Dow notified Pactiv of breach of contract. Pactiv shot back, asserting invalidity (again), and sought declaratory judgment. Dow moved for dismissal, "arguing that Pactiv’s suit was barred by res judicata (claim preclusion)."

The parties agreed that the prior dismissal was preclusive, unless (1) the 1998 Agreement reserved Pactiv’s right to challenge the patents in the future or (2) the judgment was unenforceable because Pactiv was denied a full and fair opportunity to litigate the invalidity and unenforceablity claims.

The district court (Judge David N. Hurd) considered the various agreements and concluded that Pactiv’s declaratory judgment action was barred by the prior adjudication and that the plain language of the agreements did not expressly reserve future litigation rights to Pactiv. The district court did not specifically address the contention that Pactiv was deprived a full and fair opportunity in the prior adjudication. The district court thus granted Dow’s 12(b)(6) motion and dismissed Pactiv’s declaratory judgment action. Pactiv Corp. v. Dow Chem. Co., No. 1:04-CV-0081 (N.D.N.Y. Feb. 3, 2005). Pactiv timely appealed (CAFC 05-1260).

Here, Pactiv does not dispute that under general claim preclusion principles, it would be barred from asserting the claims at issue. Instead, Pactiv argues that an exception to claim preclusion applies because Pactiv reserved the right to challenge the ’016 and ’058 patents in the 1998 Agreement.

An exception to the normal rules of claim preclusion exists when “[t]he parties have agreed in terms or in effect that the plaintiff may split his claim, or the defendant has acquiesced therein . . . .”... Thus, the parties can, in a separate agreement, like the 1998 Agreement here, reserve the right to litigate a claim that would otherwise be barred by res judicata... But that reservation must be express.

Pactiv noted that the licensing agreement would be void if the patent was found invalid, and so decided to have another stab at invalidating it.

Initially we note that Pactiv has the standard backwards: it urges that “[t]he plain and express language [of the 1998 Agreement] does not preclude Pactiv from participating in [future litigation].” Appellant’s Br. at 23. The question is not whether the 1998 Agreement precluded Pactiv from future litigation; the question is whether the 1998 Agreement expressly permitted Pactiv to participate in future litigation. We conclude that it did not.

We find that the 1998 Agreement contains no language reserving Pactiv’s right to challenge the patents at issue, much less the required express reservation.

Oops to Pactiv. If they were so adamant about invalidating the patent, why not get a reexamination going? If needing to skirt direct attack, hand prepared research off to PubPat, the Dr. Kevorkian of patent reexams, and have some patience.

Notably in the recent case of Microsoft invalidating RCT patents (Patently-O, Patent Prospector), the question arises as to whether previous licensees by settlement must continue paying royalties when a patent is invalidated. It depends upon the licensing agreement terms, but it is a fairly common clause, such as in the Dow-Pactiv case, to let a licensee off the hook if licensed patent claims are invalidated.

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Pactiv had an interesting argument about being denied a fair hearing owing to Dow using fabricated patent-related data during litigation.

Pactiv alternatively argues that res judicata is not a bar to this action because “Pactiv was denied a full and fair opportunity to litigate the [ ] patents as a result of Dow’s fraudulent misrepresentations in the earlier litigation.”... Specifically, Pactiv alleges that during discovery in the initial action, Dow served Pactiv with an expert report which related to the validity of the ’016 and ’058 patents. Pactiv asserts that after it settled that action, it discovered that the data relied upon by Dow’s expert had been fabricated. Pactiv argues that without this expert report, its charges of invalidity would have been much stronger and it would not have agreed to the settlement, including the dismissal.

The denial of a full and fair opportunity to litigate is a defense to collateral estoppel (issue preclusion). Nat’l Labor Relations Bd. v. Thalbo Corp. 171 F.3d 102, 109 (2d Cir. 1999). In the context of collateral estoppel, preclusive effect may be refused when there is a compelling showing of unfairness or inadequacy in the prior litigation. See Montana v. United States, 440 U.S. 147, 163-64 (1979); Restatement (Second) of Judgments § 28, cmt j. But that doctrine has a more limited role to play with respect to res judicata (claim preclusion). In Kremer v. Chemical Construction Corp., 456 U.S. 461 (1982), the Supreme Court stated in a footnote: “[w]hile our previous expressions of the requirement of a full and fair opportunity to litigate have been in the context of collateral estoppel or issue preclusion, it is clear from what follows that invocation of res judicata or claim preclusion is subject to the same limitation.” Id. at 481 n.22. But at the same time, the Court made clear that res judicata was precluded only where there was a denial of due process....Even under the Restatement rule, if the basic legal theory has been presented and determined (by adjudication or settlement), “[m]ere presentation of false evidence . . . does not generally warrant relief.” 18 Wright & Miller, § 4415, at 365-68; see, e.g., Travelers Indem. Co. v. Gore, 761 F.2d 1549, 1552 (11th Cir. 1985); Rogoski v. City of Muskegon, 550 F.2d 1075, 1077 (6th Cir. 1977); Rhodes v. Meyer, 334 F.2d 709, 716 (8th Cir. 1964). Thus Pactiv’s assertion that it was denied a full and fair opportunity in the prior adjudication to litigate the scope of invalidity because of fraud is not sufficient to bar application of res judicata (claim preclusion).

The CAFC noted that, if asserting fraud, Pactiv went about it the wrong way.

To the extent Pactiv is attempting to set aside the previous judgment based on fraud, Pactiv was required to directly challenge the first judgment in a Rule 60(b) motion filed in the original proceeding. See Campaniello Imps., Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655, 661, 663 (2d Cir. 1997) (quoting Federated Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981)).