Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Rehco LLC v. Spin Master Ltd.

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

March 22, 2017

REHCO, LLC, Plaintiff,
v.
SPIN MASTER, LTD., Defendant.

          MEMORANDUM OPINION AND ORDER

          John Robert Blakey United States District Judge.

         Plaintiff Rehco, LLC has sued Defendant Spin Master, Ltd. for breach of contract and patent infringement. The case is currently before the Court on Spin Master's motion for summary judgment [151]. Also before the Court is Spin Master's motion to preclude Jeffrey Rehkemper and Mike Hirtle from testifying as expert witnesses [145], and Spin Master's motion to preclude certain opinions of Rehco's expert, Dr. Matthew Spenko [148]. For the reasons explained below, the motion for summary judgment is granted in part and denied in part, and the motions related to Rehco's experts are denied without prejudice.

         Background & Procedural History

         Rehco, LLC is an Illinois limited liability corporation with its principal place of business in Chicago. DSOF, ¶2. Rehco was founded by two brothers, Steve and Jeffrey Rehkemper, who invent new products for license primarily in the toy industry. Second Amended Complaint [37], ¶¶1-2. Spin Master is a Canadian company with its principal place of business in Toronto. DSOF, ¶1. It is the third largest toy company in North America; its Air Hogs line of radio-controlled flying products is the largest radio-controlled toy brand in the world and is ranked in the top twenty-five of all brands in the toy industry. SAC [37], ¶¶7-8. Rehco and Spin Master joined forces on various product development projects, and executed at least two development agreements, one related to airplanes and one related to helicopters.

         A. The Airplane Agreement

         On December 21, 2000, Rehco and Spin Master entered into a Rechargeable Radio-Controlled Airplane Development Agreement. Second Amended Complaint [37-5]; DSOF, Exhibit 1 [153-1]. The parties executed a First Amendment to that Agreement in September 2001, [37-6], [153-1]; a Second Amendment in January 2003, [37-7]; [153-1]; and a Third Amendment in March of 2003, [37-8], [153-1]. The Agreement, together with the Amendments - collectively referred to as the “Airplane Agreement” - granted Spin Master “a sole and exclusive right to manufacture, have manufactured for it, use, sell, distribute and have distributed for it the ‘Item.'” SAC [37], ¶48; Airplane Agreement [37-5], ¶1; DSOF, ¶6, Exhibit 1 [153]. In exchange, Spin Master was obligated “to pay Rehco a royalty of 1.5% on the ‘Net Wholesale Selling Price' of all sales of the Item . . .” Second Amended Complaint [37], ¶49; DSOF, Exhibit 1 [153-1].

         The description of the “Item” changed over time, with amendments to the Agreement. The initial Agreement referred to an Item called “Rechargeable Radio Controlled Airplane, ” described as follows:

A dual motor controlled flight electric toy airplane having a 19” wingspan where each motor is mounted to the wing on either side of the fuselage and where these motors are powered by onboard rechargeable nicad batteries. Each motor/propeller spins in opposite directions and [is] controlled by onboard electronics and radio control signals from the handheld controller/transmitter. Simple and reliable take-offs are controlled by the electronics whereby the electronics further regulate the motor speed during flight unless radio signals are received to implement a turn. Motor speed is increased to one motor or the other per the controller/transmitter signal for turning. Consequently, a “turbo” button is provided on the handheld controller/ transmitter whereby the plane may receive a signal to both motors for burst of straight ahead speed. The nicad batteries are charged by a docking station having its own batteries where the same docking action resets the electronics for the next takeoff.

[153-1], ¶1.

         The parties executed several amendments to the Airplane Agreement, revising the description of the “Item” each time. On September 1, 2001, the parties executed an amendment adding a second Item, referred to as “Programmable Flight Path Plane, ” described as follows:

A dual motor controlled flight electric toy airplane having one motor mounted to the wing on each side of the fuselage and where those motors are powered by onboard rechargeable nicad batteries. Each motor/propeller is controlled by onboard programmable electronics. Simple and reliable take-offs are controlled by pre-programmed electronic control and the programmable portion of the electronics further regulate the motor speed during flight. Motor speed is increased to one motor or the other using per the programming in order to cause turns and altitude changes. The onboard nicad batteries are charged by a docking station having its own batteries where the same docking station resets the electronics for the next flight and where the docking station is equipped to provide the programming interface to the plane.

DSOF, ¶8; PRSOF, ¶8.

         On January 2, 2003, the parties executed a second amendment, which deleted the Item description from the previous versions and replaced it with an Item referred to as “R/C Stunt Plane, ” described as a “[r]adio controlled plane using two motors for left and right turning and servo for horizontal stabilizer, which controls up and down movement, having a vertical loop feature.” Id.

         Finally, on March 1, 2003, the parties amended the Agreement to add an Item referred to as the “Mini R/C Defender, ” described as follows:

Radio controlled aircraft using two motors to control left and right turning. Airplane features 14” wingspan and has the ability to “climb.” The featured control transmitter has a “turbo” button which increases the power to the motors and causes the plane to climb. The remote control transmitter also has a “land” button which decreases the power to the motors and causes the airplane to descend.

Id.

         The Airplane Agreement allowed Spin Master, “at its sole discretion and at its own expense, ” to “obtain and maintain patent protection on the ITEM, and any patent rights shall be the property of ASSIGNEE.” DSOF, Exhibit 1, ¶3. The Airplane Agreement further granted Spin Master the right to change the form of the Item and to produce and sell such changed forms, provided, however, that all provisions (including the royalty provisions) applied to the new forms:

ASSIGNEE [Spin Master] has the right to change the form of the Item and to produce and sell it under the new form, provided, however, that all the provisions of this Agreement shall apply to said new form of the Item.

         Airplane Agreement, ¶7. Although this provision was not included in the amendments, the amendments referenced and incorporated the original Airplane Agreement. See, e.g., 1st Amendment to Airplane Agreement, ¶5.

         The Airplane Development Agreement and the separate amendments each included an integration clause. DSOF, ¶10. For example, the Third Amendment provided that the

Development Agreement, the First Amendment, the Second Amendment and this Third Amendment set forth the entire agreement and understanding of the parties hereto and supersede and merge any prior agreements, arrangements and understandings related to the subject matter herein. There have been no representations or statements, oral or written, that have been relied on by any party hereto, except those expressly set forth in the Development Agreement, the First Amendment, the Second Amendment and this Third Amendment.

Id.

         On May 25, 2005, Rehco served a demand for royalties on a Spin Master airplane product called the “Dominator”; Rehco demanded royalties under the Airplane Agreement, arguing that the Dominator was a change in form from (or as a product that is derivative of) the Item described as the “Mini R/C Defender.” DSOF, ¶11; Exhibit 3. Rehco conceded that, under the Airplane Agreement, Spin Master had the right to change the form of the Item and to produce and sell it under the new form, as long as Spin Master paid royalties on sales of the new Item. DSOF, Exhibit 3.

         Spin Master responded that no royalties were owed. DSOF, ¶12; Exhibit 4. In particular, Spin Master responded that Rehco had done no development work on the Dominator, and that the Dominator did not use any propriety information or any of the lessons from the Defender. Id.

         On March 26, 2013, Rehco filed this lawsuit, alleging breach of contract and patent infringement. See Complaint [1]. The next day, Rehco served written notice of its intent to terminate the Airplane Agreement. DSOF, ¶13; Exhibit 5. Rehco terminated the Airplane Agreement on May 26, 2013 for non-payment. Second Amended Complaint [37], ¶52.

         B. The Helicopter Agreement

         On September 1, 2001, Rehco and Spin Master executed a “Radio-Controlled Helicopter Agreement, ” pursuant to which Rehco agreed to “complete development of the Item described herein.” DSOF, ¶19; Exhibit 10; SAC [37-1]. In exchange for an exclusive license on the Item, Spin Master was obligated to pay to Rehco a royalty of 3% on the “Net Wholesale Selling Price of all sales by Spin Master and its Subsidiaries or Affiliates of the Licensed Products.” Second Amended Complaint [37], ¶21.

         The Helicopter Agreement defined the “Item, ” identified as a “Radio-Controlled Helicopter, ” as follows:

A motorized helicopter toy having a launching base whereby the launching base may function both to charge the batteries in the helicopter and to energize the propeller to sufficient RPM's required for launch. The launching base has batteries and a timer circuit for charging the helicopter and may have a motor for energizing the propeller. The helicopter consists of an airframe, the motorized means for spinning the propeller, the means for protecting the ends of said spinning propeller, and the means for correcting counter-rotation and pitch variations. The helicopter may have several forms of control, starting with no control or “ free flight, ” or it may be outfitted with electronics having a microprocessor for “preprogrammed” or “programmable” flight or it may be outfitted with a radio receiver for use with a hand held remote transmitter or it may be any combination of the above. The helicopter may or may not take the form of “traditional” helicopter styling and the technology used to make the item fly could be used in other flying toys that are unidentified at this point.

DSOF, Exhibit 10, ¶1.a. The Agreement defined “Licensed Products” to include “merchandise based upon, derived from or embodying the Item, including but not limited to merchandise based upon, derived from or embodying the Item's means for controlling the horizontal stability of the helicopter.” DSOF, Exhibit 10, ¶2.g.

         The parties executed a First Amendment to the Helicopter Agreement in September 2004 [37-2], and a Second Amendment to that Agreement in July 2006 [37-3]. The First Amendment to the Helicopter Agreement added the “RC Pro Helicopter” and the “RC Mini Helicopter” to the Item description. See First Amendment to Radio-Controlled Helicopter Agreement [153-10], p. 1. The Item description from the initial agreement was deleted and replaced with the following:

1.a.i. The “Radio-Controlled Helicopter, ” described as a radio controlled rechargeable motorized toy helicopter having a single motor for driving both an approximately 14” main rotor and a small geared tail rotor. The main rotor is used for lift and features unique patented safety guards (in front of the rotor blades) as well as stabilizing means in the form of patented offset pivots and counterweights. The tail rotor is used to both offset counter rotation and point the helicopter. The RF electronics feature proportional control for the speed of the motor and the helicopter comes with a base having the means for recharging the batteries on board the helicopter.
1.a.ii. A second item, the “RC Pro Helicopter, ” described as a radio controlled rechargeable motorized toy helicopter having a single motor for driving both an approximately 16 ½” main rotor and a small geared tail rotor. The main rotor is used for lift and features unique patented safety guards (in front of the rotor blades) as well as stabilizing means in the form of patented offset pivots and counterweights. The tail rotor is used to offset counter rotation. The chassis includes two servos for lifting the main rotor forward, backward, left and right for steering the helicopter. The RF electronics feature proportional control for the speed of the motor and pulsed inputs to servos for easier steering control capability. The helicopter comes with a base having the means for recharging the batters on board the helicopter.
1.a.iii. A third item, the “RC Mini Helicopter, ” described as a radio controlled rechargeable motorized toy helicopter having two approximately 9” main rotors stacked vertically and where each rotor is individually powered by a single motor and where the tail rotor has been replaced with a large vertical fin for rotational stability. The main rotors are used for lift and feature unique patented safety guards (in front of the rotor blades) as well as stabilizing means in the form of patented offset pivots and counterweights. When the two main rotors are powered at different speeds, they will point the helicopter either right or left. The chassis includes one servo for tilting the lower rotor causing the helicopter to move forward or backward. The RF electronics feature proportional control for the speed of the motors and pulsed inputs to the servo for easier steering control and also may or may not include an electronic gyro. The helicopter comes with a base having the means for recharging the batters on board the helicopter.

         First Amendment to Radio-Controlled Helicopter Agreement [153-10], ¶1. The Second Amendment added a fourth item, the “Tethered Helicopter, ” which was described as: “a remote controlled motorized toy helicopter having two four bladed rotors with safety rings and stacked vertically. One motor powers both rotors. A power source is tethered to the helicopter from a controller via a wire.” Second Amendment [153-10], ¶1.a.iv.

         Like the Airplane Agreement, the Helicopter Agreement permitted modifications to the Item and addressed the applicability of the Agreement to those modifications:

Any improvement, modification, enhancement or derivation of the Item during the term of the License granted by this Agreement, regardless of how or by whom such improvement, modification, enhancement or derivation is made, will be deemed to be included within the scope of the rights, obligations and reversion provisions of this Agreement, except for Rehco's representations and warranties.

         [153-10], ¶1.c. Similarly, the Agreement gave Spin Master the right to “change the form of the Item and the Licensed Products and to produce and sell them under the new form.” Id., ¶5.b. With regard to royalties, the Helicopter Agreement provided that the “obligations and the covenants of the Parties to this Agreement” relating to royalties “shall survive the termination of the License and the Agreement, if any.” Id., ¶7.j.

         On September 12, 2008, Rehco terminated the Helicopter Agreement. Second Amended Complaint [37], ¶24');">24. Rehco's termination letter suggests that it was terminating the agreement because Spin Master sold “less than 2, 500 units for each of two consecutive quarters as indicated in Spin Master Ltd.'s Q1 and Q2 2008 royalty reports and confirmed by the audit currently pending.” DSOF, Exhibit 11 (9/12/08 letter from Steven Rehkemper of Rehco to Ronnen Harary of Spin Master). Rehco's complaint alleges that it terminated the agreement for non-payment. Second Amended Complaint [37], ¶24');">24.

         C. Litigation History

         Rehco initially filed this lawsuit on March 26, 2013 [1], amending its complaint first on April 19, 2013 [16] and again on August 8, 2013 [37]. In the Second Amended Complaint - which is the operative complaint - Rehco alleged breach of contract based upon Spin Master's failure to pay royalties under the Helicopter Agreement (Count I) and the Airplane Agreement (Count III); infringement of U.S. Patent No. 7, 100, 866 (Count II); and infringement of U.S. Patent No. 6, 612, 893 (Count IV). Second Amended Complaint [37]. The Court dismissed Count IV on March 17, 2014 [86].

         For its first breach of contract claim, Count I, Rehco alleges that, pursuant to the Helicopter Agreement, it granted Spin Master a “sole and exclusive license to manufacture, have manufactured for it, use, sell, distribute, and have distributed for it the ‘Licensed Products' as that term is defined in the Helicopter Agreement”; that, pursuant to the Agreement, Spin Master “was obligated to pay Rehco a royalty rate of 3% on the ‘Net Wholesale Selling Price of all sales . . . of the License Products' and on the ‘Direct to Consumer Sales Price on all Direct to Consumer Sales'”; and that, “[p]rior to termination by Rehco of the Helicopter Agreement on September 12, 2008 for non-payment, Spin Master had failed to meet its obligations under the Helicopter Agreement, including, but not limited to, failing to pay the royalty rate required by the Agreement.” SAC [37], ¶¶20-24');">24. Rehco alleges that, as a result of Spin Master's breach of the Helicopter Agreement, it “has been damaged in an amount greater than $75, 000 dollars.” Id., ¶24');">24.

         For its second breach of contract claim, Count III, Rehco alleges that, pursuant to the Airplane Agreement, it “granted Spin Master a sole and exclusive right to manufacture, have manufactured for it, use, sell, distribute, and have distributed for it the ‘Item' as that term is defined in the Airplane Agreement”; that, pursuant to the Agreement, Spin Master “was obligated to pay Rehco a royalty rate of 1.5% on the ‘Net Wholesale Selling Price' or all sales of the Item”; and that, “[p]rior to termination by Rehco of the Airplane Agreement on May 26, 2013 for non-payment, Spin Master breached the Airplane Agreement by failing to pay the royalty rate required by paragraph 4 of the Agreement.Id., ¶¶48-52. Rehco alleges that, as a result of Spin Master's breach of the Airplane Agreement, it “has been damaged in an amount greater than $75, 000 dollars.” Id., ¶52.

         Rehco's remaining patent infringement claim, Count III, relates to U.S. Patent No. 7, 100, 866 (hereinafter, the “‘866 patent”), which covers a “control system for a flying vehicle.” See Second Amended Complaint, Exhibit 4 [37-4]. Rehco alleges both direct infringement and indirect infringement of the ‘866 patent. More specifically, Rehco alleges that Spin Master directly infringed one or more claims of the ‘866 patent, including at least claims 1, 2, 10, 11 and 12, by making, using, offering for sale, selling and/or importing auto hover toys that infringe the ‘866 patent. Second Amended Complaint [37], ¶30. Alternatively, Rehco alleges that Spin Master indirectly infringed one or more claims of the ‘866 patent, including at least claims 1, 2, 10, 11 and 12, by inducing others (namely, users of the above products) to use the infringing products in a manner that violates one or more claims of the ‘866 patent. Id., ¶31.

         The parties proceeded with discovery, exchanged initial and final contentions and ultimately submitted to the Court disputed claim terms. On December 11, 2015, the Court issued its claim construction ruling. See [125]. Thereafter, Spin Master filed its motion for summary judgment, as well as its motions to preclude or limit the testimony and opinions of certain of Rehco's witnesses. The parties briefed all of these motions, and they are now ripe for resolution.

         Discussion

         Spin Master has moved for summary judgment on Rehco's breach of contract and patent infringement claims, and has also moved to preclude or limit the evidence offered by certain Rehco witnesses. The Court considers the motions in turn below.

         A. Rehco's Breach of Contract Claims

         Spin Master first argues that it is entitled to summary judgment on Rehco's breach of contract claims. Spin Master argues that Rehco's breach of contract claims are premised on “flatly ignoring the Item descriptions in the parties' contracts” and must accordingly be rejected. Rehco, on the other hand, argues that, if anyone is attempting to rewrite the parties' contracts, it is Spin Master. Rehco argues that Spin Master's interpretation of the agreements is inconsistent with their plain ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.