Foster v. Hallco Mfg. Co., Inc.

• Citation: 20 USPQ2d 1241,947 F.2d 469
• Decision Date: 27 September 1991
• Docket Number: No. 90-1299,90-1299
• Parties: , 20 U.S.P.Q.2d 1241 Raymond Keith FOSTER, Keith Mfg. Co., and Keith Sales, Co., Plaintiffs-Appellees, v. HALLCO MANUFACTURING CO., INC., and Olof A. Hallstrom, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

Page 469

947 F.2d 469

60 USLW 2231, 20 U.S.P.Q.2d 1241

Raymond Keith FOSTER, Keith Mfg. Co., and Keith Sales, Co. Plaintiffs-Appellees, v. HALLCO MANUFACTURING CO., INC., and Olof A. Hallstrom Defendants-Appellants.

No. 90-1299.

United States Court of Appeals Federal Circuit.

Sept. 27, 1991.

Suggestion for Rehearing In Banc

Declined Nov. 12, 1991.

Delbart J. Barnard, Barnard, Pauly & Kaser, P.S., Seattle, Wash., argued, for plaintiffs-appellees.

Peter E. Heuser, Kolisch, Hartwell & Dickinson, Portland, Or., argued, for defendants-appellants. With him on the brief, was David A. Fanning.

Before NIES, Chief Judge, SKELTON, Senior Circuit Judge, and RADER, Circuit Judge.

NIES, Chief Judge.

The United States District Court for the District of Oregon certified for immediate appeal its denial of a motion for partial summary judgment. Foster v. Hallco Mfg. Co., 14 USPQ2d 1746, 1989 WL 138740 (1989) (Frye, J.). Foster filed a declaratory judgment action seeking, inter alia, a declaration of invalidity and unenforceability of Hallco's patents, U.S. Patent Nos. 4,143,760 ('760) and 4,184,587 ('587). Hallco moved for partial summary judgment on

                the ground that Foster was precluded from raising those issues by reason of res judicata arising from a consent decree entered in prior litigation between the parties which states the patents are valid and enforceable.   The district court held that the provision in the consent decree with respect to the validity and enforceability of the patents contravened the federal patent policies recognized by the Supreme Court in Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), and, thus, the consent decree did not preclude Foster from raising those issues.   We reverse the district court's ruling based on Lear and hold that a consent decree respecting validity may bar future litigation of that issue.   However, there are genuine issues of fact and law respecting the application of principles of res judicata in this case.   Accordingly, we remand to the district court for reconsideration of those issues
                

I BACKGROUND

Raymond Keith Foster, Keith Manufacturing Company, and Keith Sales Company (Collectively Foster) are competitors with Hallco Manufacturing Company, owned by Olof A. Hallstrom, in the manufacture and installation of reciprocating floor conveyor systems used primarily in truck beds. Hallco is now the owner of the two patents for floor conveyors involved in this appeal, namely, the '760 and '587 patents previously owned by Mr. Hallstrom. These patents came into dispute between the same parties in interest in an earlier infringement suit and declaratory judgment action before Judge Frye, Hallstrom v. Foster, No. CV-79-1230. [Foster I ] ¹ The parties entered a settlement agreement of that litigation in early 1982, under which Foster obtained a nonexclusive royalty bearing license under the '760 and '587 patents (and foreign counterparts) and a royalty free license under three other patents. The parties terminated the litigation by the entry of a consent judgment in which Foster acknowledged the validity and infringement of the '760 and '587 patents but which provided for no monetary or injunctive relief. Other claims and counterclaims were dismissed. More specifically, the consent judgment provided:

The parties hereto ... have resolved their differences in accordance with a license agreement executed by them and have consented to the entry of the following judgment:

IT IS HEREBY ORDERED:

1. This court has jurisdiction over the parties and the subject matter of this action.

2. United States Letters Patent Nos. 4,143,760 and 4,184,587 are owned by plaintiff and are valid and enforceable in all respects.

3. Defendant R. Keith Foster, dba Keith Mfg. Co. has infringed claims of United States Letters Patent Nos. 4,143,760 and 4,185,587.

4. Judgment on the basis of infringement of United States Letters Patent Nos. 4,143,760 and 4,185,587 is entered in favor of plaintiff.

5. The above-entitled civil action, including all claims of plaintiff against defendant and all counterclaims of defendant against plaintiff, is hereby dismissed.

6. There shall be no accounting or award of damages and each party is to bear his own costs and attorneys' fees.

7. This consent judgment is binding upon and constitutes res judicata between the parties.

8. The parties waive all right to appeal from this judgment.

About four years after the district court entered the consent judgment, Foster began producing and marketing new models of conveyor equipment, which Foster refers to in its complaint as the "New Conveyors". Foster informed Hallco (successor Foster then filed suit in the district court in Oregon under the Declaratory Judgment Act, seeking a declaration that Hallco's '760 and '587 patents are invalid and unenforceable; that the New Conveyors do not infringe the patents; and that Hallco is in violation of the antitrust laws. Hallco answered asserting, inter alia, an affirmative defense of "res judicata " arising from the Foster I consent judgment. ²

                to Hallstrom) that the New Conveyors did not infringe any of the patents in the license agreement, and therefore, pursuant to paragraph 9 of the license agreement, Foster had no obligation to pay royalties to Hallco on sales of them.   Hallco disagreed, taking the position that the New Conveyors were covered by the license agreement.   In reply, Hallco demanded royalty payments on the New Conveyors by late August 1988
                

The case was assigned to a magistrate, and Hallco filed a motion for partial summary judgment on the issues of the validity and enforceability of the two patents. Hallco contended that the consent judgment precluded Foster from litigating those issues. Foster responded that inasmuch as no issue had been litigated in Foster I, the consent judgment at most precluded litigation with respect to the product in issue in that suit. The magistrate disagreed, and held that a consent judgment was not necessarily limited only to the device in issue and could cover other devices unless evidence, not present here, showed that the "new" devices fell "outside the construction of the patents" as construed in the first suit. Foster v. Hallco Mfg. Co., Inc., 14 USPQ2d at 1749 (Magistrate's Finding) (D.Ore.1989). The magistrate, however, cited no authority for this proposition.

Foster also asserted that, in any event, the consent judgment declaring a patent valid is unenforceable because it is equivalent to an agreement not to challenge the validity of a patent. Foster based its position on the holding of the Supreme Court in Lear v. Adkins, supra, that patent licensees are not precluded from challenging the validity of licensed patents because of the federal policy favoring full and free use of ideas in the public domain. The magistrate upheld Foster's position, relying on the Ninth Circuit's application of Lear in Massillon-Cleveland-Akron Sign Co. v. Golden State Adv'g Co., 444 F.2d 425 (9th Cir.), cert. denied, 404 U.S. 873, 92 S.Ct. 100, 30 L.Ed.2d 117 (1971), that a settlement agreement of patent litigation was void on its face and unenforceable where a patent licensee promised not to challenge the validity of the patent. The magistrate saw no reason why a consent judgment which coincided with a license agreement should be distinguished from a settlement agreement, noting that a consent judgment usually involves minimal judicial scrutiny and usually is entered without the benefit of any evidence, which apparently was the situation in Foster I. Foster, 14 USPQ2d at 1750. Thus, the magistrate concluded that the consent judgment did not bar Foster's attack on the patents. The district court adopted the findings and recommendations of the magistrate in full and denied Hallco's motion for partial summary judgment, although it noted the closeness of the question and the contrary views of other circuits that consent judgments of validity were enforceable despite Lear. The court certified its ruling and appeal was then perfected to this court in accordance with 28 U.S.C. § 1292(c)(1) (1988). ³

II ISSUES

1. Does the patent policy expressed in Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), override the res judicata effect of a consent decree declaring a patent valid?

2. Do principles of res judicata applicable to a consent decree bar Foster's challenge to the validity of the '760 and '587 patents?

III

A. The Patent Policies Expressed in Lear

In Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), the Supreme Court had before it a suit filed in a California state court by Adkins for royalties under a license agreement entered with Lear, Inc. The license was entered prior to issuance of Adkins' patent on an improved method of making gyroscopes. Adkins alleged royalties were due because Lear was using the later patented invention which was covered by the license agreement. Lear asserted patent invalidity as a defense. In response, Adkins argued that Lear as licensee was estopped to challenge the validity of the patent under state law contract principles.

The California Supreme Court upheld Adkins' position, but the Supreme Court reversed. The Supreme Court referred to its recent decisions emphasizing the "strong federal policy favoring free competition in ideas which do not merit patent protection. Sears, Roebuck v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964); Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669 (1964)." Id. 395 U.S. at 657, 89 S.Ct. at 1904. In view of the conflict between this federal public policy and state law, the Court held that the rule of licensee estoppel was no longer sound law, stating:

"Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of...