Under the doctrine of “claim preclusion” (res judicata), a judgment on the merits in a prior suit bars a second suit involving the same parties or their privies based on the same cause of action. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979). Claim preclusion bars both those claims that were brought as well as those that could have been brought in the earlier lawsuit. Lucky Brand Dungarees v. Marcel Fashions Grp., Inc., 140 S. Ct. 1589, 1594-95 (2020).

“Issue preclusion” (collateral estoppel) bars “successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, whether or not the issue arises on the same or a different claim.” New Hampshire v. Maine, 532 U.S. 742, 748 (2001). Only issues “actually litigated” and “essential to the prior judgment” have preclusive effect. Id.

In addition to “claim preclusion” and “issue preclusion,” the so-called “Kessler doctrine” bars a patent infringement suit against the customer of a seller who had previously prevailed against a patentee in an earlier patent infringement suit. Kessler v. Eldred, 206 U.S. 285 (1907).

On June 17, 2020, the Federal Circuit (“Court”) issued the precedential opinion of In re PersonalWeb Technologies, Inc. affirming that the Kessler doctrine barred future patent infringement suits against Amazon’s customers, because an earlier lawsuit brought by PersonalWeb against Amazon was dismissed with prejudice.

This decision illustrates that a settlement agreement failing to specify a patent owner’s right to sue can foreclose future patent infringement suits against other potential infringers.

In December 2011, PersonalWeb sued Amazon in the Eastern District of Texas for patent infringement of several patents relating to a file-naming technology using a “hash function.” PersonalWeb at 6-9. After the district court issued its claim construction order, PersonalWeb stipulated to the dismissal of all of its claims against Amazon with prejudice, and the district court then issued an order dismissing all of the claims against Amazon with prejudice and entered final judgment against PersonalWeb. Id. at 11.

Beginning in 2018, PersonalWeb filed numerous lawsuits in various districts against website operators, many of whom were Amazon’s customers using the same file-naming technology at issue in the previously-dismissed Texas case. Amazon intervened in the actions against its customers and sought a declaratory judgment seeking an order barring PersonalWeb’s new infringement actions against Amazon and its customers based on the prior dismissal of the Texas case. Id. at 11-13.

Following consolidation of the new lawsuits to the Northern District of California, the district court granted in part a motion for summary judgment filed by Amazon—holding that claim preclusion barred PersonalWeb’s claims regarding acts of infringement occurring prior to the final judgment in the Texas action, and holding that the Kessler doctrine also barred PersonalWeb’s claims of infringement relating to actions occurring after the final judgment in the Texas action. Id. at 13.

In its appeal to the Federal Circuit, PersonalWeb argued inter alia that the with-prejudice dismissal of the action against Amazon in the Texas case did not constitute an adjudication of non-infringement and therefore did not trigger the Kessler doctrine. Id. at 15. PersonalWeb specifically argued that, because the Kessler doctrine is based on principles of collateral estoppel (issue preclusion), the Kessler doctrine cannot be invoked unless the same issue of infringement or invalidity was “actually litigated” in the prior case. Id. at 20.

Based in part on the precedents set forth in Brain Life, SpeedTrack, SimpleAir, MGA and Rubber Tire Wheel, the Court disagreed with PersonalWeb’s contention that the issue of non-infringement must have been “actually litigated” in order to invoke the Kessler doctrine, and the Court also concluded that the Kessler doctrine conferred a “limited trade right” to Amazon based on the stipulated dismissal with prejudice of the earlier patent litigation. Id. at 19-25. See Brain Life, LLC v. Electa Inc., 746 F.3d 1045 (Fed. Cir. 2014); SpeedTrack, Inc. v. Office Depot, Inc., 791 F.3d 1317 (Fec. Cir. 2015); SimpleAir, Inc. v. Google LLC, 884 F.3d 1160 (Fed. Cir. 2018); MGA, Inc. v. General Motors Corp., 827 F.2d 729 (Fed. Cir. 1987); and Rubber Tire Wheel Co. v. Goodyear Tire & Rubber Co., 232 U.S. 413 (1914).

As explained in the excerpt below, the Court also found that its holding would not contravene the public interest in the settlement of patent litigation because a plaintiff wishing to preserve its rights to sue the same or other parties in the future may do so “by framing the dismissal agreement to preserve any such rights . . . .”

Based on the Supreme Court’s analysis in Kessler and Rubber Tire Wheel, we have characterized the Kessler doctrine as granting a “limited trade right” that attaches to the product itself. SpeedTrack, 791 F.3d at 1323 (quoting MGA, 827 F.2d at 734–35). The scope of that right is not limited to cases involving a finding of non-infringement that was necessary to the resolution of an earlier lawsuit, but extends to protect any products as to which the manufacturer established a right not to be sued for infringement. For that reason, the judgment in the Texas case, pursuant to a with-prejudice dismissal, protected Amazon’s S3 product from subsequent infringement challenges, even when those challenges were directed at Amazon’s customers rather than at Amazon itself.

. . .

We do not agree with PersonalWeb’s contention that applying Kessler to voluntary dismissals with prejudice would contravene the public interest in the settlement of patent litigation. See Foster, 947 F.2d at 477 (“[T]he Federal Circuit has repeatedly expressed the view that there is a strong public interest in settlement of patent lit-igation.”). Contrary to PersonalWeb’s assertions, the rule we apply here will not interfere with the ability of parties to resolve patent disputes. To the extent that a plaintiff wishes to settle an infringement action while preserving its rights to sue the same or other parties in the future, it can do so by framing the dismissal agreement to preserve any such rights that the defendant is willing to agree to. Settling parties will remain free to limit the preclusive effect of a dismissal; they simply have to fashion their agreement in a way that makes clear any limitations to which they wish to agree as to the downstream effect of the dismissal. See, e.g., Hallco Mfg. Co. v. Foster, 256 F.3d 1290, 1295 (Fed. Cir. 2001); Pactiv Corp. v. Dow Chem. Co., 449 F.3d 1227, 1231 (Fed. Cir. 2006).

Id. at 24-25 (emphasis added).

Takeaways: When a patent infringement suit is voluntarily dismissed with prejudice, the Kessler doctrine provides the prevailing party (non-patent owner) with a limited trade right to continue producing, using and selling the product in question. Such a stipulated dismissal operates as an adjudication on the merits for claim preclusion purposes, unless the dismissal agreement preserves the rights of the plaintiff (patent owner) to sue the same or other parties in the future. Settlement agreements in patent infringement cases should therefore be fashioned in a way that makes clear any limitations on the preclusive effect of the dismissal.

Judges: E. Wallach, W. Bryson, R. Taranto