Rehco LLC v. Spin Master Ltd.

Filing 86

MEMORANDUM Opinion and Order Signed by the Honorable Harry D. Leinenweber on 3/17/2014:Mailed notice(wp, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

REHCO, LLC,
Plaintiff,
Case No. 13 C 2245
v.

Hon. Harry D. Leinenweber

SPIN MASTER, LTD.,
Defendant.

MEMORANDUM OPINION AND ORDER
This breach of contract and patent infringement action arises
out of a failed business agreement between Plaintiff Rehco, LLC
(“Rehco”)

and

Defendant

Spin

Master,

Ltd.

(“Spin

Master”)

concerning the development and licensing of certain technology for
radio-controlled airborne toys.

Spin Master has moved to dismiss

Count IV of Rehco’s Second Amended Complaint [ECF No. 40] and to
strike Rehco’s infringement contentions for failure to comply with
the Local Patent Rules [ECF No. 44].

Rehco opposes both Motions

and, in addition, has moved to strike an exhibit that it contends
Spin Master annexed improperly to its brief in support of its
Motion to Dismiss [ECF No. 56].

For the reasons stated herein,

Spin Master’s Motion to Dismiss is granted, Spin Master’s Motion to
Strike is granted in part and denied in part, and Rehco’s Motion to
Strike is granted.

I.

BACKGROUND

Rehco is a company that invents and develops products for the
toy industry.

Spin Master is the third largest toy company in

North America and has offices located throughout the world.
In

December

2000,

Rehco

and

Spin Master

entered

into

a

contract whereby Rehco agreed to develop technology for a new type
of radio-controlled toy airplane (the “Airplane”) in exchange for
a royalty on all of Spin Master’s future sales of the Airplane.
(See, Def.’s Mem. in Supp. of Mot. to Dismiss (“Def.’s Mem.”),
Ex. A (the “Airplane Agreement”), ECF No. 40-1).

The Airplane

Agreement provided that Spin Master could, at its sole discretion
and expense, obtain patent protection for the Airplane. (Id. ¶ 3).
Any patents obtained would be Spin Master’s property and Spin
Master would have the right to institute, prosecute, or resolve any
action based upon the infringement of those patents.
9).

(Id. ¶¶ 3,

The parties stipulated that “[d]uring and after” the Airplane

Agreement, Rehco would assist in any efforts Spin Master took to
secure, maintain, or defend its patent rights in the Airplane.
(Id. ¶ 8).
The Airplane Agreement also assigned Spin Master “the sole and
exclusive right within the entire world to manufacture, to have
manufactured for it, to use, to sell, to distribute and to have
distributed
[Airplane]

for
and

it
the

and

to

subject

in

any

matter

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other
of

all

manner
patents

exploit
and

the

patent

applications filed or to be filed on the [Airplane].”
(the

“Assignment

Clause”)).

In

the

event

that

(Id. ¶ 17

Spin

Master

defaulted on its contractual obligations, however, all rights
granted by the Assignment Clause would revert back to Rehco.

(Id.

¶ 18 (the “Reversion Clause”)).
Ultimately,

Spin

Master

applied

for

and

received

patent

protection for the Airplane under U.S. Patent No. 6,612,893 (the
“‘893 Patent”).

In a separate document filed with the United

States Patent and Trademark Office, Rehco’s inventors assigned Spin
Master all rights to the ‘893 Patent.

(Def.’s Mem., Ex. B, ECF

No. 40-2).
On March 26, 2013, Rehco filed this action, alleging that Spin
Master breached the Airplane Agreement by failing to pay the
agreed-upon royalties on sales of the Airplane and, as a result of
its breach, had been infringing on the ‘893 Patent.

Rehco also

seeks damages related to a separate agreement for the development
of a radio-controlled toy helicopter.

(See, Second Am. Compl.,

Ex. 1, ECF No. 37-1 (the “Helicopter Agreement”)).
II.
A.

ANALYSIS

Rehco’s Motion to Strike

Before turning to the merits of Spin Master’s Motion to
Dismiss, the Court first addresses Rehco’s Motion to Strike. As an
attachment to its Reply papers in support of its Motion to Dismiss,
Spin Master submitted a Rehco internal document that outlines
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potential

claims

and

litigation

strategies

development agreements with Spin Master.
(“Exhibit
disallowed

A”)).
from

Rehco
using

contends
the

that

document

related

to

its

(See, ECF No. 53-1

Spin

because

Master
it

should

was

be

produced

inadvertently and is protected by the work product rule.

Spin

Master disagrees and argues that Rehco waived any applicable
privilege

by

failing

to

object

initially

doctrine

excludes

to

its

use

of

the

discovery

any

document.
The
documents

work
or

product
materials

that

contain

the

from

“mental

impressions,

conclusions, opinions, or legal theories of a party’s attorney or
other representative concerning the litigation.”
P. 26(b)(3)(B).

FED. R. CIV.

This protection is designed to “establish a zone

of privacy in which lawyers can analyze and prepare their client’s
case free from scrutiny or interference by an adversary.”

Hobley

v. Burge, 433 F.3d 946, 949 (7th Cir. 2006). The work product rule
is not absolute, however, and the protection may be waived by
disclosures to adversaries or to third parties “in a manner which
substantially increases the opportunity for potential adversaries
to obtain the information.” Vardon Golf Co. v. Karsten Mfg. Corp.,
213 F.R.D. 528, 534 (N.D. Ill. 2003).
The document that Spin Master seeks to use in connection with
its Motion to Dismiss is plainly Rehco’s work product.

It was

prepared by Rehco’s in-house counsel in anticipation of litigation

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against Spin Master and it contains a summary evaluation of the
strengths and weaknesses of Rehco’s potential causes of action and
legal strategies. (See, Decl. of Scott Lloyd, Esq., dated Oct. 14,
2013 (the “Lloyd Decl.”), ¶¶ 4-5, ECF No. 60-1).

Indeed, the

document essentially provides a blueprint to Rehco’s case and,
thus, falls squarely within the “zone of privacy” that the work
product rule is intended to protect.

See, Hobley, 433 F.3d at 949.

The only issue is whether Rehco’s disclosure of the document waived
its ability to assert work product protection over it.
In a Stipulated Protective Order entered on June 26, 2013,
Rehco and Spin Master agreed that the inadvertent disclosure of
work product material would be “handled in accordance with Federal
Rule

of

Evidence

26(b)(5)(B).”

502

and

Federal

Rule[]

of

Civil

Procedure

ECF No. 33 ¶ 6.

Rules 502 and 26(b)(5)(B) serve

different but related purposes.

Rule 26(b)(5)(B) “is essentially

a ‘clawback’ provision . . . [that] permits parties to flag
documents inadvertently produced during discovery that they believe
are subject to privilege, and prohibits receiving parties from
using them until the privilege claim is resolved.”

Woodward v.

Victory Records, Inc., No. 11 CV 7594, 2013 WL 4501455, at *2 (N.D.
Ill. Aug. 22, 2013).
framework

for

Rule 502, on the other hand, sets forth a

determining

whether

a

party’s

disclosure

privileged materials results in a waiver of the privilege.

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of

Under Rule 502(b), a party’s disclosure of work product to an
adversary does not constitute a waiver of any applicable protection
if (1) the disclosure is inadvertent, (2) the party took reasonable
steps to prevent disclosure, and (3) the party took reasonable
steps to rectify the error.
that

the

document

was

FED. R. EVID. 502(b).

disclosed

Rehco asserts

accidentally

following

a

miscommunication between counsel and an outside vendor that was
responsible for imaging and compiling documents for production.
(See, Undated Decl. of Aaron W. Purser, Esq. (the “Purser Decl.”)
¶ 9, ECF No. 56-1).

Spin Master does not dispute whether Rehco’s

production of the document was unintentional or even whether it
took reasonable steps to prevent the disclosure.

Rather, it

contends that Rehco’s failure to object promptly to its use of the
document is evidence that Rehco did not take reasonable steps to
rectify the disclosure. Specifically, Spin Master takes issue with
the fact that Rehco did not voice an objection to the use of the
document until approximately one week after Spin Master served
notice of and presented a motion seeking leave to file its reply
papers and the document as an exhibit under seal.

(See, ECF

No. 50).
Rehco does not deny that it failed to object to Spin Master’s
Motion, but instead explains that the motion was filed and noticed
for presentment during a time when Rehco’s lead counsel, Timothy
Gochocinski,

was

on

vacation.

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(Undated

Decl.

of

Timothy

Gochocinski, Esq. (the “Gochocinski Decl.”), ¶¶ 4-5, ECF No. 56-2).
Mr. Gochocinski’s colleague, Aaron Purser, attended the hearing in
Mr. Gochocinski’s place but, at the time, did not recognize that
the document that Spin Master was seeking to file under seal was an
inadvertently-produced
litigation strategy.

internal

document

(Purser Decl. ¶ 8).

reflecting

Rehco’s

After returning from

vacation, Mr. Gochocinski reviewed the filings that had occurred in
his absence and realized that the document was work product and had
been

produced

by

mistake.

(Gochocinski

Decl.

¶

6).

Mr.

Gochocinski immediately informed Spin Master’s counsel that the
document had been produced inadvertently and requested that the
document be returned in accordance with the parties’ stipulated
protective order.

(Id. ¶ 7).

Mr. Gochocinski also took steps to

ascertain the cause of the disclosure.

(Id. ¶ 8).

Despite Mr.

Gochocinski’s repeated requests, however, Spin Master refused to
return the document.

(Id. ¶¶ 10-11).

The foregoing demonstrates clearly that Rehco took reasonable
steps to remedy its mistaken disclosure.
document

had

been

produced

Upon learning that the

inadvertently,

Rehco’s

counsel

investigated the reason for the disclosure and promptly brought the
issue to Spin Master’s attention.

Any delay that may have been

caused by Rehco’s initial failure to object to Spin Master’s use of
the document was inconsequential and resulted in no prejudice.

In

these circumstances, the Court finds that Rehco acted diligently to

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remedy its inadvertent disclosure and, therefore, did not waive
work product protection over the document.

Accordingly, Rehco’s

Motion to Strike is granted.
B.

Spin Master’s Motion to Dismiss

Count IV of Rehco’s Second Amended Complaint alleges direct
and indirect infringement of the ‘893 Patent. Spin Master seeks to
dismiss Count IV on grounds that Rehco neither owns nor possesses
substantial rights in the ‘893 Patent and therefore lacks standing
to sue for infringement.
The

existence

requirement

in

of

every

standing
federal

is

a

action.

Wildlife, 504 U.S. 555, 560 (1992).

threshold
Lujan

v.

jurisdictional
Defenders

of

In ruling on a motion to

dismiss for lack of standing, the Court may look beyond the
pleadings

and

consider

all

competent

evidence,

including

any

external facts that may call a party’s standing into question.
Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 444 (7th
Cir. 2009).

Because standing is an indispensable part of a

plaintiff’s case and more than a mere pleading requirement, a
plaintiff bears the burden of proof in establishing standing “with
the manner and degree of evidence required at [any] successive
stages of the litigation.”

Hay v. Ind. State Bd. of Tax Comm’rs,

312 F.3d 876, 879 (7th Cir. 2002).
In patent infringement actions, standing derives from the
Patent Act, which “require[s] that a suit for infringement of

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patent rights ordinarily be brought by a party holding legal title
to the patent.”

Propat Intern. Corp. v. Rpost, Inc., 473 F.3d

1187, 1189 (Fed. Cir. 2007).

Subsequent licensees also may have

standing to sue, but only if they hold “all substantial rights”
under the patent.

Sicom Sys., Ltd. v. Agilent Techs., Inc., 427

F.3d 971, 976 (Fed. Cir. 2005).

There are some exceptions to this

rule, see, Propat, 473 F.3d at 1193, but none apply in this case.
Rehco contends that ownership or at least substantial rights
in the ‘893 Patent reverted back to it pursuant to the Airplane
Agreement’s Reversion Clause, which was triggered after Spin Master
defaulted on its contractual obligations. The argument is somewhat
puzzling,

however,

since

a

reversion

typically

implies

“the

returning of property to a former owner,” see, Miriam-Webster
Online Dictionary, http://www. miriam-webster. com/ dictionary/
reversion (last accessed March 12, 2014), and Rehco never owned the
‘893 Patent.

Indeed, as the Airplane Agreement made clear, the

power to obtain and hold patent rights in the Airplane belonged to
Spin Master alone.

(Airplane Agreement ¶ 3).

In any event, assuming Spin Master did breach the Airplane
Agreement, only the rights set forth in the Assignment Clause would
have transferred back to Rehco. Such rights included “the sole and
exclusive right . . . [to] exploit the [Airplane] and the subject
matter of all patents and patent applications . . . on the
[Airplane],” (Airplane Agreement ¶ 17), but not the patent rights

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themselves, which had been granted to Spin Master under a separate
provision of the Airplane Agreement and, therefore, were not
subject to the Reversion Clause.
Nor

did

the

Reversion

Clause

transfer

substantial rights” in the ‘893 Patent.

to

Rehco

“all

In determining whether an

agreement transfers all substantial rights to a patent, the most
important consideration is the nature and scope of the transferee’s
right

to

sue

for

infringement.

Alfred

E.

Mann

Found.

for

Scientific Research v. Cochlear Corp., 604 F.3d 1354, 1360 (Fed.
Cir. 2010).

If the transferee has no right to sue accused

infringers, there is a strong presumption that all substantial
rights were not transferred. Id. The Airplane Agreement conferred
upon Spin Master the sole right to institute, prosecute, and
resolve any action for infringement.

(Airplane Agreement ¶ 9).

Under Federal Circuit precedent, Spin Master’s authority in that
regard – which was not limited by any reversion to Rehco – is
“thoroughly

inconsistent”

with

the

notion

that

assignment of all substantial rights in this case.

there

was

an

Alfred E. Mann

Found., 604 F.3d at 1361-62.
The

Court

also

finds

it

significant

that

Rehco

had

no

obligation under the Airplane Agreement to maintain the ‘893 Patent
in any way, nor any right to veto Spin Master’s litigation or
licensing decisions.

See, New Medium Technologies LLC v. Barco

N.V., 644 F.Supp.2d 1049, 1051-53 (N.D. Ill. 2007) (discussing

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factors courts consider when determining whether an agreement
transfers “all substantial rights” to a patent).

Moreover, at the

time Spin Master obtained patent protection for the Airplane,
Rehco’s inventors assigned to Spin Master any interest that they
may have held in the ‘893 Patent.

Since that assignment contained

no mechanism for the reversion of any patent rights to Rehco, it is
difficult

to

see

how

Rehco

could

later

have

obtained

all

substantial rights to the patent.
For these reasons, the Court finds that Rehco lacks standing
to pursue its claim for infringement of the ‘893 Patent.

Spin

Master’s Motion to Dismiss Count IV is granted.
C.
Spin

Spin Master’s Motion to Strike

Master

also

has

moved

to

strike

Rehco’s

Initial

Infringement Contentions for failure to comply with Local Patent
Rule 2.2.

Specifically, Spin Master complains that Rehco has

failed to (1) demonstrate on an element-by-element basis how the
accused

products

infringe

Rehco’s

patents,

(2)

identify

the

function or structure for the means-plus-function claims, and (3)
provide adequate detail regarding its claims for indirect and
willful infringement and for infringement under the doctrine of
equivalents.
Spin

Master’s

first

two

objections

plainly

lack

merit.

Rehco’s Amended Initial Infringement Contentions contain detailed
charts that both identify the specific elements for each of its

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claims and locate where those elements can be found within each of
the accused Spin Master products. Rehco’s contentions also provide
sufficient detail concerning the function and structure of each
means-plus-function element asserted in its claims.

That is all

that is necessary under the local rules and the Court declines to
require anything further of Rehco at this point.
With respect to Spin Master’s remaining objection, Rehco has
identified

a

infringement

sufficient
claims.

basis
Rehco’s

for

its

claim

indirect

under

the

and

willful

doctrine

of

equivalents, however, falls short of compliance with the local
rules.
under

Local Patent Rule 2.2(d) requires that “[f]or any claim
the

doctrine

of

equivalents,

the

Initial

Infringement

Contentions must include an explanation of each function, way, and
result

that

substantial.”

is

equivalent

and

why

any

differences

are

not

Rehco’s Amended Initial Infringement Contentions

state that the accused Spin Master products “perform substantially
the same function, in substantially the same way, to achieve
substantially the same result,” but provide no explanation as to
why this is the case or why any differences in the accused products
are not substantial.
its current form.

Rehco’s claim therefore is insufficient in

Rehco shall have twenty-one (21) days from the

date of this order to amend its infringement contentions to include
additional information consistent with that which is required under
Local Patent Rule 2.2(d).

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Spin Master’s Motion to Strike thus is granted in part and
denied in part.
IV.

CONCLUSION

For the reasons stated herein, the Court rules as follows:
1.

Spin Master’s Motion to Dismiss Count IV of Rehco’s

Second Amended Complaint [ECF No. 40] is granted;
2.

Rehco’s Motion to Strike [ECF No. 56] is granted; and

3.

Spin Master’s Motion to Strike [ECF No. 44] is granted in

part and denied in part.

Rehco shall have twenty-one (21) days

from the date of this order to amend its infringement contentions
to include additional information consistent with that which is
required under Local Patent Rule 2.2(d).
IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court
Date:3/17/2014

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