Failing to include a standard “boilerplate” provision expressly making a consent judgment binding upon, and inuring to the benefit of, a party’s successors and assigns can limit that judgment’s scope to only the current parties, according to a recent decision of the Court of Appeals for the Federal Circuit (CAFC).This decision may be of critical importance to attorneys and their clients in settling disputes, attempting to enforce an “inherited” consent judgment, or assessing the value of any business, or of any intellectual property (IP) or other assets, transferred in a merger, asset sale, license, or other transaction. The effects of this decision could spread if the decision were extended to other types of agreements.

Specifically, the CAFC held that a consent judgment settling a trade dress, patent, and other IP infringement suit could not be enforced by the successor-in-interest to the applicable IP because the consent judgment did not include a common “boilerplate” provision stating that it inured to the benefit of the IP owner’s successors and assigns, but did include a provision binding the alleged infringer’s successors and assigns (Thatcher v. Kohl’s Dep’t Stores, 2005 WL 310875 (Fed. Cir. 2005)). According to the CAFC, inclusion of the “binding” clause but not the “benefit” clause was an expression of the intent of the parties to limit the benefit of the agreement to the current IP owner only.

Practical Guidance

Although the Thatcher decision is limited to consent judgments and relied primarily on Illinois (not California) law, the decision could be extended to other types of agreements, and California law might not dictate a different result. Therefore, you should consider these best practices:

• To render an agreement binding upon the other party’s successors and assigns, include an express statement to that effect; this statement is not mere “boilerplate” that can be discarded to streamline an agreements;
  
• To make an agreement inure to the benefit of your successors and assigns, include an express statement to that effect; this also is not “boilerplate” that you can live without;
  
• If you do not intend for an agreement to benefit the other party’s successors and assigns, include an express statement to that effect or one that prohibits assignment or other transfer of the agreement without your consent (be sure to expressly prohibit transfers by operation of law, reorganization, or change of control if that is your intent); do not rely on silence to save you, even though it saved Kohl’s;
  
• Particularly when drafting consent judgments and settlements, use extra care to express your intention in the document itself, because courts are more likely to limit such documents to their express terms than they are to limit other types of agreements; and
  
• When suing to enforce a consent judgment, settlement, or other agreement without express successors and assigns provisions, be sure to include in the suit any related legal claims (e.g., IP infringement claims), in case the claims for enforcement of the agreement are dismissed for lack of standing.
  
• In the context of a merger, asset sale, license, or other transaction, when assessing the value of any business or assets benefiting from an existing consent judgment, settlement agreement or other agreement without express successors and assigns provisions, consider whether the value of the business or assets should be discounted because of the possible inability of the acquirer to enforce the judgment or agreement.
  
• Similarly, when assessing the value of any business bound, or assets affected, by an existing consent judgment or other agreement without express successors and assigns provisions, consider whether the value of the business or assets should be enhanced because the acquirer may not be bound by the consent judgment or agreement.

Analysis of Thatcher v. Kohl’s Department Stores

The Thatcher case involved a consent judgment entered into by Kohl’s Department Stores and Mark Thatcher, then-owner of certain IP rights relating to the popular TEVA® sandals. In July 1997, Thatcher filed a suit in the U.S. District Court for the Northern District of Illinois accusing Kohl’s of infringing Thatcher’s IP rights in the TEVA® sandals by making and selling similar sandals. Thatcher and Kohl’s settled the suit later that year, and the district court entered a consent judgment. The consent judgment included two injunctions prohibiting Kohl’s from committing future acts of patent and trade dress infringement. The judgment contained explicit language making it binding upon Kohl’s successors-in-interest, but it did not contain similar language extending the benefit of the consent judgment to Thatcher's successors or indicating under which circumstances, if any, Thatcher could assign the judgment.

In November 2002, Thatcher sold his IP rights in the TEVA® sandals, including all related contracts, claims, causes of action, and judgments, to Deckers Outdoor Corporation. In 2003, Deckers discovered that Kohl’s had resumed sale of the allegedly infringing sandals. In response, Deckers sued Kohl’s in the Illinois district court for contempt of the 1997 consent judgment, seeking coercion of compliance with the consent judgment, sanctions for civil contempt, and damages.

Both the district court and the CAFC ruled that Deckers lacked standing because it was not an original party to the consent judgment and the judgment did not expressly extend to Thatcher’s successors-in-interest. Deckers argued that when an IP-related agreement is silent on assignability, it is generally construed to be freely assignable by the IP owner (especially to future owners of the same IP). The CAFC did not comment on the validity of this general rule, but decided that the rule should not apply to consent judgments.

Instead, the CAFC applied the reasoning of the Supreme Court case, United States v. Armour & Co., 402 U.S. 673 (1971), as well as prior decisions by the Illinois courts, to find that the scope of the consent judgment must be determined solely by its “four corners” and should not be interpreted beyond its plain meaning. According to the CAFC, consent judgments represent the precise bargain that hostile litigants settling disputes were able to negotiate for themselves and, as a result, the court should not give either party a greater benefit or burden than that for which they bargained. The CAFC noted that the agreement’s lack of a provision regarding Thatcher’s successors but inclusion of one regarding Kohl’s successors indicated that the parties had contemplated the successors issue and had not reached agreement regarding Thatcher’s successors.

As a result, Deckers lacked standing to bring a suit to enforce the consent judgment and could not stand in Thatcher’s shoes (or, in this case, his sandals). Ironically, Deckers, as the owner of the applicable IP, could have sued Kohl’s for IP infringement, but was unable to sue Kohl’s for contempt of a consent judgment prohibiting the same infringement.

For additional information or discussion, please contact Tom Magnani (415-434-1600, tmagnani@howardrice.com) or your usual Howard Rice attorney.

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Copyright © 2005 Howard Rice Nemerovski Canady Falk & Rabkin PC, Three Embarcadero Center, Seventh Floor, San Francisco, CA 94111.
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