MACTEC, Inc. v. Gorelick

F I L E D
United States Court of Appeals
Tenth Circuit

October 26, 2005
PUBLISH

UNITED STATES COURT OF APPEALS Clerk of Court

TENTH CIRCUIT

MACTEC, INC.,

Plaintiff - Appellant,
v.
Nos. 03-1290, 03-1378
STEVEN GORELICK,

Defendant - Appellee.

Appeal from the United States District Court
for the D. Colo.
(D.C. Nos. 02-M-1456, 02-M-1319)

F.T. Davis, Jr., McKenna Long & Aldridge LLP, Washington, DC (Philip D.
Bartz, Donna M. Donlon, McKenna Long & Aldridge LLP, Washington, DC,
Russell O. Stewart, Patrick Madigan, Faegre & Benson LLP, Denver, CO, with
him on the briefs), for Plaintiff-Appellant.

Seth P. Waxman, Wilmer Cutler Pickering LLP, Washington, DC (Johnathan E.
Nuechterlein and Todd Zubler with him on the briefs), for Defendant-Appellee.

Before EBEL and HENRY, Circuit Judges, and WHITE, District Judge. *

EBEL, Circuit Judge.

Honorable Ronald A. White, District Court Judge, Eastern District of
*

Oklahoma, sitting by designation.
 This case involves a contract dispute over payment of royalties for a

patented invention. The parties to the contract differed as to the meaning of a

contractual term and, pursuant to the agreement, arbitrated their dispute. After a

hearing, the arbitrator found for Defendant Gorelick and awarded $4.5 million.

Plaintiff MACTEC, Inc. filed an application in district court to vacate the

arbitration award pursuant to the Federal Arbitration Act, 9 U.S.C. § 10 (2000)

(“FAA”). Along with that application, MACTEC filed a declaratory judgment

action on the grounds that the arbitrator’s interpretation of the disputed

contractual term constituted illegal patent misuse. In separate orders, the district

court denied the application to vacate and dismissed the declaratory judgment

action. MACTEC appealed both decisions to this court, and we consolidated the

appeals for a hearing before a single panel.

As a matter of first impression in this circuit, we conclude that a non-

appealability clause in an arbitration agreement that forecloses judicial review of

an arbitration award beyond the district court level is enforceable. Due to the

presence of such a clause in the instant arbitration agreement, we hold that we

lack jurisdiction over MACTEC’s appeal from the district court’s denial of the

application to vacate the arbitration award and DISMISS the case.

-2-
 Regarding MACTEC’s appeal from the dismissal of its declaratory

judgment action, we conclude that the doctrine of res judicata bars the suit and we

AFFIRM the district court’s dismissal.

BACKGROUND

I. Factual history.

A. Development and assignment of the NoVOCs technology

While a professor at Stanford University, Defendant-Appellee Steven

Gorelick (“Gorelick”) and one of his colleagues, Haim Gvritzman (“Gvritzman”),

developed a new method for removing volatile organic contaminants from

groundwater (“the NoVOCs technology”). What was unique about this

technology is that it was designed to remove the contaminants in situ, or while the

water was still underground, by using processes known as vapor stripping and gas

pumping.

In 1991, Gorelick and Gvritzman assigned “any right, title, and interest,” in

the NoVOCs technology to Stanford, including the right to seek a patent. In

return for their assignment, Gorelick and Grivtzman each received a one-sixth

share of net royalty income, with the remaining two-thirds royalty going to the

university. Stanford subsequently applied for, and received, a patent for the

NoVOCs technology and has owned that patent ever since.

-3-
 In 1992, Gorelick formed a company called NoVOCs, Inc., (“NoVOCs”)

with the intention of developing profitable wells that used the NoVOCs

technology. To that end, NoVOCs obtained an exclusive license from Stanford to

use the patented technology in exchange for a series of annual royalties. Gorelick

was the sole shareholder and manager of NoVOCs.

In 1994, Gorelick sold all of his shares in NoVOCs to a company called

EG&G, pursuant to a stock purchase agreement. In return for the stock, EG&G

agreed to pay Gorelick an up-front payment of just under $3.3 million. In

addition, EG&G agreed to give Gorelick installment payments of (1) twenty-five

percent of future revenue derived from licenses or sub-licenses of the NoVOCs

technology; and (2) $3000 for each well EG&G drilled using the NoVOCs

technology. By acquiring all of Gorelick’s stock, EG&G became the exclusive

license holder of Stanford’s patent and thereby assumed NoVOCs’ obligations to

pay royalties to the university. The stock purchase agreement provided that all

disputes arising under the agreement would be governed by California law and

would be subject to arbitration. Two aspects of the stock purchase agreement are

particularly relevant to this appeal: First, the agreement specifically excluded

from the scope of arbitrable issues any disputes relating to patent invalidity or

infringement. Second, the agreement provided that any judgment upon the award

rendered by the arbitrator would be final and nonappealable.

-4-
 B. Entrance of MACTEC and subsequent re-negotiations

In 1997, EG&G agreed to sell certain of its assets to Plaintiff-Appellant

MACTEC, Inc. (“MACTEC”) including its stock in NoVOCs (and, by

implication, NoVOCs’ license to Stanford’s patent over the NoVOCs technology).

In a separate written instrument, MACTEC became the successor-in-interest to

the stock purchase agreement between EG&G and Gorelick, expressly assuming

all of EG&G’s payment obligations to Stanford and Gorelick.

In 1998, MACTEC, through one of its LLC subsidiaries, began using a

different method of in situ groundwater treatment in some of its wells, known as

“UBV” technology. 1 Because the NoVOCs and UBV technologies overlapped,

MACTEC was unsure as to whether the use of the UBV technology would trigger

the $3000 per-well royalty obligation to Gorelick it had assumed in the stock

purchase agreement. As a result, MACTEC approached Gorelick with the

intention of re-negotiating the royalty payments.

The parties eventually agreed in writing to reduce Gorelick’s royalty

payment to $1500 for each “remediation well” that was installed by the LLC. For

remediation wells not installed by the LLC, but rather by another entity under the

MACTEC umbrella, Gorelick would continue to receive his original $3000

payment. The term “remediation well” is defined in the document as “any hole

1
In the record, this technology is also referred to as “IEG technology.”

-5-
that (i) has been dug, drilled, or otherwise installed, or (ii) which existed and has

been converted in use, and that is employed or intended for the partial or

complete removal treatment of subsurface contaminants.” Nowhere in the written

agreement did MACTEC condition Gorelick’s payment on a given well’s use of

NoVOCs or UBV technology.

C. Royalty payment dispute

For the next two years, Gorelick received occasional payments from

MACTEC, ranging from $1500 to $4500. Gorelick received the final payment on

November 15, 2000. One month later, Gorelick learned from Stanford that

MACTEC had canceled its licensing agreement for the NoVOCs technology.

Gorelick then called executives at MACTEC who stated that since their

relationship with Stanford had terminated, they no longer had royalty obligations

to Gorelick.

Gorelick responded that his agreement with MACTEC was a separate legal

obligation which he expected MACTEC to honor. In addition, Gorelick asked

MACTEC for specific information regarding remediation wells for which he was

entitled to receive payment because he felt that there had been inadequate

reporting throughout the whole process. MACTEC did not provide the requested

information, and instead alleged that the NoVOCs technology had caused the

company as much as $3 million in damages.

-6-
II. Procedural history.

On August 6, 2001, Gorelick filed a demand for arbitration to recover

payments under the stock purchase agreement. During discovery, Gorelick

became aware of a number of wells that MACTEC drilled but for which it never

paid him royalties under the contract. These wells eventually became the central

issue in the controversy. MACTEC maintained that these wells were drilled using

only public-domain technology, not the NoVOCs or UBV technology. As a result,

it argued that it was not required to pay Gorelick the royalty payments. Gorelick

responded by pointing to the plain language of the 1998 amendment to the stock

purchase agreement, which makes no distinction between NoVOCs wells and

other types of wells.

A. Preliminary issues before the arbitrator

At the arbitration, MACTEC sought to introduce extrinsic evidence of the

parties’ intent over the meaning of the term “remediation well” to support its

position that the royalty payments only applied to wells involving NoVOCs or

UBV technology. Both sides briefed and argued the issue before the arbitrator.

The arbitrator felt that extrinsic evidence of intent was only relevant if one of the

contract terms was ambiguous. Finding no ambiguity in the contract, the

arbitrator excluded all extrinsic evidence of the parties’ intent.

-7-
 MACTEC also raised two affirmative defenses in its hearing brief (which

was filed only a few days before the actual hearing). First, MACTEC claimed

that Gorelick’s interpretation of the contract constituted patent misuse under

Zenith Radio Corp. v. Hazeltine Research Inc., 395 U.S. 100, 136 (1969).

Second, MACTEC argued that Gorelick’s patent was effectively invalid because

the European Patent Office concluded that the technology was not based on an

“inventive step.”

Gorelick, in his hearing brief, filed a motion to strike these two defenses.

Gorelick argued that the defenses were not timely raised because they were not

included in MACTEC’s specification of defenses, filed on April 1, 2002 (pursuant

to the arbitrator’s scheduling order). After hearing argument, the arbitrator issued

the following oral ruling:

[T]he motion to strike is granted on several bases. Number
one, we had a clear scheduling order. And I believe, if I’m accurate,
that all claims and defenses had to be asserted in writing by April 1st
of this year. That was not done.
Secondly, even if it weren’t an issue of failure to specify on
time, you can’t bring up new defenses in a case where there’s been as
much discovery and motions as there have been in this case. You
can’t bring up new defenses a week or five days before trial.
And thirdly, invalidity of the patent is beyond my jurisdiction.
That’s a federal issue, and we’re not going to decide the patent issues
here. If there was an invalidity of the patent, you’ve got a right to
file a lawsuit in federal court. Those two issues are out of this case,
period, okay?

-8-
 B. Arbitrator’s award and district court review

At the conclusion of the four-day hearing, the arbitrator found for Gorelick

and awarded approximately $4.5 million in damages. Pursuant to the stock

purchase agreement, MACTEC sought review before a federal district court and

filed an application to vacate the arbitrator’s award pursuant to the FAA, 9 U.S.C.

§ 10. In support of its application, MACTEC advanced three primary arguments:

(1) it was improper for the arbitrator to exclude extrinsic evidence relating to the

intent of the parties; (2) the court should not have struck the patent misuse

defense; and (3) enforcement of the award would be patent misuse and would

therefore be illegal. These actions, MACTEC argued, required vacatur under 9

U.S.C. § 10(a)(3) and on public policy grounds.

After considering MACTEC’s arguments, the district court held that: (1)

the arbitrator did not violate 9 U.S.C. § 10(a)(3) by either (a) granting the motion

to strike the defense of patent misuse, or (b) refusing to hear evidence of the

parties’ intent; and (2) it was not a patent misuse (or a violation of public policy)

to enforce the arbitration award.

C. The declaratory judgment action

Two weeks after filing its application to vacate the arbitration award,

MACTEC filed a complaint in the same district court seeking a declaratory

judgment that Gorelick’s (and, by implication, the arbitrator’s) interpretation of

-9-
the contract constituted patent misuse. Gorelick moved pursuant to Fed. R. Civ.

P. 12(b)(1) and (6) to dismiss, arguing, inter alia, that (1) the action was barred by

res judicata; and (2) MACTEC failed to state a claim. In a one-page order issued

the day after denying MACTEC’s application to vacate the arbitration, the district

court dismissed the declaratory judgment action with prejudice. The court did not

expressly give its reasoning, stating only that it was acting for the reasons set

forth in the earlier order denying MACTEC’s application to vacate.

MACTEC subsequently appealed both decisions to this court. 2 In addition

to his opening brief, Gorelick has filed a motion to dismiss for lack of appellate

jurisdiction, which is a matter of initial concern before the court.

DISCUSSION

I. Gorelick’s motion to dismiss the arbitration appeal for lack of
appellate jurisdiction.

Ordinarily, this court’s jurisdiction to consider an appeal from a district

court’s confirmation of an arbitration award arises under 28 U.S.C. § 1291 and 9

U.S.C. § 16(a)(1)(D). The jurisdictional problem in this case arises from the fact

2
For clarity, when referring to MACTEC’s appeal of the order confirming
the arbitration award (10th Cir. Docket No. 03-1378), we will use the term “the
arbitration appeal.” When referring to MACTEC’s appeal of the order dismissing
its declaratory judgment action (10th Cir. Docket No. 03-1290), we will use the
term “the declaratory judgment appeal.”

- 10 -
that in the stock purchase agreement, the provision dealing with arbitration

contained a non-appealability clause. It states, in relevant part:

Judgment upon the award rendered by the arbitrator shall be final and
nonappealable and may be entered in any court having jurisdiction
thereof.

Therefore, the question before us is whether such a provision is enforceable and,

as a result, deprives this court of appellate jurisdiction.

As a general rule, judicial review over an arbitration award is very limited.

The FAA, 9 U.S.C. § 10(a), lists only four situations in which it is appropriate at

the district court level to vacate an arbitration award: (1) where the award was the

product of corruption or fraud; (2) where there was evident partiality or

corruption on the part of the arbitrator; (3) where the arbitrators were guilty of

misconduct in refusing, upon sufficient cause shown, to postpone the hearing or

hear pertinent and material evidence; and (4) where the arbitrator exceeded his

powers. In addition, the Supreme Court has held that vacatur is also appropriate

when the arbitrator demonstrates a “manifest disregard” for the law. Wilko v.

Swan, 346 U.S. 427, 436-437 (1953), overruled on other grounds, Rodriguez de

Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 485 (1989); see also Hoeft v.

MVL Group, Inc., 343 F.3d 57, 64 (2d Cir. 2003). As for appellate review, the

FAA merely provides that decisions made under § 10(a) may be appealed. 9

U.S.C. § 16. The statute is silent on whether such an appeal is barred if the

- 11 -
parties agree that the district court’s judgment confirming or vacating the award is

to be non-appealable.

This court considered a similar issue in Bowen v. Amoco Pipeline Co., 254

F.3d 925 (10th Cir. 2001). In that case, the parties, pursuant to a prior agreement,

arbitrated a dispute over damages caused by an oil pipeline leak. Id. at 927-28,

930. The arbitration panel found for the plaintiff and awarded damages. Id. at

930. Thereafter, the plaintiff sought, and received, a confirmation of the award

from the district court. Id. The defendant appealed, claiming that the arbitrators

exceeded their powers and acted in manifest disregard of the law. Id. at 930, 932.

The plaintiff moved to dismiss the appeal for lack of jurisdiction, citing a

provision in the arbitration agreement that stated that the district court’s ruling on

the award was to be “final.” Id. at 930. We noted in dicta that “although parties

to an arbitration agreement may eliminate judicial review by contract, their

intention to do so must be clear and unequivocal.” Id. at 931 (citing Dep’t of Air

Force v. Fed. Labor Relations Auth., 775 F.2d 727, 733 (6th Cir. 1985); Aerojet-

Gen. Corp. v. Am. Arbitration Ass’n, 478 F.2d 248, 251 (9th Cir. 1973)). We

held that the parties’ agreement to make the district court’s judgment “final” did

not clearly evince an intent to waive all appellate review, stating:

In fact, the very statute from which we derive our jurisdiction, 28
U.S.C. § 1291, grants appellate courts jurisdiction from “all final
decisions of the district courts.” Hence, by agreeing that the district

- 12 -
 court’s ruling shall be final, the parties have merely reinforced the
appellate jurisdiction conferred by § 1291.

Bowen, 254 F.3d at 931. As a result we denied the plaintiff’s motion to dismiss

the appeal. Id. at 930.

In the instant case, the stock purchase agreement states not only that the

district court’s judgment shall be final, but also that it shall be “nonappealable.”

As a result, Gorelick relies heavily on our dicta in Bowen to argue that the instant

clause should be held to have waived all judicial review over the district court’s

confirmation of the arbitration award.

In a separate portion of Bowen, however, we held that the parties may not

contractually expand the standard of judicial review to allow the district court to

vacate the award for insufficient evidence. 254 F.3d at 935, 937. In so doing, we

noted that “[w]hen Congress passed the Act in 1925, it did so with the primary

goal of changing the judiciary’s refusal to enforce arbitration clauses in private

contracts.” Id. at 933. This policy notwithstanding, we refused to enforce the

parties’ agreement to permit judicial review of an arbitrator’s decision based on

sufficiency of the evidence. Id. at 935, 937. Our decision was rooted in another

policy goal of the FAA: “[B]y agreeing to arbitrate, a party trades the procedures

and opportunity for review of the courtroom for the simplicity, informality, and

expedition of arbitration.” Id. at 935 (alteration in original) (quotation omitted).

- 13 -
 We would reach an illogical result if we concluded that the FAA’s
policy of ensuring judicial enforcement of arbitration agreements is
well served by allowing for expansive judicial review after the matter
is arbitrated. . . . Contractually expanded standards, particularly those
that allow for factual review, clearly threaten to undermine the
independence of the arbitration process and dilute the finality of
arbitration awards . . . .

Id. We ultimately framed our Bowen holding in broad terms: “We agree and hold

that parties may not contract for expanded judicial review of arbitration awards.”

Id. at 937.

From this holding, one might argue that if Bowen expressly forbade private

expansion of judicial review, it might also, by implication, prohibit private

restriction (or elimination) of judicial review. After all, to justify our refusal to

enforce the parties’ contractual provisions expanding judicial review, we

described the Supreme Court’s jurisprudence in this area as suggesting “that the

FAA is more than a collection of default rules, which parties may alter with

complete discretion.” Id. at 935. But to make such an argument ignores our dicta

in the jurisdictional section of the decision, that “parties to an arbitration

agreement may eliminate judicial review by contract” so long as they clearly and

unequivocally indicate their intention to do so. Id. at 931.

How, then, do we reconcile our stated willingness to accept private

restrictions on judicial review with our express holding that private expansions on

judicial review are unenforceable? Fortunately, the panel in Bowen solves this

- 14 -
dilemma: “The key question is whether the alternate rule conflicts with the federal

policies furthered by the FAA.” Id. at 935. If the fundamental policy behind the

FAA is to reduce litigation costs by providing a more efficient forum, it makes

sense to uphold contractual provisions that support that aim while striking down

provisions that subvert it.

This is not to say that we would uphold any and all private restrictions on

judicial review over an arbitrator’s award. In Hoeft, the parties’ agreement

provided that the arbitrator’s decision was not “subject to any type of review or

appeal whatsoever.” 343 F.3d at 63. After the arbitrator found for the plaintiff,

the defendant successfully persuaded the district court to vacate the award on the

grounds that the arbitrator manifestly disregarded the law. Id. at 61, 63. On

appeal, the plaintiff argued that the non-appealability clause should have barred

the district court from examining the substance of the arbitrator’s decision

because the parties had expressly agreed that the arbitrator’s award would not be

subject to any sort of judicial review. Id. at 63. The Second Circuit held that a

non-appealability provision cannot deprive the federal courts of the ability to

apply the standards set forth in 9 U.S.C. § 10(a) or Wilko. Hoeft, 343 F.3d at 66.

The court noted that the plaintiff’s position was internally inconsistent: the

plaintiff essentially argued that he should be entitled to the benefits of judicial

confirmation of the award without incurring the risk of vacatur under § 10(a)(3).

- 15 -
Id. at 64. This would, the court argued, turn the district court’s involvement with

the case into nothing more than a rubber stamp of the arbitration award. Id. The

court’s overarching concern was that if the federal courts were to give the stamp

of legitimacy to the arbitrator’s decisions (by confirming his award), they must

also retain the right to abrogate that award (if his conduct falls within the narrow

parameters for vacatur). See id.

There is a fundamental difference between the instant case and Hoeft. In

Hoeft, the non-appealability clause applied to a district court’s review of the

arbitrator’s award. 343 F.3d at 63. Here, on the other hand, the clause applies

only to an appellate court’s review of the district court’s judgment (presumably

confirming or vacating the arbitrator’s award). As a result, none of the policy

concerns implicated by Hoeft are present in this case. The agreement here

preserves district court review under 9 U.S.C. § 10(a)(3), and while an unsatisfied

defendant would not be able to appeal a district court order denying his

application to vacate the award, so too would an unsatisfied plaintiff be unable to

contest a district court’s vacatur of an arbitration award in plaintiff’s favor. From

the parties’ perspective, then, the risks of a negative outcome resulting from the

non-appealability clause are borne equally by both sides. What we have here is

something less than full judicial review of the arbitrator’s decision; but we do not

have a situation in which there is no judicial review at all, nor a situation where a

- 16 -
court is asked to enforce an arbitration award without being given the authority to

review compliance of that award with the FAA. It is, in a sense, a compromise

whereby the litigants trade the risk of protracted appellate review for a one-shot

opportunity before the district court. 3 Indeed, courts routinely enforce agreements

that waive the right to appellate review over district court decisions. See 15A

Charles Alan Wright et al., Federal Practice and Procedure § 3901, at 18-19 (2d

ed. 1992) [hereinafter “Wright & Miller”]. We see no reason to treat district

court decisions concerning arbitration awards differently than any other kind of

district court judgment.

Thus, consistent with our dicta in Bowen, we hold that contractual

provisions limiting the right to appeal from a district court’s judgment confirming

or vacating an arbitration award are permissible, so long as the intent to do so is

clear and unequivocal. Here, the parties’ contract expressly provided that the

district court’s judgment would be both “final” and “nonappealable.” While use

of the term “final” would not, by itself, be enough to convey an intent to

3
MACTEC cites Team Scandia, Inc. v. Greco, 6 F. Supp. 2d 795, 798 (S.D.
Ind. 1998), in support of its argument that a non-appealability clause does not
foreclose judicial review of an arbitration award on the grounds set forth by the
Federal Arbitration Act. Like Hoeft, however, Team Scandia deals only with the
effect of such a clause on the district court’s ability to review the arbitrator’s
award. Id. at 798. It does not deal with the effect of a non-appealability
provision that affects only the appellate court’s ability to consider the judgment of
a district court that confirms or vacates an arbitrator’s award.

- 17 -
eliminate appellate rights, see Bowen, 254 F.3d at 931, inclusion of the term

“nonappealable” serves this purpose.

Accordingly, Gorelick’s motion to dismiss the arbitration appeal for lack of

jurisdiction is GRANTED. This leaves only our consideration of the declaratory

judgment appeal.

II. Whether MACTEC’s declaratory judgment appeal is barred by the
doctrine of res judicata.

As noted above, in addition to its application to vacate the arbitration

award, MACTEC contemporaneously sought, in a separate legal proceeding

before the same district court, a declaration that Gorelick’s (and, by implication,

the arbitrator’s) interpretation of the contract permitted Gorelick to collect

royalties on unpatented technologies and therefore constituted patent misuse. 4

Although framed as an illegality of contract issue, MACTEC originally raised this

argument at the arbitration. That is, MACTEC claimed that Gorelick’s

4
“Patent misuse occurs where the patent owner attempts to extend the
impact of his patent beyond its proper scope. . . .” John Gladstone Mills et al.,
Patent Law Basics § 12:8 (2004). For example, the owner of a patented salt
canning machine who requires licensees to use (and thus purchase) the owner’s
unpatented salt tablets in the machine as a condition of the license commits patent
misuse. See e.g., Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 491-92
(1942); see also Zenith Radio, 395 U.S. 100, 138-39 (1969) (holding that
conditioning a patent license on royalty payments for products which do not use
the patented technology amounts to patent misuse). Generally speaking, patent
misuse is an affirmative defense raised in response to an allegation of patent
infringement. Lawrence M. Sung & Jeff E. Schwartz, Patent Law Handbook §
4:8 (2004).

- 18 -
interpretation of the contract would amount to patent misuse and as a result,

would be an illegal contract which would be unenforceable under basic contract

law principles. The arbitrator ruled that MACTEC could not assert a patent

misuse defense because (1) MACTEC failed timely to file its defense; and (2)

because issues of patent invalidity were, by the terms of the arbitration agreement,

beyond the scope of arbitrable issues.

MACTEC then re-asserted this argument before the district court in its

application to vacate the arbitration award, arguing that since the arbitration

award permitted patent misuse, it must be vacated on public policy grounds. See

Denver & Rio Grande W. R.R. Co. v. Union Pac. R.R. Co., 119 F.3d 847, 849

(10th Cir. 1997) (noting that courts may vacate arbitration awards that violate

public policy). The district court considered and rejected this argument, based on

its conclusions that Gorelick was never a patent holder of the NoVOCs

technology, the payments were voluntary, and the agreement was not a patent

license.

When MACTEC filed its declaratory judgment action, Gorelick moved to

dismiss under Fed. R. Civ. P. 12, arguing, inter alia, that the suit was barred by

res judicata. Although the district court did not base its dismissal of the suit on

- 19 -
res judicata, 5 we nevertheless consider it as an alternate ground of affirmance

because it was adequately raised below. See Blum v. Bacon, 457 U.S. 132, 138

n.5 (1982).

Thus, the precise issue before our court is whether the arbitration award

itself (or the district court’s subsequent confirmation of the award) precludes

MACTEC’s subsequently-filed declaratory judgment action. The application of

res judicata is a question of law which we review de novo. Satsky v. Paramount

Communications, Inc., 7 F.3d 1464, 1467-68 (10th Cir. 1993).

The doctrine of res judicata, or claim preclusion, will prevent a party from

relitigating a legal claim that was or could have been the subject of a previously

issued final judgment. Id. at 1467. Under Tenth Circuit law, claim preclusion

applies when three elements exist: (1) a final judgment on the merits in an earlier

action; (2) identity of the parties in the two suits; and (3) identity of the cause of

action in both suits. Wilkes v. Wyo. Dep’t of Employment Div. of Labor

Standards, 314 F.3d 501, 504 (10th Cir. 2003). If these requirements are met, res

judicata is appropriate unless the party seeking to avoid preclusion did not have a

5
The district court’s dismissal order stated only that it was dismissing the
declaratory judgment action for the reasons stated in the order denying the
application to vacate the arbitration award.

- 20 -
“full and fair opportunity” to litigate the claim in the prior suit. Yapp v. Excel

Corp., 186 F.3d 1222, 1226 n.4 (10th Cir. 1999). 6

Here, it is undisputed that the parties to the arbitration and the declaratory

judgment were the same. As for finality, a valid and final award by arbitration

generally has the same effect under the rules of res judicata as a judgment of a

court. Restatement (Second) of Judgments § 84(1) & cmt. b (1980). Indeed,

[i]f any party dissatisfied with the award were left free to pursue
independent judicial proceedings on the same claim or defenses,
arbitration would be substantially worthless. Unless the express
terms of the agreement or the peculiar custom of a trade dictate
otherwise, therefore, subsequent judicial proceedings on the same
claim or defenses ordinarily should be precluded. And so the courts
rule.

18B Wright & Miller, supra, § 4475.1 at 509; but cf. McDonald v. City of West

Branch, 466 U.S. 284, 292 (1984) (holding that in an action under 42 U.S.C. §

1983, a federal court should not afford res judicata effect to an arbitration award

brought pursuant to a collective-bargaining agreement because of the special

federal rights that a § 1983 action is designed to protect).

6
In a number of our cases, we have characterized the “full and fair
opportunity to litigate” as a fourth requirement of res judicata. See, e.g., Plotner
v. AT&T Corp., 224 F.3d 1161, 1168 (10th Cir. 2000). However, as we noted in
Yapp, the absence of a full and fair opportunity to litigate is more appropriately
treated as an exception to the application of claim preclusion when the three
referenced requirements are met. Yapp, 186 F.3d at 1226 n.4.

- 21 -
 Here, MACTEC has not challenged whether the arbitration award (or the

district court’s confirmation thereof) was final, but rather whether the award may

be appealed to this court. The appealability of a judgment, however, does not

hinder its preclusive effect. See 18A Wright & Miller, supra, § 4433, at 78-85

(noting general rule that a final judgment from a lower court carries res judicata

effect even though it is still subject to review by an appellate court).

Identity of the cause of action is also present in both suits. Wilkes, 314

F.3d at 504. To determine what constitutes a “cause of action” for preclusion

purposes, this court has adopted the “transactional approach” found in the

Restatement (Second) of Judgments § 24. Petromanagement Corp. v.

Acme-Thomas Joint Venture, 835 F.2d 1329, 1335 (10th Cir. 1988). Under this

approach, a cause of action includes all claims or legal theories of recovery that

arise from the same transaction. Id. A contract is generally considered to be a

“transaction” for claim preclusion purposes. Id. at 1336.

Here, MACTEC’s allegations of patent misuse clearly arise out of the same

contractual transaction as the underlying arbitration – the execution of the stock

purchase agreement between Gorelick and MACTEC (as EG&G’s successor-in-

interest) and the subsequent renegotiation of the agreement’s terms in 1998.

Thus, the third prong of claim preclusion is met.

- 22 -
 However, MACTEC contends that it did not have a full and fair opportunity

to raise the patent misuse defense at the arbitration. This is because, according to

MACTEC, the arbitrator refused to allow MACTEC to present a patent misuse

defense because it ruled that such issues were beyond the scope of the arbitration.

Because the arbitrator was jurisdictionally barred from considering its patent

misuse defense, MACTEC argues that it never had the opportunity to litigate this

claim.

But this argument ignores the fact that MACTEC had a second chance to

assert its patent misuse theory before the district court in its application to vacate

the arbitration award. Indeed, MACTEC took advantage of this opportunity,

arguing in its written motion that the arbitrator’s award permitted patent misuse

and should thus be vacated on public policy grounds. Furthermore, the district

court considered and rejected this argument on the merits. Once the district court

issued its decision, any subsequent litigation raising patent misuse was precluded.

As we have noted above, the district court’s decision to confirm the arbitration

award (over MACTEC’s patent misuse objections) was nonappealable.

Accordingly, the declaratory judgment action is barred by res judicata.

- 23 -
 CONCLUSION

For the reasons stated above, the arbitration appeal (No. 03-1378) is

DISMISSED for lack of jurisdiction. As to the declaratory judgment appeal (No.

03-1290) we AFFIRM the judgment of the district court dismissing the case.

- 24 -