Matlin v. Spin Master Corp., s. 20-1039 & 20-1049

• Decision Date: 10 November 2020
• Docket Number: Nos. 20-1039 & 20-1049,s. 20-1039 & 20-1049
• Citation: 979 F.3d 1177
• Parties: Tai MATLIN and James Waring, Plaintiffs-Appellants, v. SPIN MASTER CORP., Spin Master Ltd., and Swimways Corporation, Defendants-Appellees, and Appeal Of: Stoltmann Law Offices.
• Court: U.S. Court of Appeals — Seventh Circuit

979 F.3d 1177

Tai MATLIN and James Waring, Plaintiffs-Appellants,

v.SPIN MASTER CORP., Spin Master Ltd., and Swimways Corporation, Defendants-Appellees,andAppeal Of: Stoltmann Law Offices.

Nos. 20-1039 & 20-1049

United States Court of Appeals, Seventh Circuit.

Argued September 24, 2020

Decided November 10, 2020

Tai Matlin, Pro Se

James Waring, Pro Se

Alexander N. Loftus, Attorney, Stoltmann Law Offices, P.C., Chicago, IL, for Appellant

Jonathan Graves, Attorney, Cooley LLP, Reston, VA, Allen E. Hoover, Fitch, Even, Tabin & Flannery, Chicago, IL, for Defendants - Appellees

Before Easterbrook, Manion, and Kanne, Circuit Judges.

Kanne, Circuit Judge.

Plaintiffs Tai Matlin and James Waring have spent seventeen years embroiled in disputes related to the intellectual property claims at issue in this case. In that time, arbitrators have sorted out many aspects of this IP kerfuffle, including that a company called Gray Matter is on the hook alone for paying certain royalties to Matlin and Waring. So, in 2017, when Matlin and Waring filed the suit now on appeal seeking those royalties from companies other than Gray Matter, they knew—or should have known—that they had a loser on their hands. And the district court recognized as much by sanctioning Matlin and Waring and ordering them and their former counsel, Stoltmann Law Offices, to pay certain costs and fees expended by Defendants Swimways and Spin Master.¹

Accordingly, we affirm the district court's decision granting costs and fees to Swimways and Spin Master in the amount of $271,926.92. We also deny Appellees’ motion for sanctions under Federal Rule of Appellate Procedure 38.

I. BACKGROUND

In 1997, Matlin and Waring co-founded Gray Matter Holdings, LLC.² In 1999, they entered into a Withdrawal Agreement with Gray Matter. This Withdrawal Agreement entitled Matlin and Waring to royalties on the sales of certain "Key Products." In 2003, Gray Matter sold some of its assets to Defendant Swimways Corp.

Since this asset sale, Matlin and Waring have hauled Gray Matter into arbitration four times over their royalty rights. The third and fourth arbitrations are relevant to this appeal.

The third arbitration determined that Gray Matter did not transfer its royalty obligations under the Withdrawal Agreement to Swimways. Gray Matter only transferred its intellectual property rights. As a result, Gray Matter, not Swimways, remained responsible for any royalty compensation owed to Matlin and Waring under the Withdrawal Agreement.

The fourth arbitration dealt with a claim by Matlin and Waring that Swimways tendered fraudulent filings to the United States Patent and Trademark Office ("USPTO") regarding the intellectual property rights in the Key Products. The arbitrator found no evidence supporting this claim. Moreover, even assuming the fraud allegations were true, the arbitrator determined that Matlin and Waring would not be entitled to relief because all intellectual property rights in the Key Products at issue had been transferred to Swimways; Matlin and Waring had no rights left in them to assert.

In 2016, Defendant Spin Master acquired Swimways. The next year, Matlin and Waring filed this suit against Swimways and Spin Master. Matlin and Waring's complaint alleged that they were entitled to royalties from Swimways and Spin Master for the Key Products and that Swimways tendered the alleged fraudulent filings discussed above to the USPTO. The district court dismissed the complaint for lack of personal jurisdiction. This court affirmed. Swimways and Spin Master then sought sanctions.

The district court granted the motion and sanctioned Matlin and Waring for "[o]pting to undertake this groundless lawsuit [that] was objectively unreasonable." To support this conclusion, the court noted that Matlin and Waring's claims were clearly barred by (1) "principles of res judicata "—i.e. , the holdings of the third and fourth arbitrations—and (2) "the plain language of the governing contracts in dispute."

Regarding preclusion, the court found that the arbitrations were "binding and final" because the Withdrawal Agreement stated that "any dispute or controversy arising under or in connection with this Agreement ... shall ... be submitted to binding arbitration." And the third and fourth arbitrations precluded Matlin and Waring's claims because the complaint was "premised on the same foundational issues[, royalties and fraud,] previously decided in arbitration." The court thus ordered that Matlin and Waring, along with their former counsel, Stoltmann Law Offices ("SLO"), 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.

SLO then filed a motion to reconsider the sanctions order. SLO first argued that the court's order imposing sanctions on the basis of "principles of res judicata " was an improper advisory opinion because it reached the merits of the case after the case had already been dismissed without prejudice for lack of personal jurisdiction. The court disagreed with this "novel legal theory with no support in this circuit—or elsewhere." And, the court stated that "the Seventh Circuit has upheld a district court's ‘impos[ition] [of] Rule 11 sanctions on bases different from those on which the case was dismissed.’ "

SLO next took issue with the sanction amount. After considering SLO's argument, the court did set aside a sizeable portion of the $408,471.51 that Swimways and Spin Master initially sought but still awarded them $271,926.92 on the basis of their detailed accounting, and payment, of those costs and fees. The accounting showed that attorneys and staff for Swimways and Spin Master spent 273.1 hours, charging an average rate of about $1,000 per hour, preparing the motion to dismiss and motion for sanctions, which consisted of five total filings. Matlin, Waring, and SLO ("Appellants") now appeal the district court's sanctions order and reassert the arguments from their motion to reconsider.

II. ANALYSIS

We review de novo whether the court's sanction award was an unconstitutional advisory opinion. Lopez Ramos v. Barr , 942 F.3d 376, 380 (7th Cir. 2019). We review the court's imposition of sanctions for abuse of discretion. Cooter & Gell v. Hartmarx Corp. , 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).

A. The Sanctions Order Was Not an Advisory Opinion.

Article III's "case or controversy" requirement prohibits federal courts from issuing advisory opinions that do not affect the rights of the parties before the court. Preiser v. Newkirk, 422 U.S. 395, 401, 95 S.Ct. 2330, 45 L.Ed.2d 272 (1975). This proscription has never concerned us where a district court imposes Rule 11 sanctions on grounds different from those on which a case was dismissed. See, e.g. , Pollution Control Indus. of Am., Inc. v. Van Gundy , 21 F.3d 152, 156 (7th Cir. 1994) (affirming the propriety of sanctions for filing a case in which subject-matter jurisdiction did not exist even though the case had been dismissed for lack of personal jurisdiction); Ghosh v. Lindley , Nos. 92-1237 & 92-1899, 1993 WL 311958, at *2 (7th Cir. Aug. 17, 1993) (affirming a sanctions order for pursuing frivolous litigation even after the district court found it lacked subject-matter jurisdiction). And this is for good reason—a sanctions order always affects the parties’ rights concerning the sanctions themselves. Indeed, the sanctions order in this case affected the rights of Swimways and Spin Master to costs and fees and thus was not an advisory opinion.

B. Sanctions Were Proper.

Under Federal Rule of Civil Procedure 11, courts may sanction parties who file frivolous pleadings. For example, "[b]ringing a claim that is barred by res judicata is sanctionable." Singh v. Curry , Nos. 88-2981 & 89-1619, 1995 WL 632464, at *3 (7th Cir. Oct. 25, 1995) (citing Cannon v. Loyola Univ. of Chi. , 784 F.2d 777, 782 (7th Cir. 1986) ). The district court in this case sanctioned Appellants because Matlin and Waring's claims were clearly (1) precluded by "principles of res judicata " and (2) groundless based on "the plain language of the governing contracts." We will address both bases in turn.

First, Illinois law controls the preclusion issue in this case. Taylor v. Sturgell , 553 U.S. 880, 891 n.4, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008) (citing Semtek Int'l Inc. v. Lockheed Martin Corp. , 531 U.S. 497, 508, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001) ). And both federal district courts and the Illinois Appellate Court have held that Illinois affords preclusive effect to binding arbitration awards, even if unconfirmed, unless preclusion impinges on a party's federal rights. See, e.g. , Plastic Recovery Techs., Co. v. Samson , No. 11 C 2641, 2011 WL 3205349, at *3 (N.D. Ill. July 28, 2011) (citing Stulberg v. Intermedics Orthopedics, Inc ., 997 F. Supp. 1060, 1066–67 (N.D. Ill. 1998) ; Monmouth Pub. Sch., Dist. No. 38 v. Pullen , 141 Ill.App.3d 60, 95 Ill.Dec. 372, 489 N.E.2d 1100, 1105 (1985) ).³ In short, "[i]f [an] arbitration award is binding on the parties, any inquiry into the matters originally controverted is forever closed." Monmouth , 95 Ill.Dec. 372, 489 N.E.2d at 1106.

Here, Matlin and Waring's suit did not seek to vindicate federal rights. And there is little question that the third and fourth arbitrations were binding—the Withdrawal Agreement specified that "any dispute or controversy arising under or in connection with this Agreement ... shall ... be submitted to binding arbitration." So the only issue is whether the third and fourth arbitrations disposed of the underlying suit's claims. Upon considering those claims and the rulings of the arbitrators, it quickly becomes apparent that they did.

The third arbitration resolved Matlin and Waring's allegation that Swimways and Spin Master owed them royalties from the Withdrawal Agreement by finding that "[w]hile certain assets of [Gray Matter] were transferred in conjunction in the Asset Sale, the...