A Chicago federal appeals panel has deflated a lawsuit by the designers of an inflatable beach mat, who alleged two companies rooked them out of royalties, finding the case does not belong in an Illinois federal court, because the out-of-state companies do not have any substantial presence in Illinois.
The April 22 ruling was penned by Circuit Judge Michael Kanne, with agreement from Circuit Judges Diane Sykes and David Hamilton, of the U.S. Court of Appeals for the Seventh Circuit.
The ruling sank a suit brought in 2017 in U.S. District Court for the Northern District of Illinois by Illinois residents Tai Matlin and James Waring against toymakers Spin Master, which is based in Toronto, Ontario, Canada, and Swimways, which operates out of Virginia Beach, Va.
Matlin and Waring, along with others, formed Gray Matter Holdings in 1997. They developed for Gray Matter an inflatable mat known as the Snap-2-It and a radio-controlled hang glider called the Aggressor, according to court papers. In 1999, the pair left the company, but had an agreement in place to receive royalties for sales of the products.
In 2003, Gray Matter sold assets to Swimways, including the patent rights to Matlin and Waring's products. The pair claimed they were still due royalties, but binding arbitration in 2014 determined Swimways did not take on Gray Matter's agreement to pay the royalties.
In 2016, Spin Master bought Swimways for more than $85 million. Matlin and Waring then sued for royalties. The companies had the suit dismissed on the jurisdictional ground they do not conduct business in Illinois.
Matlin and Waring appealed, arguing the companies sell the products online to Illinois customers and ship the products to the state, which establishes enough presence to fall under federal court jurisdiction in Illinois. In support of this argument, the plaintiffs' attorney bought one of the products online as purported evidence.
Circuit Judge Kanne was not impressed and upheld the district court decision to dismiss, saying plaintiffs' attorney "conjured up" proof of jurisdiction.
"This dispute involves an out-of-state defendant’s refusal to pay royalties on sales made nationwide. The Illinois sales are not the issue here. The defendants’ actions of paying or not paying royalties more appropriately relate to Virginia — where Swimways makes business decisions at its headquarters," Kanne said.
Kanne continued, noting: "Matlin and Waring attempted to salvage personal jurisdiction — after the defendants moved to dismiss — by luring them into shipping a product into Illinois. We cannot allow plaintiffs to base jurisdiction on a contact that did not exist at the time they filed suit. The defendants did not target Illinois and should not be subject to suit there."
Kanne pointed out the Seventh Circuit has previously cautioned against a plaintiff using the fact a defendant runs an interactive website, accessible in the forum state, as grounds to hale the defendant into court in that state.
Spin Master and Swimways have a motion for sanctions pending in district court against Matlin and Waring, as well as against Matlin and Waring's counsel, Stoltmann Law Offices of Chicago. The companies want plaintiffs and Stoltmann to pay their legal bills, because the suit is allegedly "frivolous."
Spin Master and Swimways are represented by Fitch, Even, Tabin & Flannery, of Chicago, and Cooley LLP, which is based in Palo Alto, Calif.