USM Corp. v. Standard Pressed Steel Co.

• Decision Date: 12 June 1978
• Docket Number: No. 74 C 1514.,74 C 1514.
• Citation: 453 F. Supp. 743
• Parties: USM CORPORATION, Plaintiff, v. STANDARD PRESSED STEEL CO., Defendant.
• Court: U.S. District Court — Northern District of Illinois

453 F. Supp. 743

USM CORPORATION, Plaintiff, v. STANDARD PRESSED STEEL CO., Defendant.

No. 74 C 1514.

United States District Court, N. D. Illinois, E. D.

June 12, 1978.

James P. Hume, Hume, Clement, Brinks, Willian, Olds & Cook, Ltd., Jerry Hosier, Hosier & Niro, Ltd., Chicago, Ill., for plaintiff.

John A. Mitchell, Leonard J. Santisi, and Curtis, Morris & Safford, New York, N. Y., Donald L. Welsh, Fitch, Even, Tabin, Leudeka, Chicago, Ill., for defendant.

ORDER

BUA, District Judge.

This is an action brought by a patent licensee seeking, among other relief, a declaration of the invalidity, and its non-infringement, of the underlying patent. The parties have both been involved for many years in the manufacture of patch-type self-locking threaded fasteners.¹ Defendant Standard Pressed Steel (SPS) is the assignee of a 1963 patent No. 3,093,177 (issued to Joseph Villo) relating to the production of such fasteners. In December, 1969, SPS brought suit in this court against the plaintiff herein, USM Corporation (USM) and a licensee of USM, alleging infringement of that patent. Negotiations followed, resulting in an April, 1971, agreement by which USM was licensed under the Villo patent and, under certain conditions, was granted a non-exclusive license to sub-license. Provisions of the agreement reciting the validity of the Villo patent, the scope of its claims, and the fact of USM's infringement were incorporated into a consent decree, dated May 3, 1971, disposing of the litigation.

For about three years USM paid royalties under the license agreement. However, it refused to make a payment falling due in April, 1974. Shortly thereafter, SPS correctly informed USM by letter that under the terms of the license agreement, if the royalty payment was not made within a sixty day cure period SPS would be entitled to terminate the agreement. On June 4, 1974, USM brought this action, asserting on various grounds the invalidity and unenforceability of the Villo patent, and that it had not infringed. Count VII of the amended and supplemental complaint sought an injunction pendente lite relieving USM of its obligation to pay royalties. By agreement of the parties, the withheld royalty payment and the following one were paid to SPS under court orders which in effect permitted SPS to hold the funds pending the outcome of the litigation. SPS then refused to continue this procedure, and the court denied USM's request for an injunction pendente lite. This ruling was affirmed on appeal. USM Corp. v. Standard Pressed Steel Co., 524 F.2d 1097 (7th Cir. 1975)

Presently before the court are four motions by the defendant, SPS.

SPS has moved to dismiss Count III of the amended and supplemental complaint for lack of subject matter jurisdiction. Count III seeks a declaration that the Villo patent is invalid for failure to comply with 35 U.S.C. §§ 101, 102, 103, and 112, and that it has not been infringed by USM. SPS argues that unless the licensee first repudiates his license by withholding royalty payments, such a claim neither presents a justiciable controversy nor arises under the patent laws. The court is reminded in this connection that USM has of its own volition continued paying royalties in order to preserve its license. This argument, however, must fail.

First, where a licensee reasonably fears that if he withholds royalty payments an infringement suit will be forthcoming his request for a declaration of the invalidity of the underlying patent clearly presents a justiciable controversy. To establish an actual controversy in an action challenging the validity of a patent the plaintiff must (1) disclose conduct on the part of the defendant that makes reasonable the plaintiff's apprehension that he will face an infringement suit or the threat of one if he commences or continues a given activity, and (2) show that he has a real stake in the outcome of the controversy, i. e., a real interest in commencing or continuing the activity in question. See Super Products Corp. v. DP Way Corp., 546 F.2d 748, 753 (7th Cir. 1976); Stickler Industrial Supply Corp. v. Blaw-Knox Co., 367 F.2d 744 (7th Cir. 1966). Here, the license agreement provides that SPS may terminate the license upon the default of USM. Moreover, SPS has suggested its intention to do so should the opportunity arise. USM's stake in the outcome lies in its desire to avoid liability for royalties. There is, then, an actual case or controversy. See, e. g., Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184, 187 n. 4 (2nd Cir. 1977); Dahlgren Manufacturing Co. v. Harris Corp., 399 F.Supp. 1253, 1255-56 (N.D.Tex. 1975).

Secondly, in this case, the declaratory action arises under the patent laws. Where the declaratory plaintiff is already the defendant in a state court action on the license for royalties, and where diversity is lacking, the declaratory action does not arise under the patent laws because it is brought solely as a means of defending a state court suit. Milprint, Inc. v. Curwood, Inc., 562 F.2d 418 (7th Cir. 1977); Thiokol Chemical Corp. v. Burlington Industries, Inc., 448 F.2d 1328 (3d Cir. 1971) cert. denied 404 U.S. 1019, 92 S.Ct. 684, 30 L.Ed.2d 668; and see Public Service Commission of Utah v. Wycoff Company, Inc., 344 U.S. 237, 248, 73 S.Ct. 236, 242, 97 L.Ed. 291 (1952). However, where, as here, there is a reason for anticipation of an infringement action, a different conclusion should result. As the court said in Warner-Jenkinson Co. v. Allied Chemical Corp., supra, 567 F.2d at 186-87:

"We first address the question of subject matter jurisdiction, . . .. The Declaratory Judgment Act, 28 U.S.C. § 2201, does not independently create federal jurisdiction. According to Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72, 70 S.Ct. 876, 94 L.Ed. 1194 (1950), an action for declaratory judgment may be brought in federal court ordinarily only if there would exist a basis for federal jurisdiction in a coercive action between the two parties. See also Public Service Commission v. Wycoff Co., 344 U.S. 237, 249, 73 S.Ct. 236, 97 L.Ed. 291 (1952). If the plaintiffs were seeking a declaration simply of their right to assert patent invalidity as a defense to a contract action for royalties, which itself could not be brought in federal court, see e. g., Luckett v. Delpark, 270 U.S. 496, 502, 510, 46 S.Ct. 397, 70 L.Ed. 703 (1926); Arvin Industries, Inc. v. Berns Air King Corp., 7 Cir., 510 F.2d 1070 (1975); see generally Louisville & Nashville R.R. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908), one might conclude that no `arising-under' jurisdiction would be present. See Thiokol Chemical Corp. v. Burlington Indus., Inc., 448 F.2d 1328, 1330-31 (3d Cir. 1971), cert. denied, 404 U.S. 1019, 92 S.Ct. 684, 30 L.Ed.2d 668 (1972). See also Hanes Corp. v. Millard, 174 U.S.App.D.C. 253, 531 F.2d 585, 594-95 n. 8 (1976).

However, a second, and perhaps more important, reason why the plaintiffs want a declaration of patent invalidity is for its use as a defense in a patent infringement action. Under their licensing arrangement, nonpayment of royalties constitutes a material breach which gives the patentee the right to terminate the license prospectively. Thus, within a few months after the plaintiffs become liable for payment of royalties under contract law, they will also be subject to an action in federal court for an injunction and damages for infringement, see Luckett v. Delpark, supra, 270 U.S. at 510, 46 S.Ct. 397. At the present time the defendant has neither a state contract action nor a federal infringement action since the plaintiffs have not stopped paying royalties. One act on the part of the declaratory plaintiffs nonpayment of royalties, will leave them vulnerable to federal as well as state claims by the declaratory defendants. Accordingly, plaintiffs' action for declaratory judgment is raising a defense in anticipation of an impending, federal action, and federal `arising under' jurisdiction is clearly present under Skelly Oil and Wycoff."

Accord: Milton Roy Co. v. Bausch & Lomb, Inc., 418 F.Supp. 975, 978-79 (D.Del.1976); Dahlgren Manufacturing Co. v. Harris Corp., supra; Medtronic, Inc. v. American Optical Corp., 327 F.Supp. 1327, 1331 (D.Minn.1971). The propriety of such a view seems to have been recognized by the Seventh Circuit in Milprint, Inc. v. Curwood, Inc., supra, 562 F.2d at 421.

Finally, it should be noted that SPS has not taken issue with the allegations of the complaint to the effect that the parties are of diverse citizenship and that the amount in controversy exceeds $10,000 exclusive of costs and interest. Hence, jurisdiction over Count III exists regardless of whether it might otherwise be held to arise under the patent laws. Milprint, Inc. v. Curwood, Inc., supra, 562 F.2d at 422 n. 5; Arvin Industries, Inc. v. Berns Air King, 510 F.2d 1070 (7th Cir. 1975).

Accordingly, SPS's motion to dismiss Count III for lack of subject matter jurisdiction is denied.

Next, SPS moves for summary judgment on Count III on the basis that the May 3, 1971, consent decree is res judicata as to the issues of the validity and infringement of the Villo patent. It is clear in this circuit and elsewhere that a consent decree containing an adjudication of the validity of a patent, but lacking an express or implied adjudication of infringement, will not be accorded res judicata effect in a later action between the parties. Kraly v. National Distillers & Chemical Corp., 502 F.2d 1366 (7th Cir. 1974); Business Forms Finishing Service, Inc. v. Carson, 452 F.2d 70 (7th Cir. 1971); and see e. g., Addressograph-Multigraph Corp. v. Cooper, 156 F.2d 483 (2nd Cir. 1946). However, "the question . . whether a consent judgment adjudicating infringement as well as validity bars a party to the judgment from subsequently challenging the validity of the patent has not been decided by . . . the Seventh Circuit." USM Corp. v. Standard Pressed Steel...