infringement of the patent. The district court denied American's motion, finding in its order that the public interest in finality of judgments was outweighed in the circumstances of this case by the public interest, endorsed by the Supreme Court in Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), in preventing continued monopolization of invalid patents. Pursuant to 28 U.S.C. § 1292(b), the district court certified to this court the question whether a prior consent judgment adjudicating infringement as well as validity bars a party to the judgment or its privies ¹ from subsequently contesting the validity of the patent.

II.

In Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), the Supreme Court overruled the doctrine of licensee estoppel, which barred a patent licensee from contesting the validity of the patent which was the subject of the license. In Lear, there had been no prior suits between the parties concerning the disputed patent. The sole issue before the Court was the relative priority of the principles of contract law upon which licensee estoppel was premised and the public policy in favor of fostering the general competitive use of ideas no longer deserving of patent protection. The Court justified its abrogation of the licensee estoppel doctrine by relying on what it declared to be the need to prevent unwarranted insulation of patents from judicial scrutiny and on its belief that often only licensees have sufficient economic incentive to challenge patent validity.

The case before us is quite different from that presented in Lear. Here, the issues to which plaintiff wishes to grant res judicata effect are embodied in a formal consent judgment rather than in a private licensing agreement. Such an order entered upon a consent decree represents a judicial act and is generally held to bar a party or its privies from subsequently relitigating the issues settled by the decree. United States v. Southern Ute Indians, 402 U.S. 159, 174, 91 S.Ct. 1336, 1343, 28 L.Ed.2d 695 (1971); United States v. Swift & Co., 286 U.S. 106, 115, 52 S.Ct. 460, 462, 76 L.Ed. 999 (1932); Kiwi Coders Corp. v. Acro Tool & Die Works, 250 F.2d 562, 568 (7th Cir. 1957). See 1B Moore's Federal Practice P 0.409(5). Although a consent judgment may, in rare cases for overriding public policy reasons, be denied res judicata effect, 1B Moore's Federal Practice P 0.405(11), we are mindful that "judicial decrees disposing of issues in active litigation cannot be treated as idle ceremonies without denigrating the judicial process." Wallace Clark & Co. v. Acheson Industries, Inc., 532 F.2d 846, 849 (2d Cir.), cert. denied, 425 U.S. 976, 96 S.Ct. 2177, 48 L.Ed.2d 800 (1976) (footnote omitted).

To give adequate weight to considerations of public policy, courts, in considering its application to patent litigation, have recognized exceptions to an inflexible view of the res judicata doctrine. To protect the public interest in free circulation of ideas, the doctrine of res judicata has been limited to assure that invalid patents are not used or valid patents misused to acquire monopoly power. Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 669-70, 64 S.Ct. 268, 273, 88 L.Ed. 376 (1944). Res judicata effect will not be accorded to consent decrees containing only a concession of the validity of the patent without an express or inferable acknowledgment of its infringement. Kraly v. National Distillers & Chemical Corp., 502 F.2d 1366, 1368-69 (7th Cir. 1974); Business Forms Finishing Service, Inc. v. Carson, 452 F.2d 70, 75 (7th Cir. 1971); Addressograph-Multigraph Corp. v. Cooper, 156 F.2d 483, 485 (2d Cir. 1946). The distinction drawn between a decree containing merely an adjudication of validity and one establishing both validity and infringement reflects the strategic realities of patent litigation, which often dictate that a defendant readily concede validity in order to avoid a finding of infringement:

Courts have agreed that it is unlikely that a party who defends successfully on the issue of infringement will adequately press the issue of invalidity. If the defendant can easily prove that he is not infringing, the hypothetical validity of his opponent's patent does not concern him. Indeed, a concession of its validity would not prejudice him at all because the patent, even in the absence of such concession, is presumed to be valid. The alleged infringer, therefore, has little incentive to contest a recital of validity. . . .

In contrast, the litigation which results in a concession of validity in a decree which adjudicates both infringement and validity is more likely to be genuine because the defendant who is losing on the issue of infringement must contest validity in order to avoid either the issuance of an injunction which restrains future infringement or the inclusion of a provision for what could amount to substantial liability for past infringement. Thus, the recital of validity in a consent decree which includes a finding of past infringement is less likely to validate invalid patents than the same recital in a decree which does not address the issue of infringement. Comment, Res Judicata Effect of Consent Judgments in Patent Litigation, 18 B.C. Indus. & Com. L.Rev. 66, 95-96 (1976).

Accordingly, courts are reluctant to give res judicata effect to decrees which fail to contain an adjudication of both validity and infringement because the determination of validity may have depended upon a construction of the patent claim that was sufficiently narrow to avoid a determination of infringement and was at best a hypothetical pronouncement about the existence of infringement.

Prior to Lear, we had not hesitated to accord full res judicata effect to consent decrees which addressed both infringement and validity of the disputed patent. See, e. g., Brunswick Corp. v. Chrysler Corp., 408 F.2d 335, 338 (7th Cir. 1969); Kiwi Coders Corp. v. Acro Tool & Die Works, 250 F.2d at 562, 568. However, notwithstanding dictum in Kraly v. National Distillers & Chemical Corp., 502 F.2d 1366, 1368 (7th Cir. 1974), ² the impact of Lear on "the question . . . whether a consent judgment adjudicating infringement as well as validity of the patent has not yet been decided by this court." USM Corp. v. Standard Pressed Steel Co., 524 F.2d 1097, 1098-99 (7th Cir. 1975). ³ The question before us is whether the Brunswick and Kiwi Coders line of cases can withstand the policy imperatives of Lear. We hold that it can.

In so deciding, we join the interpretation of Lear adopted by three...