Under Illinois Law, Failure To Assert Patent-Based Defenses In Contract Cases May Have Preclusive Effect In Later Related Actions

In Cummins, Inc. v. TAS Distributing Co., No. 10-1134 (Fed. Cir. Dec. 5, 2012), the Federal Circuit, applying Illinois law, held that res judicata bars invalidity and unenforceability defenses under 35 U.S.C. §§ 102 and 103 when those defenses could have been raised in prior litigation featuring the same parties, arising from the same group of operative facts, and resulting in a final resolution on the merits.

The appeal resulted from the third of three litigations between TAS Distributing Company, Inc. ("TAS") and Cummins, Inc. ("Cummins") over a 1997 Master License Agreement ("the Agreement"). The Agreement granted Cummins the coexclusive right to use technology owned or licensed by TAS relating to "Temp-A-Start" and "Temp-A-Stop" systems for automatically turning a diesel engine on or off, including U.S. Patent Nos. 5,072,703 ("the '703 patent") and 5,222,469 ("the '469 patent") (collectively "the TAS patents").

First, TAS filed a DJ action against Cummins (then known as Cummins Engine Company, Inc.) in the Central District of Illinois in 2003 ("TAS I"), alleging that Cummins breached the Agreement by failing to make all reasonable efforts to market and sell the TAS technology and requesting specific performance. Cummins counterclaimed that its obligation to pay royalties under the Agreement was set to expire the following month. The district court ruled on SJ that TAS failed to present any proof of damages and declined to order specific performance of Cummins's obligations. The district court also ruled that Cummins had a continuing contractual obligation to make royalty payments for sales beyond the expiration date of the Agreement. On appeal, the Seventh Circuit affirmed the district court's TAS I decision.

TAS filed a second suit against Cummins in Illinois in 2007 ("TAS II"), claiming that Cummins breached the Agreement by failing to pay royalties on all of Cummins's products that incorporated the TAS technology. During discovery, the inventor of the TAS patents admitted that a version of TAS's Temp-A-Start system was sold to another manufacturer in the mid-1980s, prior to the critical dates of the TAS patents, and that the prior sales and marketing efforts had not been disclosed to the PTO during prosecution of the TAS patents. Cummins sought leave to amend its Answer to include patent-based affirmative defenses and counterclaims related to the prior sales of the TAS technology, but the district court denied Cummins's motion. The...