Advertising injury policy coverage for counterclaims?

Landmark American Ins. Co. v. Ray, 2006 WL 4092436 (W.D. Tex.)

The Scooter Store sued Ray, who was doing business as the Scooter Warehouse, for trademark infringement and dilution and false designation of origin. Ray counterclaimed for trademark infringement and false advertising, and won a substantial settlement. (Apparently the Scooter Store advertised a “free scooter,” but the actual terms made this unlikely, and FBI and IRS investigations into the Scooter Store’s practices “changed the tone of the [settlement] negotiations.”) Ray also notified her insurance company, since her policy covered “advertising injury,” and the insurer agreed to provide a defense subject to a reservation of rights, preserving its ability to raise coverage defenses. Ray had retained her own counsel, and the insurance company was content to provide second-chair support. After the underlying litigation ended, Ray sought reimbursement for her attorneys’ fees.

The court found in her favor for fees accrued after the insurer was given notice of the claim. Because the insurer offered to defend pursuant to a reservation of rights, Ray was entitled to choose to defend the suit personally, with the insurer liable for her attorneys’ fees, although Ray’s failure to explicitly reject the offered attorney was troublesome. The insurer’s designated attorney spent most of his time reviewing the other attorneys’ work, and he did not dispute Ray’s attorney’s role as lead counsel. Thus, the court found that the insurer’s behavior was inconsistent with a rejection of any obligation to pay Ray’s attorney.

The real issue, then, was how much the insurer had to pay. Ray argued that the insurer should pay essentially all the fees, since the offensive and defensive issues of who, if anyone, was an infringer were substantively and strategically interrelated. The court agreed in part, finding that the insurance company had to pay all the pure defense-related fees – only a few hours’ worth – and half of the other fees that could not be allocated to the false advertising claims (as all the expert-related fees were). The insurer argued that the award should be offset by Ray’s settlement with the Scooter Store. But, since the court didn’t award any fees related to the counterclaim, it refused to find any setoff amount.