Inventors Sanctioned for Pursuing Frivolous Litigation Over Royalty Rights

Two inventors who were entitled to royalties on the sales of products sued the purchaser of their former company over their royalty rights. The litigation and arbitration took years, and after the third round of arbitration, the arbitrator determined that the inventors were not entitled to compensation from the company they sued. Despite this finding, the two continued to engage in litigation against the firm. After their final suit was dismissed in the district court, the company sought sanctions for bringing a groundless lawsuit. The district court granted the motion, finding that the suit had been barred by the doctrine of res judicata and the plain language of the governing agreements. The appellate panel agreed, determining that the results of the third and fourth rounds of arbitration made the suit frivolous and it affirmed the imposition of sanctions.

In 1997, Tai Matlin and James Waring co-founded Gray Matter Holdings, LLC. In 1999, they entered into a Withdrawal Agreement with Gray Matter. The agreement entitled Matlin and Waring to royalties on the sales of certain key products. In 2003, Gray Matter sold some of its assets to Swimways Corp.

Since that sale, Matlin and Waring have been engaged with Gray Matter in protracted litigation and arbitration over their royalty rights. During the third arbitration, the arbitrator determined that Gray Matter had not transferred its royalty obligations to Swimways in 2003, and therefore remained solely responsible for any royalty compensation owed to Matlin and Waring under the Withdrawal Agreement.

In 2016, Spin Master acquired Swimways. The next year, Matlin and Waring filed suit against Swimways and Spin Master, seeking royalties from the two companies for the key products. The district court dismissed the complaint due to lack of personal jurisdiction, and Maitlin and Waring then appealed to the  7th Circuit. Swimways and Spin Master then sought sanctions. The district court granted that motion, sanctioning Martin, Waring, and their legal counsel for opting to undertake a groundless lawsuit that was objectively unreasonable. The court found that the claims in the suit were clearly barred by the holdings of the third and fourth rounds of arbitration and the plain language of the governing contracts. Stoltman Law Offices then appealed.

The appellate panel began by addressing SLO’s argument that the sanctions were an improper advisory opinion because the sanctions were imposed for a basis other than what the suit was dismissed for. The panel rejected this argument. Citing Pollution Control Indus. of Am., Inc. v. Van Gundy, the panel stated that the 7th Circuit has never been concerned with Article III’s “case or controversy” requirement when a district court imposes Rule 11 sanctions on grounds different from those on which a case was dismissed. The panel noted that a sanctions order always affects the parties’ rights concerning the sanctions themselves and is therefore never an advisory opinion.

Next, the panel addressed the question of whether the sanctions imposed in the case were proper. The panel noted that courts may sanction parties who file frivolous pleadings. Citing Singh v. Curry, the panel stated that bringing a claim barred by res judicata is sanctionable. The panel found that there was little question that the third and fourth rounds of arbitration were binding on Matlin and Waring. The panel stated that the third arbitration resolved Matlin and Waring’s allegation that Swimways and Spin Master owed them royalties from the Withdrawal Agreement. The panel then found that the secondary basis for imposing sanctions, that the plaintiffs’ claims were barred by the plain language of the governing contracts, was compelling. The panel determined that, because preclusion and the language of the contracts rendered Matlin and Waring’s suit frivolous, the district court did not abuse its discretion in finding that opting to undertake the lawsuit was objectively unreasonable and necessitated sanctions. The panel, therefore, affirmed the decision of the district court.

You can read the entire opinion here

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