Wallace Clark & Co., Inc. v. Acheson Industries, Inc.

• Decision Date: 26 March 1976
• Docket Number: D,No. 526,526
• Parties: WALLACE CLARK & CO., INC., Plaintiff-Appellant, v. ACHESON INDUSTRIES, INC., Defendant-Appellee. ocket 75-7483.
• Court: U.S. Court of Appeals — Second Circuit

Page 846

532 F.2d 846

190 U.S.P.Q. 321

WALLACE CLARK & CO., INC., Plaintiff-Appellant, v. ACHESON INDUSTRIES, INC., Defendant-Appellee.

No. 526, Docket 75-7483.

United States Court of Appeals, Second Circuit.

Argued Jan. 9, 1976.

Decided March 26, 1976.

Paul H. Blaustein, New York City (Hopgood, Calimafde, Kalil, Blaustein & Lieberman, New York City), for plaintiff-appellant.

Michael R. Dinnin, Birmingham, Mich. (Harness, Dickey & Pierce, Birmingham, Mich.) and J. G. Foley, New York City (Pennie & Edmonds, New York City), on the brief, for defendant-appellee.

Before LUMBARD, SMITH and MANSFIELD, Circuit Judges.

SMITH, Circuit Judge:

Wallace Clark & Company ("Wallace Clark") appeals from a partial summary judgment entered by the United States District Court for the Southern District of New York, Edward Weinfeld, Judge, denying Wallace Clark the right to contest the validity of the patent underlying its licensing agreement with Acheson Industries ("Acheson"), the defendant and the holder of the patent, where, in an earlier action between the parties, the court had already adjudicated the validity and the infringement of the patent in a consent decree. We affirm.

In November of 1971, Wallace Clark instituted an action against Acheson in the United States District Court for the Southern District of New York, John M. Cannella, Judge, seeking a declaratory judgment that Acheson's patent No. 2,976,257 was invalid and that it was not infringed by the plaintiff's product Meta-Tef 530. The case was resolved without a trial. Instead, a licensing agreement was executed allowing Wallace Clark to manufacture and sell certain products under the claims of Acheson's patent through March 21, 1978, in return for the licensee's payment of royalties. In addition, pursuant to the agreement, the parties entered into a consent decree stipulating to both the patent's validity and its infringement by Meta-Tef 530. The decree was duly approved and entered by the district court in October of 1972. ¹

In June of 1974, the instant action was brought by Wallace Clark for declaratory relief and damages after the plaintiff was sued by Acheson in a Michigan state court for royalties owing under their licensing agreement. The third "cause of action" asserted by the complaint in the federal proceeding sought an adjudication of the invalidity of the patent underlying the licensing agreement, and Wallace Clark promptly moved for a ruling that, notwithstanding the 1972 consent decree, it had the right to assert this claim. Treating this motion as for summary judgment with respect to the complaint's third cause of action, Judge Weinfeld ruled that the patent's validity was res judicata, 394 F.Supp. 393 (S.D.N.Y.1975), and accordingly directed the entry of a final judgment dismissing the cause of action after certifying pursuant to Fed.R.Civ.P. 54(b) the absence of any just reason for delay.

The principal issue presented by this appeal is whether a consent decree adjudicating the patent's infringement as well as its validity bars a party to the decree from subsequently challenging the validity of the patent. As a general rule, consent decrees are accorded res judicata effect. E. g., United States v. Southern Ute Indians, 402 U.S. 159, 91 S.Ct. 1336, 28 L.Ed.2d 695 (1971); Siegel v. National Periodical Publications, Inc., 508 F.2d 909, 913 (2d Cir. 1974); 1B Moore, Federal Practice P 0.409(5), at 1032 (2d ed. 1974). In Addressograph-Multigraph Corp. v. Cooper, 156 F.2d 483 (2d Cir. 1946), however, this court ruled that a party to a consent decree adjudicating the validity but not the infringement of a patent is not barred from contesting the patent's validity in a subsequent suit. ² This decision was predicated on the rationale that the validity of a patent is apt to be too readily conceded by a party not found to have infringed it. 156 F.2d at 484-85. Consistent with this rationale, Addressograph indicates in dictum that, when accompanied by an adjudication of infringement, a consent decree's adjudication of a patent's validity should be accorded res judicata effect:

(I)n a decree, at least in one entered by consent, either an adjudication of infringement, or a grant of some relief from which infringement may be inferred, is essential before any effect of res judicata can be given to it on the issue of validity.

156 F.2d at 485.

Wallace Clark contends that this dictum did not survive Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969). In Lear the Supreme Court overruled the contract doctrine of licensee estoppel, under which a patent licensee had been barred from contesting the validity of the patent underlying its license. The Court justified its abrogation of the doctrine on the need to prevent unwarranted insulation of patents from judicial scrutiny and on its belief that often only licensees have sufficient incentive to challenge the validity of patents. 395 U.S. at 670-71, 89 S.Ct. at 1911, 23 L.Ed.2d at 622-623.

In Broadview Chemical Corp. v. Loctite Corp., 474 F.2d 1391 (2d Cir. 1973), this court observed that it had been presented with "no authority for (the) extension of Lear to the consent decree cases where there has been a prior adjudication of infringement." 474 F.2d at 1394. This situation still obtains. Although at the time of the decision below support for such an extension of Lear could be found in the Seventh Circuit, e. g., Kraly v. National Distillers & Chemical Corp., 502 F.2d 1366, 1369 (7th Cir. 1974) (dictum); USM Corp. v. Standard Pressed Steel Co., 184 U.S.P.Q. 476 (N.D.Ill.1974), vacated in part, 524 F.2d 1097 (7th Cir. 1975), subsequently this support has been eroded by the opinion in the latter case on appeal, 524 F.2d at 1098, which states:

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 this court . . . .

Only the Sixth Circuit appears to have ruled definitively upon the issue before us. In Schlegel Manufacturing Co. v. USM Corp., 525 F.2d 775 (6th Cir. 1975), a corporation was barred in a contempt proceeding from contesting the validity of a patent because it had previously entered into a consent decree adjudicating both the patent's validity and its infringement. Wallace Clark contends that the fact that Schlegel was an appeal from a contempt proceeding distinguishes it from the instant case which was brought as a declaratory judgment action; however, Schlegel's extended discussion of the res judicata issue provides no support for this argument. 525 F.2d at 778-781. ³

We conclude that the interests of litigants and the public in general will be best served by according res judicata effect to consent decrees adjudicating a patent's infringement as well as its validity. While in some cases this policy may result in the survival of invalid patents, the agreements are arrived at in settlement of adversary litigation with infringement as well as validity determined and with the discovery machinery of the courts available to the parties, and are subject to court scrutiny, in...