IP Law Daily Sanctions of $272K affirmed on appeal for frivolous litigation over royalties
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Thursday, November 12, 2020

Sanctions of $272K affirmed on appeal for frivolous litigation over royalties

By Brian Craig, J.D.

Because the suit seeking unpaid royalties was frivolous, the district court properly awarded $271,926 for attorney fees, including an average rate of $1,000 per hour for the lead defense attorney.

Concluding that a suit seeking to recovery unpaid royalties for intellectual property rights was frivolous, the U.S. Court of Appeal for the Seventh Circuit has affirmed a decision by the federal district court in Illinois to impose sanctions for $271,926. Because preclusion and the language of the contracts rendered the suit frivolous, the district court did not abuse its discretion in finding that the groundless lawsuit was objectively unreasonable and necessitated sanctions. In affirming an average rate of approximately $1,000 per hour for the lead defense attorney, the court also held that the best evidence of whether attorney’s fees are reasonable is whether a party has paid them (Matlin v. Spin Master Corp., November 10, 2020, Kanne, M.).

Tai Matlin and James Waring co-founded a company called Gray Matter Holdings. Matlin and Waring obtained two patents for their inventions, an inflatable beach mat known as the "Snap-2-It" and a radio-controlled hang glider called the "Aggressor." Matlin and Waring sued defendants Spin Master Corp., Spin Master Ltd., and Swimways Corporation alleging fraud, breach of contract, and unjust enrichment over unpaid royalties. In a previous suit between the parties, the U.S. Court of Appeals for the Seventh Circuit affirmed in April 2019 dismissal based on lack of personal jurisdiction over the defendants. In a subsequent case involving the same parties, the district court concluded that the case was frivolous based on claim preclusion and the language in the contracts. While the defendants sought $408,471 in sanctions, the district court awarded $271,926.92 in sanctions. The district court held that the plaintiffs, along with their former counsel, were jointly and severally liable for the costs and fees that Swimways and Spin Master expended preparing their motion to dismiss and motion for sanctions. The plaintiffs and their former counsel appealed.

Imposition of sanctions. The Seventh Circuit held that because preclusion and the language of the contracts rendered the suit frivolous, the district court did not abuse its discretion in finding that opting to undertake the groundless lawsuit was objectively unreasonable and necessitated sanctions. Under Federal Rule of Civil Procedure 11, courts may sanction parties who file frivolous pleadings. For example, bringing a claim that is barred by res judicata is sanctionable. The Seventh Circuit agreed with the district court that the claims were clearly (1) precluded by principles of res judicata and (2) groundless based on the plain language of the governing contracts. The Seventh Circuit found that at the time of the suit, the plaintiff knew—or should have known—that they had a "loser" on their hands. Therefore, the Seventh Circuit held that sanctions were properly awarded.

Reasonableness of sanctions. The Seventh Circuit also affirmed the reasonableness of sanctions, concluding that the best evidence of whether attorney fees are reasonable is whether a party has paid them. A district court’s fee award receives wide latitude under a highly deferential abuse of discretion standard. The Seventh Circuit has previously held that the best evidence of whether attorney’s fees are reasonable is whether a party has paid them. The district court found that the lead counsel for the defendant has 28 years of litigation experience, primarily in the intellectual property sector with an effective hourly billable rate ranged from $973 to $1,092 during this matter. Though the rate is above the median rate of comparable intellectual property attorneys, the court found that the amount was nonetheless reasonable where the defendants actually paid their attorneys $271,926 to prepare the motions to dismiss and for sanctions.

Accordingly, the Seventh Circuit affirmed the district court’s decision granting costs and fees to Swimways and Spin Master in the amount of $271,926. The appeals court denied the motion for sanctions under Federal Rule of Appellate Procedure 38.

This case is Nos. 20-1039 and 20-1049.

Attorneys: Tai Matlin, pro se. Jonathan Graves (Cooley LLP) for Spin Master Corp., Spin Master Ltd. and Swimways Corp.

Companies: Spin Master Corp.; Spin Master Ltd.; Swimways Corp.

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