Matlin v. Spin Master Corp., 1:17-cv-07706

Background

Plaintiffs Tai Matlin and James Waring previously litigated and arbitrated disputes with their former employer (180s, LLC) over ownership of intellectual property for certain “Key Products” and entitlement to royalties.
The Withdrawal Agreement between Plaintiffs and 180s required binding arbitration for disputes and waived jury trial for contractual disputes.
In two later arbitrations (the third and fourth), arbitrators found that: 180s owned the Key Product IP; the Asset Purchase Agreement transferred the Key Product assets and IP to Swimways; the Withdrawal Agreement itself was not transferred; and Plaintiffs retained no IP ownership or royalty claims against Swimways.
Plaintiffs filed a First Amended Complaint in federal court against Spin Master Corp., Spin Master Ltd., and Swimways alleging fraud, breach of contract, and unjust enrichment—claims premised on the theory that Defendants assumed royalty obligations or otherwise injured Plaintiffs’ IP interests.
This Court dismissed the federal complaint for lack of personal jurisdiction; Defendants moved for Rule 11 sanctions arguing the complaint was precluded by prior arbitration rulings and the plain contract language.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Plaintiffs’ claims in federal court were precluded by prior arbitrations	Matlin/Waring contended Swimways assumed royalty obligations and that defendants committed fraud regarding ownership filings	Defendants argued prior arbitrators already decided 180s retained obligations and transferred IP assets to Swimways, so Plaintiffs retained no rights and claims are precluded	Court held claims barred by collateral estoppel and the arbitration rulings; plaintiffs’ suit was precluded
Whether arbitration awards (including unconfirmed awards) have preclusive effect	Plaintiffs implicitly argued federal court could hear their claims despite arbitration outcomes	Defendants argued arbitration decisions interpreting the Withdrawal Agreement are binding and preclusive as to the private contractual rights at issue	Court held arbitrator rulings on contract issues are entitled to preclusive effect in this suit because disputes concern private contractual rights
Whether Plaintiffs’ fraud claims were plausible given arbitration findings	Plaintiffs alleged defendants filed fraudulent USPTO-related documents and obtained IP by fraud	Defendants argued arbitrators found Plaintiffs retained no ownership interest, so fraud (even if proven) would not give Plaintiffs relief	Court held fraud claims foreclosed by arbitration findings that Plaintiffs had no IP interest, so claims lack a good-faith basis
Whether Rule 11 sanctions are appropriate and timely	Plaintiffs argued defendants delayed and motion was untimely/gamesmanship	Defendants showed they provided Rule 11 safe-harbor notice, filed postjudgment within acceptable bounds, and claims were objectively unreasonable given arbitration rulings	Court held sanctions appropriate; Defendants complied with Rule 11 timing and are entitled to fees/costs related to the motions

Key Cases Cited

Tobey v. Chibucos, 890 F.3d 634 (7th Cir. 2018) (district court need not accept all plead facts as true when reviewing sanctions)
Berwick Grain Co. v. Illinois Dep’t of Agric., 217 F.3d 502 (7th Cir. 2000) (Rule 11 authorizes sanctions for legal contentions not warranted after reasonable inquiry)
Hartmarx Corp. v. Abboud, 326 F.3d 862 (7th Cir. 2003) (sanctions should be used sparingly given their consequences)
Cuna Mut. Ins. Soc. v. Office & Prof’l Emp. Int’l Union Local 39, 443 F.3d 556 (7th Cir. 2006) (objective reasonableness standard for sanctionable conduct)
Matrix IV, Inc. v. Am. Nat’l Bank & Trust Co., 649 F.3d 539 (7th Cir. 2011) (Rule 11 safe-harbor timing; 21-day rule is a floor not a ceiling)
IDS Life Ins. Co. v. Royal All. Assocs., Inc., 266 F.3d 645 (7th Cir. 2001) (arbitration awards may have preclusive effect as a matter of contract)
McDonald v. City of West Branch, Mich., 466 U.S. 284 (U.S. 1984) (arbitration cannot substitute for judicial protection of federal statutory or constitutional rights)
Bethesda Lutheran Homes & Servs., Inc. v. Born, 238 F.3d 853 (7th Cir. 2001) (claims barred by res judicata are obvious to counsel and sanctionable)
Singh v. Curry, 69 F.3d 540 (7th Cir. 1995) (bringing a claim barred by res judicata can be sanctionable)
Cannon v. Loyola Univ. of Chicago, 784 F.2d 777 (7th Cir. 1986) (affirming that res judicata-based filings may warrant sanctions)