Partain v. Mid–Continent Specialty Ins. Servs., Inc.
| Decision Date | 20 January 2012 |
| Docket Number | Civil Action No. H–10–2580. |
| Citation | 838 F.Supp.2d 547 |
| Parties | Joe B. PARTAIN, et al., Plaintiffs, v. MID–CONTINENT SPECIALTY INSURANCE SERVICES, INC., Defendant. |
| Court | U.S. District Court — Southern District of Texas |
OPINION TEXT STARTS HERE
Christopher Alfred Stevenson, Joseph K. Watts, Matthew Alexander Knox, Adair Myers PLLC, Houston, TX, for Plaintiffs.
Timothy Brian Poteet, Chamberlain & McHaney, Austin, TX, for Defendant.
Pending before the Court are Defendant's Motion to Dismiss (Doc. No. 97), Defendant's Motion for Summary Judgment (Doc. No. 101), and Plaintiffs' Motion for Summary Judgment (Doc. No. 100). After considering the pending motions, all responses thereto, and the applicable law, the Court finds that Defendant's Motion to Dismiss must be GRANTED IN PART and DENIED IN PART. Defendant's Motion for Summary Judgment must be GRANTED IN PART.
This case arises out of a separate civil action brought by Kipp Flores Architects LLC (“KFA”). In 2009, KFA filed a copyright infringement suit (hereinafter the “KFA Suit” or the “Underlying Suit”) in the Southern District of Texas against Hallmark Collection of Homes LLC, Hallmark Design Homes L.P. (collectively, “Hallmark”), and Plaintiff Joe Partain (an individual partner in Hallmark). Kipp Flores Architects LLC v. Hallmark Designs Homes, L.P. et al., Case. No. 4:09–cv–00850. In November 2009, Hallmark filed bankruptcy, but the KFA Suit proceeded as to Mr. Partain. On April 29, 2010, KFA added Laura Partain and William Graper as defendants in the suit.
KFA's Second Amended Complaint asserts that KFA creates and markets architectural designs, and that it owns copyrights protecting those designs. (Doc. No. 58 at 3–5.) The Complaint refers to KFA's designs collectively as the “Copyrighted Works.” KFA alleges that Joe Partain, Laura Partain, and William Graper (collectively, the “Plaintiffs”) obtained copies of the Copyrighted Works, and that they infringed upon these works by: (1) making paper and digital drawings and plans based on the Copyrighted Works; (2) constructing structures based on the Copyrighted Works; (3) selling and offering for sale structures based on the Copyrighted Works without authority from KFA; (4) creating, publishing, and using non-pictorial depictions of structures based on the Copyrighted Works in promotional and advertising materials; and (5) publishing and using the infringing materials in the course of advertising their infringing structures. ( Id. at 5–6.) KFA alleges that, in November 2008, KFA demanded that defendants cease and desist from further acts of copyright infringement, but that the defendants have refused to do so and continue to violate KFA's rights. ( Id. at 6.) KFA seeks as damages lost profits and any profits resulting from the alleged infringement or, alternatively, an award of statutory damages. ( Id. at 8.) KFA also seeks injunctive relief and attorneys' fees. ( Id.)
Defendant Mid–Continent provides general liability insurance to Hallmark. On December 31, 2009, attorneys Adair & Myers, acting on behalf of Mr. Partain, notified Mid–Continent of the KFA Suit and requested that Mid–Continent engage Adair & Myers to represent Mr. Partain in that suit. On January 25, 2010, Mid–Continent responded to this notification by offering a defense, subject to a reservation of rights. (Pl. Compl., Ex. 7.) In its reservation of rights, Mid–Continent informed Mr. Partain that it had retained the law firm of Cooper & Scully to defend him. After KFA added Ms. Partain and Mr. Graper as defendants in the Underlying Suit, these two Plaintiffs notified Mid–Continent of the suit, and also requested that Mid–Continent engage Adair & Myers to defend them. Mid–Continent again tendered the defense subject to a reservation of rights, and again indicated that Cooper & Scully had been retained to defend all Plaintiffs the KFA Lawsuit. (Doc. No. 100, Ex. A8.)
The terms of the relevant insurance policies include “Coverage A,” relating to “Bodily Injury and Property Damage,” and “Coverage B,” relating to “Personal and Advertising Injury Liability.” The KFA Lawsuit implicates Coverage B. The insuring agreement under this coverage provides as follows:
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “personal and advertising injury” to which this insurance does not apply ....
B. This insurance applies to “personal and advertising injury” caused by an offense arising out of your business but only if the offense was committed in the “coverage territory” during the policy period.
( See, e.g., Doc. No. 101, Ex. 1, “Mid–Continent Policy No. 04–GL–000717323, effective May 28, 2008 to January 20, 2009, at 17.”)
The policies define “personal and advertising injury” as “injury, including consequential ‘bodily injury,’ arising out of,” among other things, “[i]nfringing upon another's copyright, trade dress or slogan in your ‘advertisement.’ ” ( Id. at 25–26.) “Advertisement” is defined as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” ( Id. at 24.) “Notices that are published include material placed on the internet or on similar electronic means of communication.” ( Id.) According to these terms, the policies afford coverage for copyright infringement only in the context of the insured's advertisement.
The policies also contain specific exclusions that limit coverage, including the following exclusions that may be pertinent to the KFA Suit: Exclusion 2(a) includes denies coverage of a “knowing violation of rights of another,” and indicates that “ ‘personal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’ ” ( Id. at 17.) Exclusion 2(c) denies coverage for “ ‘personal and advertising injury’ arising out of oral or written publication of material that took place before the beginning of the policy period.” ( Id. at 18.) Exclusion 2(e) denies coverage for “ ‘personal and advertising injury’ for which the insured has assumed liability in a contract or agreement,” except any liability for damages that the insured would have in the absence of the contract or agreement. ( Id.) Exclusion 2(f) denies coverage for “ ‘personal and advertising injury’ arising out of a breach of contract, except an implied contract to use another's advertising idea in your ‘advertisement.’ ” ( Id.) Finally, exclusion 2(i) denies coverage for “ ‘personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” ( Id.) Exclusion 2(i) does not apply to copyright infringement in the insured's “advertisement.” ( Id.)
In its reservation of rights,1 Mid–Continent informs Plaintiffs that the above policy exclusions preclude or limit coverage under the policies. (Doc. No. 100, Ex. A8.) Mid–Continent also reserves the right to deny coverage in the event the alleged injury did not occur within the policy period, or in the event Mr. Partain does not qualify as an insured under the policies. ( Id.) Finally, the reservation of rights gives notice of potential non-coverage based on the fact that the insureds failed to provide timely notice of KFA's initial claim in July 2008, and of the KFA Lawsuit filed on March 24, 2009. ( Id.)
After receiving Mid–Continent's first reservation of rights, Mr. Partain responded (via Adair & Myers) that Mid–Continent's reservation of rights creates a conflict of interest that allows him to select his own, independent counsel. (Doc. No. 102, Ex. A12.) Mid–Continent denied Mr. Partain's request to select counsel on the ground that no disqualifying conflict existed. (Doc. No. 102, Ex. A13.) Mr. Partain then asked Mid–Continent to provide, in seven days, “the legal and factual basis” for its position that there was no conflict of interest. (Doc. No. 102, Ex. A14.) Mid–Continent responded, in sixteen days, that there was no conflict of interest because Mid–Continent's chosen counsel could not control the outcome of the coverage issues. (Doc. No. 101, Ex. A15.) Mid–Continent also indicated that its refusal to pay Adair & Myers should not be construed as a rejection of its duty to defend. ( Id.) Mid–Continent's position is the same as to Ms. Partain and Mr. Graper.
Plaintiffs filed this suit in state court alleging that a conflict of interest exists between Plaintiffs and Mid–Continent, giving Plaintiffs the right to select independent counsel to represent them in the Underlying Suit. Because Mid–Continent has refused to pay for Plaintiffs' chosen counsel, Plaintiffs allege that Mid–Continent has breached its contractual duty to defend. Mid–Continent removed the case to this Court. In their Fourth Amended Complaint (the “Complaint”) (Doc. No. 95), Plaintiffs bring suit under the Texas Declaratory Judgment Act seeking a declaratory judgment that there is a conflict of interest giving rise to Plaintiffs' authority to select their own counsel. They also allege breach of contract and violations of the Texas Insurance Code (the “Insurance Code”) and the Texas Deceptive Trade Practices Act (“DTPA”).
Joe B. Partain and Laura Partain filed personal bankruptcy on February 4, 2011; this case was stayed until April 28, 2011, when the...
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