CAFC speaks to res judicata in Cummins case

The outcome of Cummins v. Tas Distributing

Since 2003, Cummins, Inc. (“Cummins”) and TAS Distributing
Company, Inc. (“TAS”) have been engaged in
three separate actions regarding idle-control technologies
for heavy-duty truck engines. In the latest, filed in 2009,
Cummins sought a declaratory judgment that claims of
TAS’s U.S. Patent Nos. 5,072,703 (“the ’703 patent”) and
5,222,469 (“the ’469 patent”) (collectively “the TAS patents”)
are invalid and unenforceable. The present appeal
challenges the summary judgment determination of the
district court, which found that Cummins’ declaratory
judgment suit against TAS is barred by the doctrine of res
judicata in light of an earlier litigation. Cummins, Inc. v.
TAS Distributing Co. (TAS III), 676 F. Supp. 2d 701 (C.D.
Ill. 2009). We agree that Cummins could have pursued
claims regarding invalidity and unenforceability of the
TAS patents in prior litigation, which featured the same
parties, arose from the same group of operative facts, and
resulted in a final resolution on the merits. Because res
judicata bars Cummins’ defenses under 35 U.S.C. §§ 102
and 103 in the present case, we affirm.

The problems between Cummins and Tas started with a license agreement:

The dispute in this case has its basis in the February
1997 agreement between the TAS and Cummins (hereinafter
“the Master License Agreement”), which granted
Cummins the co-exclusive right to use technology owned
or licensed by TAS relating to the “Temp-A-Start” and
“Temp-A-Stop” systems, including the TAS patents.
Cummins agreed under the terms of the Master License
Agreement to pay a minimum $1 million royalty over five
years, as well as an ongoing royalty of $50 to $125 per
unit sold of the licensed products.

BUT

In February 2003, TAS filed a declaratory judgment
action in the United States District Court for the Central
District of Illinois, alleging that Cummins had breached
the Master License Agreement by failing to make “all
reasonable efforts” to market and sell the TAS technology.
TAS Distrib. Co. v. Cummins Engine Co. (TAS I), 491
F.3d 625, 630 (7th Cir. 2007).

The topic of misrepresentation arose:

Cummins claimed an equitable exception to res judicata
on the grounds that TAS made contractual misrepresentations
that prevented Cummins from raising the
patent-based defenses in TAS I. Id. at 713. The trial
court rejected this argument, relying on testimony and
evidence showing that Cummins was informed prior to
TAS I that TAS had sold potentially invalidating variants
of the Temp-A-Start system since the 1980s. See id. at
715-17.

The issue before the CAFC:

The district court concluded that
it “was not convinced, even when all the evidence is
viewed in the light most favorable to Cummins, that TAS
had made any misrepresentations that prevented Cummins
from asserting its patent invalidity claim in TAS I.”
Id. at 715. The district court held that as a matter of law,
Cummins’ TAS III suit was precluded by the doctrine of
res judicata, and terminated the case. Cummins timely
appealed.

As to law:

Whether a claim is barred by res judicata is a question
of law reviewed by appellate courts de novo. See, e.g.,
Accumed LLC v. Stryker Corp., 525 F.3d 1319, 1323 (Fed.
Cir. 2008). Because this court applies the law of the
regional circuit where general principles of res judicata
are at issue, Illinois state law governing res judicata
applies in this case. See id.; Media Tech. Licensing, LLC
v. Upper Deck Co., 334 F.3d 1366, 1369 (Fed. Cir. 2003).
The res judicata effect of a prior judgment of a federal
court sitting in federal diversity is determined by the law
of the state in which the court sits. Semtek Int’l Inc. v.
Lockheed Martin Corp., 531 U.S. 497, 508 (2001).

The details of Cummins' appeal:

Cummins presents three main questions on appeal
challenging the trial court’s application of res judicata: (1)
whether the trial court’s basis for jurisdiction in TAS I
was such that its judgment could have preclusive effect
over subsequent patent-based defenses; (2) whether TAS I
and TAS III are based on the same set of transactional
facts; (3) whether exceptions to the application of the res
judicata are available to Cummins. We address each of
these questions in turn.

The issue turned on state law:

We find River Park controlling. The court in River
Park held that “different kinds or theories of relief still
constitute[] a single cause of action if a single group of
operative facts give rise to the assertion of relief.” River
Park, 703 N.E.2d at 891. Hence, “operative facts” are not
just those supporting the first judgment, but all “facts
that give rise to plaintiffs’ right to relief.” Id. at 892
(quoting Rein v. David A. Noyes & Co., 172 Ill. 2d 325,
338–39 (1996)).

AND

We conclude that the district court’s decision is within
the Illinois standard for res judicata as announced by
River Park. Cummins elected not to assert the defenses
despite that if argued and won, the defenses would have
been a complete defense in TAS I. See Henry v. Farmer
City State Bank, 808 F.2d 1228, 1235-36 (7th Cir. 1986)
(applying Illinois law to find former defendants barred
from bringing a claim that would have been a complete
defense to the prior action). The onus was on Cummins
under Illinois state law to raise the defenses at that time
or forfeit their use at a later time. See Cabrera, 324 Ill.
App. 3d at 94 (“[U]nder Illinois law no counterclaims are
classified as compulsory; however, this does not preclude
the application of res judicata.” (internal citations omitted));
Sanders Confectionery Prods., Inc. v. Heller Fin.,
Inc., 973 F.2d 474, 484 (6th Cir. 1992) (“[W]hat is important
is not whether a particular claim is compulsory, but
whether the claim should have been considered during
the prior action.”).

Note

The risk of inconsistent decisions is a longstanding
concern of the judiciary. See Alvear-Velez v. Muskasey,
540 F.3d 672, 677 (7th Cir. 2008) (quoting Montana v.
United States, 440 U.S. 147, 153-54 (1979)). Courts
routinely refuse under Illinois law to “either nullify the
earlier judgment or impair the rights established in the
earlier action.” Corcoran-Hakala, 840 N.E.2d at 290;
accord Henry, 808 F.2d at 1235-36.

Bottom line:

We find Cummins’ claims in TAS III are barred by the
doctrine of res judicata, and affirm the district court’s
grant of summary judgment in favor of TAS.