Santa's Best Craft LLC v. St. Paul Fire And Marine Ins. Co., 08-3572

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation611 F.3d 339
Docket NumberNo. 08-3572,08-3773.,08-3572
PartiesSANTA'S BEST CRAFT, LLC; Santa's Best; and H.S. Craft Manufacturing Co., Plaintiffs-Appellants/Cross-Appellees,v.ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant.
Decision Date01 July 2010

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David A. Gauntlett, James A. Lowe (argued), Gauntlett & Associates, Irvine, CA, for Plaintiffs-Appellants/Cross-Appellees.

Shaun M. Baldwin (argued), Tressler LLP, Chicago, IL, for Defendant-Appellee/Cross-Appellant.

Before CUDAHY, FLAUM, and EVANS, Circuit Judges.

CUDAHY, Circuit Judge.

This is an insurance case about twinkling Christmas lights. JLJ, Inc. and its licensee Inliten, LLC (collectively JLJ) sued Santa's Best Craft, LLC (SBC) over its marketing of “Stay-On” lights. The present case is about an insurer's duties to SBC and others in that underlying action.

JLJ alleged that SBC copied JLJ's “Stay Lit” lights packaging design and that SBC sold Stay-On lights using false and deceptive language. SBC asked its insurer, St. Paul Fire and Marine Insurance Company (St. Paul), for a defense and then sued St. Paul when none was forthcoming. St. Paul counterclaimed with a declaratory action about its duty to defend and then tendered hundreds of thousands of dollars to SBC for its litigation expenses after the district court held that St. Paul had a duty to defend. The district court, however, agreed with St. Paul that it was not obliged to cover defense expenditures for SBC's contract indemnitee Monogram Licensing (Monogram) or to reimburse the settlement payment that resolved the underlying action. Each party appealed. We agree with the district court that St. Paul had, but did not breach, a duty to defend. We also agree that the district court properly declined to require St. Paul to reimburse SBC for Monogram's expenses, but we remand for further proceedings to resolve whether St. Paul owes prejudgment interest on litigation expenses and reimbursement for the settlement expenses.

I. Background
A. The relevant parties.

The present litigation has its roots in August 2002, when JLJ sent SBC a cease-and-desist letter, demanding that SBC change the packaging of its Stay-On lights. JLJ claimed that the Stay-On lights boxes aped the look and slogans of JLJ's Stay Lit lights. SBC forwarded the letter to St. Paul, which responded that the commercial general liability (CGL) coverage policy SBC purchased did not cover the claims in the demand letter. Specifically, St. Paul claimed that false representation claims were not covered by the policy in the first instance and that two policy exclusions, relating to intellectual property and material previously made known or used, meant that it owed no defense for the remaining claims.

In November 2002, JLJ sued SBC in federal court in the southern district of Ohio for Lanham Act trademark infringement, false designation of origin, false advertising, trademark dilution and deceptive trade practices. See JLJ, Inc. v. Santa's Best Craft, LLC, No. C-3-02-00513, 2004 WL 5655875 (S.D.Ohio). St. Paul again denied coverage. In 2004, after JLJ joined as defendants Santa's Best and H.S. Craft Manufacturing Co., two principal members of SBC, as well as Monogram, St. Paul continued an investigation of its duties, but reserved the right to determine that the policy provided no coverage.

SBC did not wait for St. Paul to finish its investigation. In February, SBC and the other plaintiffs filed this declaratory action to compel St. Paul to defend them and, in June, St. Paul counterclaimed for a declaratory judgment that it had no such duty. In December 2004, the underlying action settled after SBC and its members agreed to pay JLJ $3.5 million and to refrain from using the mark Stay-On or any colorable imitation of the Stay Lit mark.

As noted above, Monogram was added as a defendant in the underlying action based on claims of unjust enrichment and conspiracy for approving SBC's use of the allegedly offending marks and slogans. Monogram, a General Electric (GE) Company subsidiary, and SBC had entered into a trademark licensing agreement (Licensing Agreement) in which SBC promised to “defend, indemnify and hold harmless [Monogram] and GE ... from and against any and all claims ... arising out of or in connection with ... the Licensed Products including ... any infringement of any rights ... in connection with the manufacture, advertising, promotion, sale, possession or use of [the] Licensed Products.” Santa's Best (recall, one of the members of SBC, which is a limited liability company) reimbursed Monogram's defense expenses of approximately $1.3 million. St. Paul's CGL policy requires it to defend its insured's contract indemnitees, assuming certain control and cooperation requirements are satisfied. These requirements include the indemnitee's obligation to provide St. Paul notice of each legal paper “as soon as possible after it is received”; St. Paul's obligation to first determine that there is no conflict between the insured's interests and those of the indemnitee; and the indemnitee and insured's agreement in writing that they can share the same counsel. Monogram never tendered a defense to St. Paul. Instead, in August 2004, the plaintiffs advised St. Paul that, under the Licensing Agreement, they believed that Monogram was a contract indemnitee and that St. Paul owed coverage. Monogram, in the underlying action, was represented by counsel separate from plaintiffs', although the two legal teams coordinated a defense.

B. The district court's orders.

The district court held that St. Paul had, but did not breach, a duty to defend because the complaints in the underlying action potentially sketched a claim for infringement of slogan, which was covered as an “advertising injury offense.” See Santa's Best Craft v. St. Paul Fire & Marine Ins. Co. (Santa's Best I), 1:04-cv-01342, 2004 WL 1730332, at *10 (N.D.Ill. July 30, 2004). It also held that the intellectual property exclusion did not apply or that, even if it did, the allegations could be construed as a infringement of a trademarked slogan, which was an exception to the exclusion. See id. at *7-8. In addition, the court held that the “material previously made known or used” exclusion did not apply because not all of the slogans were finalized until 2002, after St. Paul's policy became effective. See id. at *8-10. In a subsequent order, the district court stayed the action pending the outcome of state-court litigation involving St. Paul. See Santa's Best Craft v. St. Paul Fire & Marine Ins. Co. (Santa's Best II), 353 F.Supp.2d 966 (N.D.Ill.2005).

This state-court litigation primarily involved a coverage action instituted by SBC against the last significant party in this case-Zurich American Insurance Company (Zurich), SBC's insurer before St. Paul's policy took effect in January 2002.1 Before they filed the present lawsuit, the plaintiffs also looked for a defense from Zurich and, even though Zurich provided one, they filed a declaratory action in the Circuit Court of Cook County, Chancery Division, to address several issues about Zurich's reimbursement of the defense expenses. See Santa's Best Craft, LLC v. Zurich Am. Ins. Co., Case No. 04 CH 01885 (Cook County Ct., Ch. Div.) ( Zurich action). Zurich drew St. Paul into the action via a third-party complaint for contribution. In a December 2005 order, the Zurich court indicated that St. Paul “agree[d] that it is bound by this Court's determination as to the reasonableness of fees at issue both in this proceeding and also in [our present case on appeal].” Santa's Best Craft, LLC v. Zurich Am. Ins. Co., Case No. 04 CH 01885 (Cook County Ct., Ch. Div. Dec. 14, 2005). It entered a judgment of $1.54 million in defense costs for the plaintiffs, of which approximately $1.27 million were Monogram's defense costs.2 The Zurich court then denied the plaintiffs' motion for prejudgment interest for reasons stated on the record. See id. To date, according to the parties' briefing, all of the costs the plaintiffs incurred in the underlying action have been reimbursed except the Monogram defense costs and the settlement payments (and possible interest payments).

After the Zurich action was terminated, the district court held that St. Paul did not owe the plaintiffs a duty to indemnify them for settlement costs in the underlying action because some of the claims were not covered under the CGL policy exclusions and because the plaintiffs failed to allocate the settlement between covered and non-covered claims. See Santa's Best III, 1:04-cv-01342, 2008 WL 4328192, at *9 (N.D.Ill. Sept.16, 2008). It also held that St. Paul did not owe prejudgment interest or reimbursement for Monogram's defense costs because of other CGL policy exclusions and the Zurich court's findings. See id. at *6-7, 9.

II. Standard of Review

Since this is a diversity case, we apply state substantive law and federal procedural law. See Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965); Bevolo v. Carter, 447 F.3d 979, 982 (7th Cir.2006). No party raises a choice of law issue and therefore, as did the district court, we apply the law of the forum state, Illinois. See Casio, Inc. v. S.M. & R. Co., 755 F.2d 528, 531 (7th Cir.1985). A district court's grant of summary judgment is reviewed de novo Narducci v. Moore, 572 F.3d 313, 318 (7th Cir.2009), examining the record in the light most favorable to the non-moving party. Trade Fin. Partners, LLC v. AAR Corp., 573 F.3d 401, 406 (7th Cir.2009). Insurance contracts are interpreted to effectuate the intent of the parties as expressed through the contract language. See Nicor, Inc. v. Assoc. Elec. & Gas Ins. Servs. Ltd., 223 Ill.2d 407, 307 Ill.Dec. 626, 860 N.E.2d 280, 285-86 (2006). Ambiguities are construed against the insurer, as drafter. See, e.g., McKinney v. Allstate Ins. Co., 188...

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