Court Opinion

ID: 9464393
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:31:44.64266+00
Date Added: 2024-06-11T17:38:35.824331
License: Public Domain

TIMBERS, Circuit Judge
dissenting:
In this concededly close case, I cannot say that the majority’s analysis is an unreasonable one. Indeed, I agree with Judge Lum-bard’s clear, straightforward opinion to the extent that it holds that under Lear, Inc. v. Adkins, 395 U.S. 653 (1969), a licensee need not repudiate his licensing agreement as a precondition to challenging the validity of the patent. I also agree with the majority’s rejection of appellants’ proposal that as licensees they be permitted to pay into escrow royalties that accrue pending adjudication of validity, although under my view of the merits set forth below the escrow question need not be reached.
Turning to the critical issue, the licensing agreement here involved, properly construed, bars appellants from contesting the validity of the patents for a period of two years. To enforce the licensing agreement thus construed as an integral part of the earlier settlement, it seems to me, would not frustrate in any material way the policy of Lear of encouraging prompt and effective challenges to the validity of patents. I therefore would hold that the licensing agreement estops appellants from litigating the validity of the patents prior to the expiration of the two year period. It is on this issue that I respectfully dissent from the holding of the majority.
The unmuzzling of licensees provided for in Léar stemmed from the Court’s determination to accord primacy to the federal policy favoring dedication to the public of useful ideas not protected by a valid patent over the technical requirements of contract law. But the Court explicitly restricted the balance thus struck in the licensee’s favor to “the typical situation involving the negotiation of a license after a patent has issued.” 395 U.S. at 670-71.
This typical situation strikes me as being significantly altered when the patentee seeks to prevent his licensee from challenging validity, not by merely standing on the contract, but by claiming a res judicata bar based upon an earlier consent decree or an estoppel stemming from a settlement agreement executed in connection with an earlier stipulated dismissal. The patentee with a res judicata defense, for example, introduces into the balance considerations of effective judicial administration and fairness to litigants, to be weighed against Lear’s policy of providing access to the courts for potential contestants of patent validity. A patentee such as appellee here, which is a party to a licensing agreement entered into in connection with a settlement agreement and stipulated dismissal without prejudice, lacks the requisites for a res judi-cata defense. See Fed.R.Civ.P. 41. But a valid settlement agreement can bind a party as effectively as a judgment despite the absence of an adjudication. Settlement of course is a favored method of terminating disputes. Williams v. First National Bank, 216 U.S. 582, 595 (1910). When properly entered into, a settlement is just as binding, final and conclusive of the parties’ rights as a judgment. See, e. g., Thomas v. State of Louisiana, 534 F.2d 613 (5 Cir. 1976); Clinton Street Greater Bethlehem Church v. City of Detroit, 484 F.2d 185 (6 Cir. 1973). This rule of preclusion rests on the same administrative and equitable considerations as does the res judicata bar.
Decisions subsequent to Lear have indicated a tendency to accord controlling weight to the administrative and equitable policies behind the rule of preclusion without transgressing Lear’s policy of open access to the courts. Pre-Lear case law, see Addressograph-Multigraph Corp. v. Cooper, 156 F.2d 483 (2 Cir. 1946), which gave res judicata effect to consent decrees containing findings of infringement, has been reaffirmed. See, e. g., Broadview Chemical *190Corp. v. Loctite Corp., 474 F.2d 1391, 1394-95 (2 Cir. 1973); Schlegel Manufacturing Co. v. USM Corp., 525 F.2d 775 (6 Cir. 1975), cert, denied, 425 U.S. 912 (1976).1 But cf. Kraly v. National Distillers and Chemical Corp., 502 F.2d 1366, 1369 (7 Cir. 1974) (dicta suggesting that Lear would preclude a res judicata bar grounded on a consent decree containing a finding of infringement). See generally, Note, “ ‘To Bind or Not to Bind’: Bar and Merger Treatment of Consent Decrees in Patent Infringement Litigation,” 74 Colum.L.Rev. 1322 (1974).
The question whether, under Lear, patent settlements should be given any preclusive effect was raised and ruled upon squarely in Aro Corp. v. Allied Witan Co., 531 F.2d 1368 (6 Cir. 1976), cert, denied, 429 U.S. 862 .(1976). There the Sixth Circuit enforced a licensing agreement entered into in connection with a settlement and dismissal without prejudice. Effecting an accommodation of the conflicting policies, the court held that the “public interest in the settlement of this litigation far outweighs any public interest to be served by providing [the licensee] with a second chance to litigate . . . validity . . . .” 531 F.2d at 1374. The amount of royalties involved was minimal; there were other potential challengers; and the patent had only three years to run. The court concluded that enforcement of the settlement agreement would result in no substantial detriment to the public interest. In so holding, the court’s reading of Lear strikes me as particularly appropriate to the instant case:
“Whatever boon Lear may have provided those who take licenses under certain conditions, it cannot be interpreted so broadly as to condone a kind of gamesmanship, wherein the alleged infringer after employing the judicial system for months of discovery, negotiation and sparring, abandons its challenge to validity, executes a license in settlement, and then repudiates the license and seeks to start the fight all over again in the o courts. Lear does not require that the courts answer every beck and call of the fickle suitor whose transient affection is governed by such on-again, off-again strategies. . . . ” 531 F.2d at 1373.2
Cf. Duplan Corp. v. Deering Milliken, Inc., 540 F.2d 1215, 1221 (4 Cir. 1976); Randsherg Electro-Coating Corp. v. Spiller & Spiller, Inc., 489 F.2d 974 (7 Cir. 1973).
Aro strikes me as providing a sound accommodation of the competing interests here involved. It recognizes that Lear’s promotion of the public interest in prompt and effective challenges to patent validity will not be served in all cases by granting a putative infringer absolute liberty to subvert orderly litigation processes to suit his momentary pecuniary interests. On the contrary, Aro recognizes that judicial efforts toward avoiding time-consuming and expensive patent litigation will retain their utility only if the licensee to some extent is bound by the contract. I would follow Aro and require the holder of a license obtained in an earlier settlement to demonstrate a substantial public need for immediate adjudication at his instance before reopening the courthouse doors.
One factor in the present case impresses me as weighing heavily toward a required demonstration of public need. Appellants are paying substantial royalties which the *191public presumably will reimburse eventually. On the other hand, there is another potential challenger to the patent. Even more important, the licensing agreement bound appellants for a term of only two years, less than half of which remained to run at the time they filed the instant suit. The public’s interest in the invalidation of these patents therefore can be vindicated after an immaterial delay without sacrificing its interest in the integrity of the settlement process.
The majority attempts to deflect the thrust of Aro with what seems to me to be a pair of mutually contradictory propositions. On the one hand, it draws a heavy line on the side of implementing Lear policy because the case-by-case “balancing of interests” suggested by Aro leaves the parties “at the mercy of . .an imprecise and uncertain test.” Ante at 188. Yet on the other hand it also suggests that a settlement agreement containing an “explicit prohibition” of future licensee suits “may” be enforced. But the majority does not explain how such future suits are to be decided other than by balancing the conflicting interests which invariably arise whenever a patentee asks that preclusive effect be given to some earlier disposition that fell short of full adjudication. Under the majority’s formulation the courts will be engaged in the delicate process of working out the contours of the Lear rule for some time to come. Pending completion of this task parties necessarily will face prolonged legal uncertainty. Needless postponement of answers to the hard questions will not benefit them in the long run.
Significantly, as noted above, the majority does not hold that a settlement agreement concluded in connection with a stipulated dismissal without prejudice never can be given preclusive effect. It holds out the possibility that the Lear policy “may” be overcome if a settlement agreement “contains an explicit prohibition on licensee suits during some future period.” Ante at 188. The majority apparently finds the instant agreement to lack preclusive effect because it prohibits only “termination” and not “suit”. Accepting what I presume would be the majority’s willingness to enforce this agreement if the requisite language were present, I differ with the majority only on a matter of contract construction. Here I would hold that the parties’ specific two year nontermination clause necessarily implies a two year moratorium on litigation.
Any other construction would ignore significant circumstances surrounding the making of this contract. The parties were before the district court ready for trial. Appellee, understandably hoping to be rid of this litigation on a permanent basis, initially asked for a consent decree which would have established infringement and validity. But appellants, looking ahead to the eventual delisting of Red No. 2, insisted that they be bound for no longer than two years. In acceding to this proposal and in settling for $200,000 in exchange for release of its claims for past infringement, appellee certainly was entitled to assume that it was agreeing to a two year moratorium on litigation. Any other construction would attribute to appellee the improbable action of signing a settlement agreement which would permit appellants to return to court the very next day with not only a new complaint but an escrow motion which could bar any return on the contract for an indefinite period. I recognize that appellants’position regarding a two year moratorium on suit is equivocal. But given their expectations at the time the settlement was concluded, a moratorium certainly would not have been inimical to their interests. In light of the importance to appellee of freedom from suit and bearing in mind that what is here involved is the settlement process and not normal contract negotiations, I think that a fair assessment of the parties’ intent strongly indicates a two year preclusion from suit.3
*192The majority construes the instant contract to permit immediate relitigation not based on the parties’ intent but by invoking a presumption favoring litigation grounded in Lear. This strikes me as bringing Lear policy in at a premature stage. Settlements, like other contracts, are to be construed to effectuate the parties’ intent. If it appears after that inquiry that the parties intended their agreement to have pre-clusive effect, then a question arises under Lear. If the preclusive term violates public policy, then it can be overridden by the direct application of Lear.
I would affirm the judgment of the district court which dismissed the declaratory judgment action seeking patent invalidity.

. In Addressograph-Multigraph Corp. v. Cooper, supra, 156 F.2d at 484-85, our Court, for substantially the same reasons of public policy which later proved decisive in Lear, held that no res judicata effect would be given to a patent consent decree containing findings of validity but lacking findings of infringement. Even though Cooper delimits the preclusive effect of some consent decrees, I would not read it to imply a per se rule that settlement agreements under no circumstances can bar litigation. Although the instant settlement was not the result of any adjudication, much less one of validity only, appellee seeks enforcement of only a two year term and does not ask that it be given the permanent preclusive effect of a judgment.

. There has been similar gamesmanship in the instant case. All concerned exerted a great deal of effort prior to concluding the settlement. The parties engaged in discovery for three years. Both the parties and Judge Conner had prepared for trial when the latter suggested settlement. Two days of conferences before Judge Conner then led to four months of negotiations between the parties.

. The majority correctly points out, by analogy to a liquidated damages clause, that through the non-termination provision the licensing agreement brought the appellee beneficial rights above and beyond a means to preclude a new complaint. To be sure, the licensing agreement necessarily had to have this effect in order to be valid. But, in view of the arsenal of *192weapons available to a post-Lear licensee and the expense of patent litigation, a licensing agreement lacking preclusive effect would have been of dubious practical utility to appellee. Significantly, appellee’s counsel stated at oral argument that appellee at present is in the process of disposing of its interest in the patents.