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Knowles Electronics, LLC v. American Audio Components, Inc.

United States District Court, N.D. Illinois, Eastern Division

March 8, 2017

KNOWLES ELECTRONICS, LLC, Plaintiff,
v.
AMERICAN AUDIO COMPONENT, INC., et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          Edmond E. Chang United States District Judge

         This is an action to enforce a settlement agreement. More than ten years ago, Knowles Electronics sued American Audio Component, AAC Acoustics Technologies Holdings, and General MEMS Corporation for allegedly knocking off a Knowles-made microphone. R. 169, Second Am. Compl.[1] The original suit asserted claims for tortious interference, unfair competition and violation of the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. The parties eventually reached a settlement that covered the claims pending before this Court, as well as claims at issue in other patent-related proceedings and threatened proceedings in other forums. See R. 254, Knowles Compl. at Exh. B, Settlement Agreement. Under the terms of the Settlement Agreement, Knowles licensed certain intellectual property to the Defendants, who would pay Knowles royalties on products using that intellectual property in accordance with an agreed payment structure. Settlement Agreement § 2. In light of the settlement, this Court dismissed the case with prejudice. R. 197, Order of Dismissal (Jan. 7, 2008).

         But the dispute was revived in 2014, when AAC stopped paying royalties for certain products-in violation of the Settlement Agreement, Knowles alleges. Knowles Compl. ¶¶ 90-91; see also R. 260, Defs.' Countercl. ¶ 24. In response, Knowles filed an enforcement action[2] against American Audio Components and AAC Technologies Holdings[3] (for convenience's sake, these related parties, Knowles Compl. ¶ 31; R. 260, Defs.' Ans. ¶ 31, will be referred to together as “AAC”).[4] See Knowles Compl. AAC filed a counterclaim, asking for a declaration that it has not infringed Knowles' patents and that no royalties are owed. See Defs.' Countercl. Each side has moved for judgment on the pleadings, with Knowles seeking judgment in its favor on its breach of contract claim and on all of AAC's counterclaims, R. 278, Pl.'s Mot. for J. on the Pleadings, and AAC in turn seeking declaratory judgment on the Settlement Agreement's interpretation, R. 284, Defs.' Mot. for J. on the Pleadings. For the reasons stated below, Knowles' motion is granted in part and AAC's motion is denied.

         I. Background

         In deciding each party's motion for judgment on the pleadings, the Court takes all well-pled allegations as true and draws all reasonable inferences in the nonmovant's favor. Hayes v. City of Chi., 670 F.3d 810, 813 (7th Cir. 2012). But before diving into the enforcement dispute, some background on the initial legal dispute is needed.

         A. The Original Litigation

         The lawsuit originally filed with this Court (call it the 2006 Litigation, for convenience's sake) revolves around a Knowles microphone-specifically, the SiSonic MEMS Microphone, which Knowles introduced in the early 2000s after a long period of research and development. Knowles Compl. ¶¶ 2, 4, 50. The microphone's design and manufacture incorporated a slew of trade secrets and patents, including U.S. Patent Nos. 7, 242, 089, 7, 166, 910, and 6, 781, 231 (for ease of reference, this Opinion will refer to these as the “'089 Patent, ” the “'910 Patent, ” and the “'231 Patent, ” respectively). Id. ¶¶ 3, 13, 53. The SiSonic enjoyed considerable commercial success, which Knowles credits to the microphone's innovative qualities, and spawned a number of copycats and knockoffs. Id. ¶¶ 8-9, 54.

         According to the 2006 Litigation complaint, AAC was among those companies eager to jump on the SiSonic train. Knowles Compl. ¶¶ 15-16. To that end, Knowles alleged, AAC hired one of Knowles' employees and mined his knowledge of the SiSonics technology and manufacturing processes in order to develop a knockoff product. Id. ¶¶ 10-13, 56-63. Knowles also accused AAC executives of sneaking into Knowles' manufacturing facility in Suzhou, China. Id. ¶ 61. When it discovered what AAC was up to, Knowles filed suit in this Court for violations of the Illinois Trade Secrets Act, tortious interference, and unfair competition. Id. ¶¶ 16, 64-65; Defs. Ans. ¶¶ 64-65; see also Second Am. Compl. A separate complaint was filed with the Office of Unfair Import Investigations at the United States International Trade Commission that, in addition to trade secret allegations that are also included in the district court complaint, raised patent infringement claims in connection with the '089 and '231 Patents (the Opinion will refer to this as the ITC Action). Knowles Compl. ¶¶ 67-71; Defs.' Ans. ¶ 71.

         B. The Settlement Agreement

         A year into the 2006 Litigation, the parties resolved the case and executed the Settlement Agreement. Knowles Compl. ¶¶ 17, 74; Defs. Ans. ¶¶ 17, 74. The Agreement settled both the 2006 Litigation and the ITC Action, and also settled patent-related proceedings that the parties had filed against one another in China. Knowles Compl. ¶ 75; Defs. Ans. ¶ 75; Settlement Agreement at 1, § 3. Among other things, the Agreement also granted AAC a license to use the '089, '910, and '231 Patents, Settlement Agreement § 1.4, 2.1, in exchange for regular royalty payments, id. § 1.5, 2.3-2.6. Royalties were calculated through a two-tier payment structure, with different rates for “First Tier Royalty Products” and “Second Tier Royalty Products.” Id. The Agreement defined First Tier Royalty Products as those incorporating the '231 Patent:

AAC microphones … within the scope of, or covered by, the language of any claim of the '231 Patent including, without limitation, Part Numbers: SM0102, SM0301, SM0301L, SM0301EL, SM0401L, SM0401EL, SDM0102, SDM0301, SDM0401 and SDM0501.

         Settlement Agreement § 1.5(A). And Second Tier Royalty Products were those covered by the '089 or '910 Patents:

AAC microphones … within the scope of, or covered by, the language of any claim of the '089 or '910 Patents including, without limitation, Part Numbers SM0102B, SM0102BL, SM0301BL, SM0301BEL, SM0401BL, SM0401BEL, SDM0102B, SDM0301B, SDM0401B, and SMD0501B.

Id. § 1.5(B). Presumably because some products involved overlapping claims of both the '231 Patent and the '089 or '910 Patents, the definition of Second Tier Royalty Products clarified that those products fell in the First Tier rather than the Second Tier camp:

Part Numbers SM0102, SM0301, SM0301L, SM0301EL, SM0401L, SM0401EL, SDM0102, SDM0301, SDM0401 and SDM0501 [that is, the Part Numbers specifically listed as First Tier Royalty Products and therefore within the scope of the '231 Patent], as presently configured and notwithstanding that these products fall within the scope of or are covered by one or ...

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