Kraly v. National Distillers & Chemical Corp., s. 73-1589

• Decision Date: 02 October 1974
• Docket Number: Nos. 73-1589,73-1590,s. 73-1589
• Citation: 502 F.2d 1366,183 USPQ 79
• Parties: Mary S. KRALY, Plaintiff-Appellant, and Cross-Appellee, v. NATIONAL DISTILLERS AND CHEMICAL CORPORATION, Defendant-Appellee and Cross-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1366

502 F.2d 1366

183 U.S.P.Q. 79

Mary S. KRALY, Plaintiff-Appellant, and Cross-Appellee, v. NATIONAL DISTILLERS AND CHEMICAL CORPORATION,

Defendant-Appellee and Cross-Appellant.

Nos. 73-1589, 73-1590.

United States Court of Appeals, Seventh Circuit.

Argued April 25, 1974.

Decided July 25, 1974, As Amended Sept. 4, 1974, Rehearing

Denied Oct. 2, 1974.

George W. Thompson, Chicago, Ill., Marvin C. Soffen, New York City, for National Distillers.

James M. Wetzel, Chicago, Ill., for Mary S. Kraly.

Before CASTLE, Senior Circuit Judge, SPRECHER, Circuit Judge, and SOLOMON, Senior District Judge. ^*

CASTLE, Senior Circuit Judge.

Plaintiff Mary S. Kraly appeals from an order of the district court holding claims 3-6 of patent No. 3,095,342, ¹ relating to a specific type of tubeless tire repair insert, invalid and a partial defense to an action for specific performance and damages for breach of an agreement granting defendant National Distillers and Chemical Corporation's predecessor-in-interest, H. B. Egan Manufacturing Co., a nonexclusive license under the above patent. National Distillers cross-appeals from that aspect of the order holding it liable to Kraly under the licensing agreement for royalties for the fourth quarter of 1969 and the first three quarters of 1970. On appeal, Kraly contends that principles of res judicata bar National Distillers from challenging the validity of the patent because an earlier litigation between Kraly and Egan was dismissed with prejudice when the parties accepted a licensing agreement which provided, inter alia, that Egan would not contest the validity of the patent. Kraly alternatively argues that the court erred in determining that the claims of the patent in question were invalid. In its cross-appeal, National Distillers asserts that it is not liable to Kraly for royalties under the licensing agreement, even though it continued to stamp Kraly's patent number on its tire inserts through September 1970, because Kraly obtained the patent through misrepresentation. National Distillers also argues that it is excused from its duty to pay royalties because Kraly breached its licensing agreement by failing to take measures to abate unlicensed sales after receiving adequate notice of such sales from National Distillers. We affirm the order of the district court.

On November 4, 1966, Mary Kraly instituted an action in federal district court against Sears, Roebuck & Co. and H. B. Egan Manufacturing Co., Inc. ² That suit alleged infringement of the same patent involved in this case, and Egan asserted defenses of invalidity and fraud in his answer. On February 27, 1967, Kraly and Egan entered into an agreement providing that Egan would receive a nonexclusive license from Kraly for production of the patented tire repair insert, that Egan would pay royalties to Kraly on each licensed insert sold, and that Egan would mark each insert with 'Licensed under U.S. Patent No. 3,095,342' or its equivalent. Moreover, the agreement provided that Egan's obligations would be conditioned on Kraly's bringing suit for infringement to prevent substantial quantities of unlicensed sales within six months after notice of such sales was given by Egan. Finally, Egan would pay Kraly $8,000 'in full satisfaction of any and all claims' that Kraly might have against Egan arising from the latter's 'past sales of tire repair inserts,' and would not 'contest the validity' of the patent. Thereafter, the court dismissed the action with prejudice (even though the parties had requested that the dismissal be entered without prejudice). The court stated that the parties, by agreement, had made full settlement of all claims for infringement, with Egan taking a license under the Kraly patent.

The parties or their successors complied with the terms of the licensing agreement through each quarter of 1967, 1968, and the first three quarters of 1969. Additionally, Mrs. Kraly received $8,000 from Egan. National Distillers sent Kraly a letter on May 5, 1969, allegedly giving notice of substantial unlicensed sales, and no royalty payments were made subsequent to the third quarter of 1969.

I.

Citing Phillips v. Shannon, 445 F.2d 460, 462 (7th Cir. 1971), Kraly first argues that a 'dismissal with prejudice is as conclusive of the rights of parties as an adverse judgment after trial, being res judicata of all questions which might have been litigated in the suit.' We do not quarrel with the general proposition that a judgment with prejudice entered upon a settlement or compromise is binding as to the parties and their privies. See generally, 1B J. Moore, Federal Practice, P0.409 (2d ed. 1948). Nonetheless, this proposition is subject to qualification where overriding principles are implicated, and it is well-established that one such principle is 'the public interest in obtaining a judicial determination of the invalidity of a worthless patent.' Id.; accord, Addressograph-Multigraph Corp. v. Cooper, 156 F.2d 483 (2d Cir. 1946). In the circumstances of this case, therefore, the doctrine of res judicata has no applicability.

Kraly next asserts that the court erred in extending the rationale of Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969) to a prior dismissal with prejudice and in concluding that the dismissal did not estop National Distillers from defending the suit on the ground of invalidity. In Lear, a contract action for unpaid royalties, the Court held that the licensee was not estopped from challenging the validity of the patent notwithstanding a prior licensing agreement. The Court reasoned that 'federal law requires, that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent,' id. at 668, 89 S.Ct. at 1910, and that this federal policy prevails over the 'technical requirements of contract doctrine.' Id. at 670, 89 S.Ct. 1902. In Business Forms Finishing Service, Inc. v. Carson, 452 F.2d 70 (7th Cir. 1971), this court held that even though Lear involved a purely private agreement entered into prior to any litigation, the rationale of Lear required that a party be permitted to challenge validity notwithstanding a prior consent decree which had held the patent not infringed. The Court, relying on Addressograph-Multigraph Corp. v. Cooper, supra, stated that unless there was an adjudication of infringement embodied in the consent decree, the decree would not estop the licensee from subsequently challenging the validity of the patent. Id. at 75; accord, Broadview Chemical Corp. v. Loctite Corp., 474 F.2d 1391, 1395 (2d Cir. 1973). In this case, as in Business Forms, there was no adjudication of infringement. ³ It is true that Egan agreed to pay Kraly $8,000 in settlement of 'any and all claims.' That, however, is not the equivalent of an adjudication of infringement. ⁴ Certainly the expeditious settlement of a potentially lengthy and costly lawsuit as well as the obtaining of a licensing agreement can be expected to have an independent value to the licensee. Moreover, in contrast with Addressograph-Multigraph v. Cooper, supra, the parties to this suit were ordered to bear their own costs and fees. Even if we assume, however, that the consent decree embodied and adjudication of infringement, we do not believe that the Lear rationale would necessarily be inapplicable. To allow the parties to consent to an adjudication of infringement would simply result in the erection of another obstacle to tests of patent validity. We conclude that National Distillers, the licensee, is not estopped from challenging the validity of the patent, even though a prior consent decree incorporated an understanding not to challenge the validity of the patent. As Judge Stevens points out in Business Forms, 'A contrary result could not be reconciled with 'the public interest in a judicial determination of the invalidity of a worthless patent." 452 F.2d at 75.

Kraly argues that this result conflicts with our decision in Ransburg Electro-Coating Corp. v. Spiller & Spiller, Inc., 489 F.2d 974 (7th Cir. 1973), and in support of this argument cites Schlegel Manfacturing Co. v. King Aluminum Corp., 369 F.Supp. 650 (S.D.Ohio 1973). We cannot agree with the Schlegel court that Ransburg supports the proposition that 'once a party enters a consent decree accepting the validity of a particular patent, that party is estopped from raising the validity issue in subsequent litigation regarding the same parties and the same patent.' Id. at 653. While it is true that in Ransburg this court reasoned that 'the Lear case did not signify that something called 'federal public policy on patents' could be used to undo the effects of a valid lawsuit settlement contract,' id., that reasoning was applied only to that portion of the settlement involving past infringement.

In Ransburg, the court was confronted with the issue of the extent to which a prior settlement of an infringement action is enforceable once noninfringement has been established. There, as here, the settlement agreement included both a payment for past infringement and a prospective licensing agreement. With respect to the payment for past infringement described in the opinion as the 'settlement contract,' the court allowed the plaintiff to recover the balance due on the basis that the agreement was 'a promise . . . to pay liquidated damages for past infringements in return for a dismissal of the infringement suit.' 489 F.2d at 977. The court properly recognized the difference between the consideration supporting a 'release from past wrongdoing' and a 'license to do rightfully the same thing in the future.' The enforcement of the settlement contract, unlike prospective enforcement of a licensing agreement, does not represent a demand for royalties for use of an idea within the public domain but rather a demand for the quid pro quo of a 'good faith compromise of a bona fide claim.' Id. at 976-978. It was for this reason...