## Facts

- SPS owned a 1963 patent covering a patch-type self-locking industrial fastener; USM sold competing fasteners.
- In 1969, SPS sued USM for infringement in the Northern District of Illinois; after trial-level rulings, the parties settled by consent judgment.
- The consent judgment included USM’s acknowledgment that the patent was valid and infringed, and SPS granted USM a license in exchange for royalties.
- The license used differential royalties for sublicensing: USM owed a 25% royalty on sublicenses generally, but owed 75% of sublicense royalties if it sublicensed to any of four companies that SPS had previously licensed directly.
- In 1974, USM filed a new action seeking to invalidate the patent, recover royalties paid under the license, and assert patent misuse and antitrust theories.
- USM alleged SPS committed fraud on the Patent Office in procuring the patent and concealed that fraud during the earlier litigation, amounting to fraud on the court.
- The district court held (1) res judicata barred recovery of royalties paid before the 1974 suit, (2) the differential royalty clause was not patent misuse, and (3) SPS committed fraud on the Patent Office but not fraud on the court; it declared the patent void as of the filing of the 1974 suit and allowed recovery of post-filing royalties and attorneys’ fees.
- USM appealed the no–fraud-on-the-court and res judicata rulings; SPS cross-appealed the fraud-on-the-Patent-Office finding and the award of post-filing relief.

## Issues

1. What preclusive effect does a patent infringement consent judgment (acknowledging validity and infringement) have on later efforts to challenge validity or recover royalties?
2. Whether alleged fraud on the Patent Office or fraud on the court defeats res judicata and permits reopening the settlement’s royalty consequences.
3. Whether a differential patent royalty clause for sublicensing constitutes patent misuse and/or an antitrust violation, and what standard governs that analysis.

## Decision

- The Seventh Circuit held that the earlier consent judgment carried res judicata effect and rejected the argument that patent consent judgments lack preclusive force.
- The court agreed there was no fraud on the court sufficient to set aside or neutralize the consent judgment’s preclusive consequences for pre-1974 royalties.
- The court upheld rejection of USM’s patent misuse theory, concluding differential royalties (price discrimination) are not unlawful absent anticompetitive effect under antitrust analysis.
- The court affirmed in part and reversed in part, modifying aspects of the relief in light of res judicata and the limits of fraud-based challenges while leaving intact the central rulings on preclusion and misuse.

## Legal Principles

- A consent judgment in patent litigation, including one that embodies acknowledgments of validity and infringement, can operate as a judgment on the merits for res judicata purposes.
- Fraud on the Patent Office and fraud on the court are distinct; only fraud on the court can justify setting aside the earlier judgment itself for preclusion purposes.
- Patent misuse claims outside traditional misuse categories are evaluated using antitrust principles, typically under the rule of reason, requiring proof of anticompetitive effect.
- Differential patent royalties and price discrimination by a patentee are not per se unlawful and do not constitute misuse without evidence that the arrangement harms competition or extends the patent beyond its lawful scope.

## Conclusion

The Seventh Circuit treated the prior patent consent judgment as preclusive for past royalty obligations absent fraud on the court and held that differential sublicensing royalties amounted to permissible price discrimination, not patent misuse, without a showing of anticompetitive effect under antitrust standards.


USM Corp. v. SPS Techs., Inc., 694 F.2d 505 (7th Cir. 1982)