Klipsch, Inc. v. WWR Technology, Inc.

• Decision Date: 14 October 1997
• Docket Number: No. 97-1114,97-1114
• Citation: 127 F.3d 729
• Parties: KLIPSCH, INC., Appellant, v. WWR TECHNOLOGY, INC., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 729

127 F.3d 729

44 U.S.P.Q.2d 1588

KLIPSCH, INC., Appellant, v. WWR TECHNOLOGY, INC., Appellee.

No. 97-1114.

United States Court of Appeals,

Eighth Circuit.

Submitted June 11, 1997.

Decided Oct. 14, 1997.

William A. Waddell, Little Rock, AR, argued (Duane R. Denton, on the brief), for appellant.

Marsha Talley Ballard, Little Rock, AR, argued (Marshall S. Ney, on the brief), for appellee.

Before BOWMAN, FLOYD R. GIBSON, and MORRIS SHEPPARD ARNOLD, Circuit Judges.

BOWMAN, Circuit Judge.

In exchange for various debt instruments, Klipsch, Inc. sold nearly all of the assets from its professional loudspeaker business to WWR Technology, Inc. (WWR) and licensed WWR to use Klipsch's patents and trademarks. As part of the purchase price, WWR issued a debenture to Klipsch. When Klipsch's attempt to redeem the debenture from either WWR or WWR's parent company failed, Klipsch brought an action in district court to collect on the debenture and to replevin collateral under a Security Agreement covering the assets sold to WWR. After WWR paid Klipsch the remaining balance on the debenture, the case ultimately was dismissed. On the same day that Klipsch received payment for the debenture, however, Klipsch filed its complaint in the present action alleging, among other things, trademark and patent infringement by WWR. After allowing WWR to amend its answer to assert an affirmative defense of res judicata, the District Court granted WWR's motion for summary judgment, based on the affirmative defenses of res judicata, waiver, and equitable forfeiture. We reverse.

I.

In 1992, Klipsch, WWR, and WWR's then-parent company entered into a series of agreements involving Klipsch's professional loudspeaker business. Besides an Asset Purchase Agreement, a Security Agreement, and a Manufacturing Agreement, the parties entered into a Non-Exclusive Patent and Trademark License, Non-Competition and Right of First Refusal Agreement [hereinafter License Agreement], which granted various Klipsch licenses to WWR. The License Agreement was revised by an August 5, 1994, Extension and Modification Agreement [hereinafter Extension Agreement] entered into by Klipsch, WWR, and WWR's current parent company, Concept Technologies Group, Inc. (Concept). The agreement effectively extended the maturity date of the original debenture and substituted Concept in the place of WWR's previous parent company in the original agreements. The agreement also provided, inter alia, that upon default or breach of the substitute debenture, "[t]he licenses shall automatically terminate, and all rights thereunder shall revert to Klipsch." The substitute debenture allowed Klipsch the option to require redemption at any time on or after June 30, 1995, provided prior written notice to Concept was given, and it stated that Klipsch shall receive periodic payments of interest from Concept. After Klipsch gave sufficient prior notice of redemption, Concept was unable to redeem the substitute debenture. Additionally, Concept failed to pay timely the July 1, 1995, interest payment.

In a July 5, 1995, correspondence, Klipsch informed Concept of two consequences of its failed redemption and late interest payment--Klipsch had a right to pursue its security interest in the collateral held by WWR, and the licenses granted to WWR had terminated and reverted to Klipsch. On July 24, 1995, Klipsch filed a complaint against WWR and Concept, in which Klipsch sought from WWR the assets that served as collateral pursuant to the Security Agreement and from Concept the remaining balance of principal and interest on the substitute debenture less any proceeds realized from disposition of the collateral. WWR paid the remaining balance on the substitute debenture on August 15, 1995, and after resolving issues of attorney fees and expenses, the District Court dismissed the case on November 6, 1995.

August 15, 1995, also marked the date that Klipsch filed its complaint in the present action, naming only WWR as a defendant and alleging trademark infringement pursuant to 15 U.S.C. § 1114 (1994), patent infringement pursuant to 15 U.S.C. § 1125(a) (1994), and unfair competition pursuant to both 15 U.S.C. § 1125(a) (1994) and Indiana state law, in addition to seeking a declaratory judgment that its covenant not to compete with WWR had expired. Klipsch's right to recover under these various theories grows from the failure of WWR or Concept to redeem the substitute debenture and their failure to make a timely interest payment, just as the right to recover did in the first action. In this action, however, Klipsch focuses not on the failure to redeem itself or the failure to make a timely interest payment, but on the effect of these failures--triggering of the License Agreement's automatic termination provision. Klipsch filed a motion for partial summary judgment on September 17, 1996, and in response WWR filed a cross-motion for summary judgment on the grounds of res judicata, waiver, and equitable forfeiture. Not until October 23, 1996, however, six days after the District Court conducted a hearing on the parties' summary judgment motions, did WWR file a motion to amend its answer to assert the affirmative defense of res judicata. The District Court granted the motion to amend WWR's answer on November 7, 1996. Summary judgment in favor of WWR on the grounds of res judicata, waiver, and equitable forfeiture was granted on December 19, 1996.

II.

Klipsch claims that the District Court erred in: (1) permitting WWR to amend its answer to assert res judicata, (2) granting summary judgment for WWR, and (3) denying Klipsch's motion for summary judgment.

III.

Klipsch argues that the District Court erred in granting WWR's motion to amend its answer to assert the affirmative defense of res judicata. We review for abuse of discretion a district court's decision to allow a party to amend an answer. See Corsica Livestock Sales, Inc. v. Sumitomo Bank, 726 F.2d 374, 377 (8th Cir.1983). Federal Rule of Civil Procedure 15(a) provides that leave to amend pleadings "shall be freely given when justice so requires." Amendments to pleadings should be allowed with liberality in the absence of circumstances such as "undue delay, bad faith or dilatory motive on the part of the movant, ... undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment." Foman v. Davis, 371 U.S. 178 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); see Sanders v. Clemco Indus., 823 F.2d 214, 216 (8th Cir.1987) (noting that "only limited circumstances justify a court's refusal to grant leave to amend pleadings"). Having carefully considered all of Klipsch's arguments on this point, we cannot say that the District Court abused its discretion by granting WWR leave to amend.

IV.

The District Court granted summary judgment in favor of WWR on three alternative grounds, each of which is challenged by Klipsch on appeal. We review de novo the decision to grant summary judgment. See Temporomandibular Joint (TMJ) Implant Recipients v. Dow Chemical Co. (In re Temporomandibular Joint (TMJ) Implants Prods. Liab. Litig.), 113 F.3d 1484, 1492 (8th Cir.1997). "Summary judgment is proper only when, viewing the evidence in the light most favorable to the nonmoving party, the record presents 'no genuine issue of material fact ... and the moving party is entitled to a judgment as a matter of law.' " Id. (quoting Federal Rule of Civil Procedure 56(c)). Likewise, we review de novo a district court's determination of state law. See Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220-21, 113 L.Ed.2d 190 (1991).

A.

The District Court, in granting summary judgment in favor of WWR, held that the affirmative defense of res judicata barred Klipsch from seeking the relief sought in this second action. Before addressing the District Court's res judicata analysis, however, we first must settle the choice-of-law question the case presents. In the first action, the District Court exercised its diversity jurisdiction under 28 U.S.C. § 1332 (1994). The District Court sat in Arkansas, but pursuant to the parties' Security Agreement and Extension Agreement the court applied Indiana substantive law. ¹ In the second action, confronted with the res judicata issue, the District Court determined that federal rules of res judicata were applicable because the prior litigation was brought in federal court. This is not the rule when the prior litigation was brought in federal court under diversity jurisdiction. When the prior judgment is one entered in a diversity case, the preclusive effect of the prior judgment is determined by the preclusion rules of the forum that provided the substantive law underlying that judgment. See Hicks v. O'Meara, 31 F.3d 744, 746 (8th Cir.1994). Because Indiana substantive law governed the first action, the District Court should have looked toward the res judicata rules of Indiana in assessing the preclusive effect of its judgment in that action.

Res judicata precludes the relitigation of a claim on grounds that were raised or might have been raised in a prior action. See Town of Flora v. Indiana Serv. Corp., 222 Ind. 253, 53 N.E.2d 161, 163 (1944); Wedel v. American Elec. Power Serv. Corp., 681 N.E.2d 1122, 1131 (Ind.Ct.App.1997). Res judicata consists of two preclusion concepts--issue preclusion and claim preclusion. See, e.g., Wedel, 681 N.E.2d at 1131. The claim preclusion aspect of res judicata, which is at issue here, provides that "a final judgment on the merits bars further claims by parties or their privies based on the same cause of action." Montana v. United States, 440 U.S. 147, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979); see Wedel, 681 N.E.2d at 1131. Klipsch argues that the doctrine of res judicata should not bar its second action because the two suits do not involve the same cause of action. ² Moreover, Klipsch continues even if the doctrine of res judicata would otherwise be...