JLJ sued Santa’s Best (SBC) over its marketing of “Stay-On” twinkling Christmas lights. This is the duty to defend case arising out of that action. JLJ alleged that SBC copied JLJ’s “Stay Lit” lights packaging design and sold Stay-On lights using false and deceptive language. St. Paul tendered money for SBC’s litigation expenses after the district court held that it had a duty to defend. The district court held that St. Paul was not obliged to cover $1.3 million in defense costs for SBC’s contract indemnitee Monogram Licensing, or to reimburse the $3.5 million settlement payment in the underlying action. The court of appeals agreed that St. Paul had a duty to defend, and didn’t breach it. Moreover, St. Paul wasn’t required to reimburse SBC for Monogram’s expenses, but a remand was required on the questions of prejudgment interest on litigation expenses and reimbursement for settlement expenses.
St. Paul’s CGL policy requires it to defend its insured’s contract indemnitees, assuming certain control and cooperation requirements are satisfied. The indemnitee has to provide St. Paul notice of each legal paper as soon as possible after it’s received; St. Paul has to determine there’s no conflict between the insured’s interests and those of the indemnitee; and the indemnitee and the insured have to agree in writing that they can share the same counsel. Monogram never tendered a defense to St. Paul. Monogram was represented by separate counsel, though they coordinated a defense. There’s also some relevant state court litigation involving SBC’s prior insurer, Zurich, which awarded $1.54 million in defense costs, of which about $1.27 million were Monogram’s defense costs.
St. Paul had a duty to defend, which arises when the facts alleged fall within, or potentially within, the policy’s coverage. The complaints in the underlying action potentially stated a claim for infringement of slogan, a covered “advertising injury offense.” A slogan is defined as “a phrase that others use and intend to attract attention in their advertising.” The term slogan excludes a phrase “used as, or in, the name of” organizations or businesses other than the insured or “any of the ... products ... of any person or organization, other than [the insured].” An intellectual property exclusion didn’t apply, or if it did the allegations could be construed as infringement of a trademarked slogan, which was an exception to the exclusion. And an exclusion for “material previously made known or used” didn’t apply because not all the slogans at issue were finalized until 2002, after the St. Paul policy took effect.
St. Paul argued that the policy covered “unauthorized use” of a slogan, which suggested that the claims had to include as an element the underlying plaintiff’s ownership or at least control over the slogan. St. Paul argued that JLJ had no ownership or exclusive right to the slogans on the packages, but the complaints alleged that SBC copied slogans, suggesting a claim of ownership. Though many of these allegations went to JLJ’s trade dress claim, the inquiry is based on the allegations in the complaint, not the legal labels attached to them.
St. Paul’s IP exclusion disallows coverage for “injury or damage ... that results from any actual or alleged infringement or violation of any of the following rights or laws: ... trade dress, ... trademark, other intellectual property rights or laws.” An exception to the IP exclusion is “unauthorized use of ... trademarked slogan ... of others in your advertising.” St. Paul argued that the alleged infringement of slogan “results from” the trade dress claim, so that the IP exclusion applied. But, the court concluded, unless the slogan infringement claim would not have arisen but for the trade dress violation claim, or necessarily arose out of the trade dress violation claim, there was still a duty to defend. Even if the IP exclusion applied, the trademark exception would require St. Paul to defend given uncertainty about whether the court in the underlying action would have decided that the slogan was capable of being trademarked.
There was no breach of the duty to defend because St. Paul timely filed a cross-motion and counterclaim seeking a declaration that it did not have a duty to defend.
The settlement payment: St. Paul argued that SBC failed to designate which of the claims addressed by the settlement were covered by the St. Paul policy, and therefore St. Paul properly declined to reimburse the settlement. SBC argued that it had no burden to allocate, and that JLJ’s threatened damages were undifferentiated as to the various claims so that there is no practical way of allocating the settlement.
In Illinois, an insurer must reimburse an insured for settlement expenses when the settlement was made in reasonable anticipation of liability for damage covered by the policy, and the primary focus of the settlement was a covered claim. An insured is not required to apportion its liability for different claims because that would either “require a retrial of the merits of the underlying lawsuit” or would “discourage settlement because the insured would essentially have to prove its own liability for the underlying conduct even if it had not made that concession in arriving at a settlement.” Thus, the court predicted that Illinois courts would evaluate whether a primary focus of the claims settled was a potentially covered loss, placing the burden on the insured to show this. But if the claims were not even potentially covered, which is the insurer’s burden to show, the insurer isn’t required to reimburse the settlement. Several of the allegations in the underlying action’s complaint here dealt with claims outside of the policy coverage, including trademark claims based on product names and false advertising claim.
So the remaining question was whether the primary focus of settlement was damages for a covered infringement of slogan claim. The court of appeals decided to remand on this point.
It also affirmed the district court’s conclusion a conflict existed between Monogram and SBC such that it did not comply with the preconditions for covering Monogram’s defense. The court of appeals noted that certain of St. Paul’s requirements were impossible to satisfy because St. Paul refused to defend SBC in the underlying action, but SBC could have complied with the other requirements and chose not to do so. (The court of appeals didn’t flat-out say, but one presumes that St. Paul could not defeat covering indemnitees through refusing to play its role in satisfying the preconditions.) The court refused to read a rule allowing recovery of “reasonably related” expenses to extend to the expenses of non-insured parties, because that would swallow the general rule that coverage is limited to the insured.
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