Opinion ID: 166601
Heading Depth: 2
Heading Rank: 2

Heading: Whether MACTEC's declaratory judgment appeal is barred by the doctrine of res judicata.

Text: 49 As noted above, in addition to its application to vacate the arbitration award, MACTEC contemporaneously sought, in a separate legal proceeding before the same district court, a declaration that Gorelick's (and, by implication, the arbitrator's) interpretation of the contract permitted Gorelick to collect royalties on unpatented technologies and therefore constituted patent misuse. 4 Although framed as an illegality of contract issue, MACTEC originally raised this argument at the arbitration. That is, MACTEC claimed that Gorelick's interpretation of the contract would amount to patent misuse and as a result, would be an illegal contract which would be unenforceable under basic contract law principles. The arbitrator ruled that MACTEC could not assert a patent misuse defense because (1) MACTEC failed timely to file its defense; and (2) because issues of patent invalidity were, by the terms of the arbitration agreement, beyond the scope of arbitrable issues. 50 MACTEC then re-asserted this argument before the district court in its application to vacate the arbitration award, arguing that since the arbitration award permitted patent misuse, it must be vacated on public policy grounds. See Denver & Rio Grande W. R.R. Co. v. Union Pac. R.R. Co., 119 F.3d 847, 849 (10th Cir.1997) (noting that courts may vacate arbitration awards that violate public policy). The district court considered and rejected this argument, based on its conclusions that Gorelick was never a patent holder of the NoVOCs technology, the payments were voluntary, and the agreement was not a patent license. 51 When MACTEC filed its declaratory judgment action, Gorelick moved to dismiss under Fed.R.Civ.P. 12, arguing, inter alia, that the suit was barred by res judicata. Although the district court did not base its dismissal of the suit on res judicata, 5 we nevertheless consider it as an alternate ground of affirmance because it was adequately raised below. See Blum v. Bacon, 457 U.S. 132, 138 n. 5, 102 S.Ct. 2355, 72 L.Ed.2d 728 (1982). 52 Thus, the precise issue before our court is whether the arbitration award itself (or the district court's subsequent confirmation of the award) precludes MACTEC's subsequently-filed declaratory judgment action. The application of res judicata is a question of law which we review de novo. Satsky v. Paramount Communications, Inc., 7 F.3d 1464, 1467-68 (10th Cir.1993). 53 The doctrine of res judicata, or claim preclusion, will prevent a party from relitigating a legal claim that was or could have been the subject of a previously issued final judgment. Id. at 1467. Under Tenth Circuit law, claim preclusion applies when three elements exist: (1) a final judgment on the merits in an earlier action; (2) identity of the parties in the two suits; and (3) identity of the cause of action in both suits. Wilkes v. Wyo. Dep't of Employment Div. of Labor Standards, 314 F.3d 501, 504 (10th Cir.2003). If these requirements are met, res judicata is appropriate unless the party seeking to avoid preclusion did not have a full and fair opportunity to litigate the claim in the prior suit. Yapp v. Excel Corp., 186 F.3d 1222, 1226 n. 4 (10th Cir.1999). 6 54 Here, it is undisputed that the parties to the arbitration and the declaratory judgment were the same. As for finality, a valid and final award by arbitration generally has the same effect under the rules of res judicata as a judgment of a court. Restatement (Second) of Judgments § 84(1) & cmt. b (1980). Indeed, [i]f any party dissatisfied with the award were left free to pursue independent judicial proceedings on the same claim or defenses, arbitration would be substantially worthless. Unless the express terms of the agreement or the peculiar custom of a trade dictate otherwise, therefore, subsequent judicial proceedings on the same claim or defenses ordinarily should be precluded. And so the courts rule. 55 18B Wright & Miller, supra, § 4475.1 at 509; but cf. McDonald v. City of West Branch, 466 U.S. 284, 292, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984) (holding that in an action under 42 U.S.C. § 1983, a federal court should not afford res judicata effect to an arbitration award brought pursuant to a collective-bargaining agreement because of the special federal rights that a § 1983 action is designed to protect). 56 Here, MACTEC has not challenged whether the arbitration award (or the district court's confirmation thereof) was final, but rather whether the award may be appealed to this court. The appealability of a judgment, however, does not hinder its preclusive effect. See 18A Wright & Miller, supra, § 4433, at 78-85 (noting general rule that a final judgment from a lower court carries res judicata effect even though it is still subject to review by an appellate court). 57 Identity of the cause of action is also present in both suits. Wilkes, 314 F.3d at 504. To determine what constitutes a cause of action for preclusion purposes, this court has adopted the transactional approach found in the Restatement (Second) of Judgments § 24. Petromanagement Corp. v. Acme-Thomas Joint Venture, 835 F.2d 1329, 1335 (10th Cir.1988). Under this approach, a cause of action includes all claims or legal theories of recovery that arise from the same transaction. Id. A contract is generally considered to be a transaction for claim preclusion purposes. Id. at 1336. 58 Here, MACTEC's allegations of patent misuse clearly arise out of the same contractual transaction as the underlying arbitration — the execution of the stock purchase agreement between Gorelick and MACTEC (as EG & G's successor-in-interest) and the subsequent renegotiation of the agreement's terms in 1998. Thus, the third prong of claim preclusion is met. 59 However, MACTEC contends that it did not have a full and fair opportunity to raise the patent misuse defense at the arbitration. This is because, according to MACTEC, the arbitrator refused to allow MACTEC to present a patent misuse defense because it ruled that such issues were beyond the scope of the arbitration. Because the arbitrator was jurisdictionally barred from considering its patent misuse defense, MACTEC argues that it never had the opportunity to litigate this claim. 60 But this argument ignores the fact that MACTEC had a second chance to assert its patent misuse theory before the district court in its application to vacate the arbitration award. Indeed, MACTEC took advantage of this opportunity, arguing in its written motion that the arbitrator's award permitted patent misuse and should thus be vacated on public policy grounds. Furthermore, the district court considered and rejected this argument on the merits. Once the district court issued its decision, any subsequent litigation raising patent misuse was precluded. As we have noted above, the district court's decision to confirm the arbitration award (over MACTEC's patent misuse objections) was nonappealable. Accordingly, the declaratory judgment action is barred by res judicata.