ZippySack LLC et al v. Ontel Products Corporation

Filing 49

MEMORANDUM OPINION AND ORDER Signed by the Honorable Harry D. Leinenweber on 4/19/2016:Civil case terminated. Mailed notice(wp, )

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

ZIPPYSACK LLC and LF
CENTENNIAL LIMITED,
Plaintiffs,

Case No. 16 C 757

v.

Judge Harry D. Leinenweber

ONTEL PRODUCTS CORPORATION,
Defendant.

MEMORANDUM OPINION AND ORDER
Plaintiffs ZippySack LLC and its licensee, LF Centennial
Limited

(hereinafter,

collectively

“ZippySack”),

brought

this

suit against Defendant Ontel Products Corporation (“Ontel”) for
breach of contract and patent infringement.
after

Ontel

allegedly

between the parties.

breached

a

prior

The dispute arose

settlement

agreement

The Motion now before the Court is to

enforce that settlement [ECF No. 37].

For the reasons stated

herein, the Court grants the Motion and dismisses this case.
I.

BACKGROUND

A predecessor lawsuit to the current action was filed in
August

2015.

infringed

At

its

that

patents

time,

covering

ZippySack
a

alleged

specialty

bed

that

Ontel

sheet.

The

sheet, marketed for children, is designed to be zipped up rather
than

folded

and

tucked,

obviating

the

everyday

drudgery

of

making

the

bed.

ZippySack’s

product

is

appropriately

named

“ZippySack,” while Ontel’s allegedly infringing product is known
as “ZipIt Friends.”

The parties settled the 2015 matter and

stipulated to a dismissal with prejudice.

See, Case No. 1:15-

cv-07510.
ZippySack filed the present suit in January 2016, arguing
that Ontel breached the settlement agreement.
also

includes

a

claim

for

patent

The Complaint

infringement,

which

is

essentially the same infringement claim that ZippySack brought
in 2015.

As part of the settlement, Ontel agreed to cease

producing ZipIt Friends, and ZippySack in turn relinquished all
relevant legal claims against Ontel.

Ontel also agreed that it

would sell no more than its existing inventory of ZipIt Friends,
which at the time it believed numbered at 80,000.

The agreement

required Ontel to report monthly on the status of its effort to
sell off the remaining inventory.
That number – 80,000 – is at the heart of the current
dispute.

Shortly

after

the

Court

dismissed

the

predecessor

litigation, in November 2015, Ontel sent a letter to ZippySack
stating:
Ontel has discovered a discrepancy that existed with
the prior inventory numbers. . . . Specifically, the
prior inventory number . . . included only retail
inventory.
Ontel
tracks
mail
order
inventory
separately and there was a miscommunication between
the business and finance groups when this information
was gathered in connection with our discussions, which
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caused it to unintentionally understate its inventory
number. As such, in accordance with [the settlement],
Ontel reports that it has 119,432 ZipIt Friends units
remaining in inventory.
Ontel will continue to
dispose of its inventory in accordance with the terms
of the [settlement] with respect to the channels of
distribution and timing.
(Compl. Ex. C.)
ZippySack, concerned about the larger inventory of ZipIt
Friends, sent a letter requesting clarification:
First, does the number 119,432 mean the number of
ZipIt Friends products that Ontel had on hand as of
the date of the [settlement], or the number on hand
now?
Either way, ZippySack and LF Centennial do not
agree to allowing more than 80,000 ZipIt Friends
products to be sold by Ontel after the [settlement]
date.
Ontel represented . . . that it had 80,000
units at the time of the [settlement], and that
representation was a key and material term that led to
the settlement.
We also do not accept as reasonable
that Ontel could be 150% off from its representation –
or even more if the 119,432 is a current number and
not a past number.
Please confirm today that any
surplus products above 80,000 units as of the time of
the [settlement] will be destroyed or sold outside the
United States or Canada.
(Compl. Ex. D.)
The last quoted sentence is a mystery to the Court, because the
settlement doesn’t appear to contain a provision allowing Ontel
to manufacture and sell ZipIt Friends outside the United States
and Canada.

There also appears to be some confusion between the

parties on this point.

Regardless, Ontel responded that it had

not

excess

“sold

any

of

the

mail

order

inventory

that

was

discovered,” and that it was “exploring channels to sell this

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excess mail order inventory outside of the U.S., including in
Canada.”

(Compl. Ex. E.)

Ontel further argued that ZippySack’s

“refusal to accommodate [Ontel] despite [its] oversight is not
reasonable,”

and

it

offered

ZippySack

royalties

on

potential

sales of the excess inventory. (Id.)
In

response

present lawsuit.

to

the

back-and-forth,

ZippySack

filed

the

In a recent hearing before the Court, Ontel’s

counsel stated that it still had not sold in excess of 80,000
ZipIt Friends, and that it had no intention of doing so “until
there’s an arrangement made with plaintiff pursuant to which the
plaintiff agrees that they may be sold.”
Ontel’s

counsel

agreed

that

his

(Pl.’s Mot. Ex. B.)

client

would

put

that

representation in writing, after which ZippySack would withdraw
the suit.

The Court thought the matter resolved, but then Ontel

filed its written representation, and it contained the following
paragraph:
In an effort to resolve this dispute, Ontel previously
agreed and again agrees that it will not sell this
excess on-line/mail order inventory in the U.S. prior
to reaching an agreement with Plaintiffs under what
terms
this
on-line/mail
order
inventory
may
be
disposed.
However, such agreement must not be
unreasonably withheld by Plaintiffs.
(Pl.’s Mot. Ex. C) (emphasis added).
ZippySack objected to the final sentence of the representation,
and the dispute endured.

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II.

JUSTICIABILITY UNDER ARTICLE III

In a response brief that barely runs 3 double-spaced pages,
Ontel states that ZippySack does not raise a justiciable issue
in its Motion to enforce the settlement.

While the argument is

acutely underdeveloped, the issue is a legitimate and important
one:

as a threshold matter, the Court must decide whether there

is an actual case or controversy for proper judicial resolution.
See, U.S. Const. art. III, § 2, cl. 1.
ZippySack
Act,

28

requests

U.S.C.

§

relief

2201(a),

under

asking

the

the

Declaratory

Court

to

Judgment

declare

settlement agreement valid and enforceable against Ontel.

the

Ontel

responds that because it has not breached the settlement (and
supposedly

has

no

plans

to

breach),

there

is

no

actual

controversy within the meaning of Article III.

It cites one

Seventh

support

Circuit

proposition:
Cir. 1983).

case

over

30

years

old

to

this

Crown Drug Co. v. Revlon, 703 F.2d 240, 243 (7th
In that case, the plaintiffs feared potential legal

action from the defendant, because the plaintiffs produced and
distributed
plaintiffs

a

drug

filed

a

similar
lawsuit

to

the

defendant’s

preemptively,

asking

drug.
the

The

district

court to declare that their conduct did not violate the Lanham
Act and certain Illinois laws governing unfair trade practices.
Id. at 241.

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The Seventh Circuit, closely scrutinizing the facts, held
that the plaintiffs “failed to identify a single instance in
which

the

defendants

complained,

threatened

to

sue,

or

even

contacted the plaintiffs or any other manufacturers about the
sale [of infringing products].”
the

plaintiffs

plausible,

jumped
it

but

the
also

was

Id. at 244.

gun;

the

entirely

In other words,

dispute

may

have

been

hypothetical

when

they

rushed to court seeking a declaratory judgment.
More directly on point is the Supreme Court’s decision in
MedImmune,

Inc.

v.

Genentech,

Inc.,

although Ontel doesn’t cite it.
agreement
royalties

under
on

which

sales

of

licensed

Id. at 121.

settlement

a

to

U.S.

118

(2007),

The case involved a license

MedImmune

patent rights.

549

agreed
products

to

pay

covered

Genentech
by

certain

The license acted like a preemptive

potential

infringement

claim;

it

defined

“licensed products” as drugs that, if not for the license, would
infringe

one

Genentech

of

claimed

Genentech’s
that

patents.

MedImmune’s

Trouble
most

came

when

successful

drug

qualified as a licensed product, triggering royalty payments.
Id. at 121-22.

MedImmune disagreed and filed suit, requesting

declaratory relief.

However, MedImmune began paying royalties

on its sales of the drug anyway, as if it agreed with Genentech.
Id.

at

122.

To

avoid

excess

hassle,

breach.
- 6 -

MedImmune

declined

to

These

facts

raised

the

question:

was

MedImmune

first

required to breach the license agreement in order to have a
justiciable
consider

its

underlying
“no.”

case

or

request

patents?

Id. at 137.

breached,

the

controversy,
for
The

a

such

that

declaratory

Supreme

Court

a

court

judgment

definitively

could

on

the

answered

The Court noted that, if MedImmune had

company

would

have

risked

severely

adverse

consequences, including treble damages and an injunction against
further sales.

Id. at 133-34.

Genentech effectively coerced

MedImmune into paying royalties, which was sufficient to confer
standing (an “injury in fact”) to request declaratory relief
under Article III.
The present case is admittedly somewhat different.

Here,

it is Defendant’s inaction, not Plaintiff’s, which precludes a
breach.

Nevertheless,

like

Genentech,

Ontel

is

the

party

engaging in the coercive conduct while simultaneously arguing
for lack of justiciability.

Consider the facts:

the parties

reached a settlement and agreed to dismiss the former lawsuit.
But Ontel discovered it had made a mistake during negotiations,
and it now wishes to change an important term of the settlement.
True that it has stopped short of an explicit threat to breach,
but it has dropped furtive hints throughout these proceedings
that it will not comply.

For example, one of Ontel’s letters

stated that it was “exploring channels” to sell additional ZipIt
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Friends,

and

accused

ZippySack

of

being

unreasonable

attempting to hold it to the terms of the settlement.

in

Ontel

later submitted a declaration to the Court admitting an active
dispute,

and

ominously

stating

that

ZippySack

must

not

unreasonably withhold consent for Ontel to sell off its excess
inventory.
recent

Finally,

hearing,

$400,000

–

settlement’s

and

Ontel’s

$770,000
terms

perhaps

most

counsel

Ontel

against

stated

would
sale

Friends was too much to bear:

telling,
that

forego

of

more

at
the

because
than

the

most

estimated
of

80,000

the
ZipIt

“[Ontel] felt that that was too

large a penalty to take, and so [Ontel] would like to go forward
with

the

litigation.”

(Hr’g

Tr.

from

Feb.

24,

2016,

ECF

No. 34.)
So it is puzzling for Ontel to claim now that the terms of
the settlement “are not disputed.”
From

ZippySack’s

perspective,

(Def.’s Reply Br. at 2-3).

Ontel’s

existing

inventory

obviously a key issue during settlement negotiations.

was

The final

agreement contained a term enabling ZippySack to monitor Ontel’s
remaining units on an ongoing basis.

ZippySack reasonably may

be concerned that 40,000 additional ZipIt Friends in circulation
would hurt its sales and cause consumer confusion (and at a
recent hearing, Ontel told the Court that the additional units
could actually number up to 70,000).

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A breach also threatens to

revive the underlying claims for patent infringement, causing
ZippySack further expense and headache.
The facts reveal a concrete dispute between the parties,
wholly different from the hypothetical legal challenge imagined
by

the

plaintiffs

ZippySack

has

in

Crown

plausibly

Drug

alleged

Co.
“a

v.

Revlon.

substantial

Moreover,
controversy,

between parties having adverse legal interests, of sufficient
immediacy

and

reality

a declaratory judgment.”

to

warrant

the

issuance

of

MedImmune, 549 U.S. at 127 (quoting

Maryland Casualty Co. v. Pacific Coal & Oil, 312 U.S. 270, 273
(1941).
III.

THE SETTLEMENT AGREEMENT

A brief procedural side note:

the parties negotiated the

settlement on their own, without judicial supervision, and the
Court subsequently dismissed the 2015 lawsuit with prejudice.
That means there must be some independent basis for subjectmatter jurisdiction for the Court to enforce the settlement;
jurisdiction is not retained post-settlement unless the Court
explicitly decides to retain it.

See, id.

Here, the parties

are diverse and the amount in controversy (roughly determined by
reference to the 40,000 – 70,000 additional ZipIt Friends Ontel
wants to sell) meets the statutory requirement for diversity
jurisdiction.
as

the

See, 28 U.S.C. § 1332(a).

settlement

was

negotiated
- 9 -

here,

Illinois law applies,
and

it

contains

a

provision

indicating

that

Illinois

law

will

govern

disputes.

See, Midwest Grain Prods. v. Productization, Inc., 228 F.3d 784,
788 (7th Cir. 2000).
enforceable

“just

And in Illinois, a settlement agreement is

like

any

other

contract.”

Lynch,

Inc.

v.

SamataMason Inc., 279 F.3d 487, 489 (7th Cir. 2002).
The

settlement

is

fairly

straightforward.

The

parties

relinquished all relevant legal claims, subject to compliance
with the other terms of the agreement.
promise

that

it

would

not

underlying ZippySack patent.

challenge

This included Ontel’s
the

validity

of

the

The key clause regarding inventory

reads:
Ontel
represents
that
is
has
no
more
than
approximately 80,000 current units of the ZipIt
Friends product in existing on-hand inventory or goods
to
be
delivered
from
its
manufacturer(s)
(the
“Inventory”), and the Parties agree that Ontel may
sell off that Inventory and shall not thereafter sell
any further ZipIt Friends product after that Inventory
is exhausted.
(Compl. Ex. B.)
The clause is unambiguous.

It clearly defines “Inventory” to

mean “no more than approximately 80,000” units.

Thus, Ontel

cannot sell more than that number, and the word “approximately”
cannot be read reasonably to include thousands of additional
units.
That the parties styled the settlement a “memorandum of
understanding” has no effect on its finality.

- 10 -

They may have

intended to work out additional terms at a later date, but they
undoubtedly

intended

to

be

bound

by

the

document:

“This

Confidential Memorandum of Understanding is a legally binding
contract.

.

.

.

The

Parties

shall

then

use

commercially

reasonable efforts to negotiate and enter into a final detailed
agreement, which will then replace and supersede this Memorandum
of Understanding.”

(Compl. Ex. B.)

As the Seventh Circuit has

noted, “[t]he fact that a formal written document is anticipated
does

not

promise.”

preclude

enforcement

of

a

specific

preliminary

See, Dawson v. General Motors, 977 F.2d 369, 374 (7th

Cir. 1992) (applying Illinois law).

That is especially true

here, where ZippySack relied on the agreement by stipulating to
dismiss the suit with prejudice.

See, id.

And this is not a

case in which the preliminary agreement contains a host of terms
making

performance

subject

to

future

contingencies,

casting

doubt on the enforceability of initial representations.

See,

Empro Mfg. Co. v. Ball-Co Mfg., 870 F.2d 423, 425 (7th Cir.
1989) (letter of intent not binding where terms were explicitly
subject to negotiation of a formal, definitive agreement and
receipt of shareholder approval).
Ontel’s
unilateral

only

mistake

discernable
of

fact.

defense
It

against

thought

it

enforcement
had

only

is

80,000

remaining ZipIt Friends, and then later learned it had neglected
its

mail-order

inventory;

now

the

- 11 -

number

is

significantly

higher.

The defense of unilateral mistake is available under

Illinois

law

convincing

where

the

evidence

aggrieved

that

(1)

the

party

“shows

mistake

is

by
of

clear
a

and

material

nature; (2) the mistake is of such consequence that enforcement
is unconscionable; (3) the mistake occurred notwithstanding the
exercise of due care by the party seeking rescission; and (4)
rescission can place the other party in status quo.”

Blue Cross

Blue Shield v. BCS Ins., 517 F.Supp.2d 1050, 1061 (N.D. Ill.
2007) (quotation and citation omitted).
Ontel’s mistake does not invalidate this contract, because
enforcement

on

these

terms

is

not

unconscionable.

Under

Illinois law, “[a] contract is unconscionable when, viewed as a
whole,

it

is

improvident,

oppressive,

or

sided.”

Id. (quotation and citation omitted).

totally

one-

The parties had

full and fair opportunity to negotiate the preliminary terms of
settlement.

If Ontel believed that it had a strong case for the

invalidity

of

the

ZippySack

litigating

in

2015.

patent,

Instead,

it

it

could

relinquished

have
its

continued
rights

to

produce ZipIt Friends going forward, and at the time, it thought
the right to offload 80,000 existing units was an acceptable
tradeoff to ending the suit.

Its mistake was not clerical; by

all accounts, Ontel believed that 80,000 was the correct number
at the time.

If the term was acceptable to Ontel then, it is

not unconscionable now.

It is also unclear how Ontel could have
- 12 -

exercised due care when its estimate was so far off the mark
(and inexplicably, that estimate has continued to grow).
In sum, the Court holds that the settlement is valid and
enforceable against both parties.
inventory

at

80,000

stands;

The term calculating Ontel’s

unless

ZippySack

consents,

the

agreement forbids Ontel from selling more units after exhausting
that 80,000.

Ontel’s representation that ZippySack must not

unreasonably withhold consent for it to sell more units finds no
support in the contract or in any other evidence before the
Court.

Ontel is stuck with the terms of the contract that it

negotiated and signed.
Resolution

of

this

Motion

disposes

of

the

entire

case.

ZippySack’s resurrected patent infringement claim is dismissed
as moot.

The settlement required the parties to relinquish the

infringement claim, and the Court is enforcing the terms of that
settlement.

The

claim

for

breach

of

contract

likewise

is

dismissed because there has been no material breach (so far).
Lastly,

the

Court

dismisses

ZippySack’s

claim

for

attorneys’

fees; ZippySack does not develop adequately its argument for
fees,

and

in

Illinois,

“absent

a

statute

or

contractual

provision, a successful litigant must bear the burden of his or
her own attorney’s fees.”

Fednav Intern. Ltd. v. Continental

Ins., 624 F.3d 834, 839 (7th Cir. 2010) (quotation and citations

- 13 -

omitted).

However, ZippySack may petition for any other costs

allowed under Federal Rule of Civil Procedure 54(d).
IV.
For

the

reasons

CONCLUSION

stated

herein,

Plaintiffs’

Motion

Enforce the Settlement Agreement [ECF No. 37] is granted.

to
The

case is dismissed.

IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court
Dated: April 19, 2016

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