Court Denies Jurisdiction in Suit Over Breach of Contract and Failure to pay Royalties Because Plaintiffs’ Contrived Jurisdiction Through Single Purchase

When two founders of a company sued the company that had come into possession of the founders’ patents and intellectual property rights, the district court dismissed their suit for lack of personal jurisdiction. The appellate court affirmed on appeal, finding that the plaintiffs’ lawyer contrived to create personal jurisdiction by ordering a single item from the defendant company be shipped into the state of Illinois, even though the defendant company did not do business in or specifically target the Illinois market. The appellate panel also noted that the conduct that allegedly created personal jurisdiction had happened after the plaintiffs filed suit and was therefore clearly contrived.

Tai Matlin and James Waring, and other business partners co-founded a company called Gray Matter Holdings, LLC in 1997. Matlin and Waring developed certain products for Gray Matter, including an inflatable beach mat known as the “Snap-2-It” and a radio-controlled hang glider called the “Aggressor.” In 1999, facing failure of the company, Matlin and Waring entered into a Withdrawal Agreement with Gray Matter wherein they sold their partnership shares and forfeited their salaries. The agreement also assigned Matlin and Waring’s intellectual property to Gray Matter but entitled them to royalty payments. In the following years, Matlin and Waring frequently brought Gray Matter to arbitration to enforce royalty payments.

In 2002, Gray Matter filed an assignment of the products’ intellectual property rights with the United States Patent and Trademark Office. Matlin and Waring allege that Gray Matter filed the assignment without their knowledge and that the company forged Waring’s signature on the paperwork. The following year, Gray Matter sold assets to Swimways, including the patent rights to Matlin and Waring’s products. A 2014 arbitration between Gray Matter and Matlin and Waring determined that Gray Matter did not assign the Withdrawal Agreement to Swimways upon the sale of the products and that the plaintiffs were owed no further royalties. In 2016, Spin Master acquired Swimways and intellectual property rights.

In 2017, Matlin and Waring sued Swimways, and Spin Master in the Northern District of Illinois. Swimways is a Virginia corporation with its principal place of business in Virginia Beach. Spin Master is a Canadian corporation with its principal place of business in Toronto. None of the defendants are registered to conduct business in, have employees in, or have registered agents for service in Illinois. The defendants moved to dismiss the suit, arguing that the court lacked personal jurisdiction. In response, the plaintiffs’ lawyer submitted that he was able to buy from Swimways’ website and receive in Illinois a single royalty-generating product. The district court sided with the defendants, finding that the defendants had insufficient contacts with Illinois to establish either general or specific personal jurisdiction. Matlin and Waring then appealed.

The appellate panel began by addressing the issue of personal jurisdiction. The panel found that the district court correctly declined to exercise personal jurisdiction over the defendants. The panel stated that the defendants’ alleged failure to pay Matlin and Waring royalties had little to do with Illinois. The panel stated that even if it accepted that online purchase of a single royalty-generating product caused Illinois-based harm, this contact arose after the plaintiffs initiated suit, and was performed solely to lure the defendants into Illinois to establish personal jurisdiction over them. The panel stated that because the defendants did not target Illinois, they should not be subject to suit in that state. The panel, therefore, affirmed the decision of the district court.

You can look at the full decision of the Court here.

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