Avoiding Malpractice by Providing Prompt Notice of Intellectual Property Claims to Insurers
“Intellectual property attorneys may have a duty to apprize their clients of the need to notify their clients’ insurers of claims as part of their retention in order to fully represent their clients’ interests in a lawsuit for which they are counsel of record.”
Intellectual property litigators are often required to assess and pursue insurance coverage that may be available for policyholders they represent in ongoing litigation. More than assuring prompt notice of a potentially covered claim is required to meet these responsibilities. Five issues intellectual property defense counsel need to focus on in assuring that insurance coverage opportunities are properly vetted include:
1. Provide prompt notice to insurers, including accurate statements regarding the availability of insurance under the Federal Rules of Civil Procedure (F.R.C.P.) 26(f);
2. keep insurers who may potentially owe a defense for a complaint or counterclaim apprised of facts as they develop in the underlying action even if they are not admissible in the forum in which coverage law may apply;
3. make sure that pre-tender fees are recoverable by giving notice to all potentially applicable insurers and linking in the brokers for each to engage them in communications with the insurers as well;
4. make sure settlement authority is obtained before contacting the claimant even early on in a lawsuit to avoid a bar to recovery under the “voluntary payments” doctrine; and
5. make sure defensive fees are recovered even if they are part of the prosecution of affirmative relief, such as a counterclaim or pursuit of a lawsuit after a counterclaim is filed, as “conducted against” liability fees are recoverable in most forums.
Proper Notice to Insurers Under F.R.C.P. 26(f) Does Not Limit Notice to Filed Lawsuits
Coverage for Complaints Requiring a Formal Suit
Even though a policy may limit the obligation to defend any “suit,” attorneys’ fees expended in response to a claim where a party seeks damages against a policyholder (or threatens legal action) may inevitably lead to a lawsuit. This “suit” will trigger the insurer’s duty to assist policyholders, avoiding the argument that all policy benefits are precluded because of the failure to give prompt notice, which is often worth the early warning. If an insurer treats the notice as a “notice of circumstance” under Claims Made and Reported policies, such as Directors & Officers or Media Liability, this could be beneficial.
Counterclaims and Third-Party Complaints
A complaint is not the only pleading to consider. Counterclaims and third-party claims can also trigger an independent defense obligation. The duty to defend must be assessed at the outset of the case based upon facts and inferences known to an insurer from the pleadings, available information and its own investigation at the time of the tender of defense.
While some forums limit the duty to defend to the four corners of the pleading, viewed in light of the policy language, even those forums often look to inferences from the allegations of the pleading. The duty to defend lasts through appeal and includes fees necessary to address post-judgment motions. Policy benefits can be critical to litigants who have not resolved their suit. The insurer’s duty to fund an appeal does not, however, include the duty to collateralize an appeal bond so appellants may have to fund an adverse judgment while an appeal is pending.
IP Defense Counsel Must Assure that Clients Do Not Lose Coverage
Intellectual property attorneys may have a duty to apprize their clients of the need to notify their clients’ insurers of claims as part of their retention in order to fully represent their clients’ interests in a lawsuit for which they are counsel of record. This duty is heightened when there is an obligation in a federal court action to give the notice to the opposing counsel of any coverage that may be available under F.R.C.P. 26(f).
Several Significant Forums Have Entered Orders Evidencing Malpractice Scenarios
Illinois
In Intact Ins. Co. v. Comptoir Des Indes, Inc et. al. Cook County Circuit Court, Chancery Division Case No. 2019 CH 1308, the Chancery Court determined that a three-year statute of limitation under applicable Québec law, Civil Code of Québec S.Q 1991 c. 64 art. 2925 barred potential coverage under the First Halo Action filed in federal court on October 20, 2014. Notice of the First Halo Action was not sent until February 8, 2018 ( 3 years and 4 months after the First Halo Action was filed.) This notice was after the 3 years prescribed by of the referenced Québec statute. It is a fair inference from the court’s ruling The court determined that since indistinguishable copyright infringement claims to those asserted in the First Halo Action triggered a defense in the Second Halo Action, but for the failure of defense counsel to tender a timely defense to intact a duty of defense would have arisen (even if Intact did not recognize that duty to defend at the time of tender). Although not referenced in the court’s order, prior counsel’s filing of a FRCP 26(f) report contending that no coverage existed which would provide a defense in the First Halo Action in that lawsuit (without consulting coverage counsel or conducting any independent legal analysis of that issue) would support liability for legal malpractice under applicable Illinois law.
The court concluded that the Intact Policy’s notice provision was a condition precedent to coverage under Illinois law which required notice “as soon as [they] become aware of it” pursuant to Whalen v. Kmart Corp. 166 Ill. App. 3rd 339, 343 (1st Dist. 1988) where the court determined that there were ”no exceptions or causes within the Policy negating Defendant's duty to notify Plaintiff of the First Halo Action because of the defendant's “reasonable belief" that a claim may not be covered under the Policy. . . . Defendant's knowingly and unreasonably failed in its duty to timely notify the Plaintiff “as soon as it becomes aware" of the First Halo Action . . . [Thus] . . . Defendants forfeited all rights to coverage under the Policy." (p.7) It was no excuse that “Defendants reasonably relied on the advice of their prior counsel an insurance broker that there was no potential for coverage under the First Halo Action" (p.6). “Moreover, Defendants claim that until they retained new counsel, they were unaware that there was a potential for coverage under the policy. Nor was it an excuse that “When their newly retained counsel notified them of this . . . Defendants . . . immediately notified Plaintiff of the First Halo Action. (p.6).
The Court's analysis explains why the prior insurance prior lawyer who were in a position to notify Intact of the First Halo Action advised that that was not necessary, and did not perform any careful coverage analysis, nor retain coverage counsel to do so did not meet the applicable standard of care, exposing the Clients to unreimbursed defense fees and costs as well as an adverse judgment in the federal court action without the befit of Intact’s insurance coverage.
In Amerisure Ins. Co. v. Laserage Tech. Corp., 2 F. Supp. 2d 296, 204 (W.D.N.Y. 1998), the court concluded potential coverage under “personal injury” policy language for claims of disparagement based on allegations that the insured’s competitor accused it of wrongfully telling mutual potential customers that the competitor’s product infringed its patent because “wrongfully asserting that a competitor’s product infringes patents clearly defames the competitor and disparages his product.” Nevertheless, a defense was unavailable because Laserage waited from August to October of 1995 before altering its insurers to the lawsuit against it and actively engaged counsel to defend its interests. This delay triggered application of Illinois’ late notice rules which required notice be provided to all impact insurers as soon as practicable under the applicable policy language.
New York
Several cases applying New York law concluded that pre-suit cease and desist letters could eviscerate potential liability so that the failure to advise of an insurer of those claims could preclude potential coverage for a subsequently filed lawsuit, as the asserted claims required prompt notice to the insurer to avoid loss of policy benefits as precluded pre-tender fees.
Prof'l Prod. Research Inc. v. Gen. Star Indem. Co., 623 F. Supp. 2d 438, 445 (S.D.N.Y. 2008) citing Technaoro Inc. v. U.S. Fidelity & Guar. Co., 2006 WL 3230299, at *7 (S.D.N.Y. Nov. 7, 2006) (five-month delay unreasonable in advertising injury case) (A statute effective January 1, 2009 modifies New York law prospectively to require a prejudice standard for delayed or incomplete notice. But this new standard will not apply to coverage in place before that date.).
A recent decision purporting to apply New York law in Frankenmuth Mut. Ins. Co. v. Hockey Cup, LLC, No. 18 C 8142, 2019 U.S. Dist. LEXIS 160278 (N.D. Ill. Sep. 20, 2019) relied heavily upon Gelfman v. Capitol Indem. Corp., 39 F. Supp. 3d 255 (E.D.N.Y. 2014). Gelfman held that it was “undisputed” that the Gelfmans learned of the underlying plaintiffs’ possibility of suing them “when the [underlying plaintiffs’] attorney sent the Gelfmans, through their then counsel, a cease-and[-]desist letter dated May 31, 2007, demanding that they stop their infringing activities and threatening to take legal action.” Id. at 263 (emphasis added). The insurer in Gelfman became aware of the dispute “more than thirteen months later, … after the [underlying suit] commenced[.]” Id. In turn, Gelfman relied upon Prof’l Prod. Research, Inc. v. Gen. Star Indem. Co., 623 F. Supp. 2d 438, 442 (S.D.N.Y. 2008), which determined that late notice arose on the basis of two C&D letters sent to the insured, one of which alleged that the insured’s product was infringing on underlying plaintiff’s trade dress and the other of which alleged that the underlying plaintiff “has been and continues to be damaged.” (emphasis added)
While superficially relevant, Gelfman and Prof’l Prod. featured C&D letters that threatened to take legal action or made demands for damages. The Court conceded that the March 2017 email in Hockey Cup “stops short of threatening legal action.” Instead, it characterized the letter as “leav[ing] no doubt that the NHL intended to enforce its trademark rights against A&R.” But that inference was improperly drawn in favor of Frankenmuth, who sought summary judgment.
Ensuring Pre-Tender Fees Are Recoverable by Providing Prompt Notice to Insurers
A failure to provide notice even where it does not preclude the right to any defense may limit a client to recovery of only post-notice attorneys’ fees. There are three significant issues posed by late notice of a claim for an insured or its counsel to an insurer.
First, will late notice forfeit the insured’s right to obtain any benefits under its policy for either defense or indemnity?
Second, will prejudice be a burden of the insurer or insured in those jurisdictions that follow a prejudice rule? In jurisdictions where notice is a condition precedent has time passed so that no benefits are available or are only pre-tender fees precluded?
Third, where pre-tender fees are barred in the majority of jurisdictions, including Alabama, Connecticut, Georgia, Michigan, Minnesota, Pennsylvania, Texas and Utah, as well as California and New York, it is critical to provide notice as soon as possible.
IP Counsel May Have Duty to Refer Cases to Coverage Counsel
The growing number of IP counsel may have a heightened duty to secure the assistance of coverage counsel in jurisdictions that make the trigger of coverage “facts known to the insurer” rather than “facts pled” or “facts available to an insurer.”
This problem is compounded in an increasing number of jurisdictions where “facts known to the insurer” determine whether an insured can secure coverage. The “facts known” standard raises the bar for IP defense counsel because counsel’s ethical duties to their insured clients may no longer be discharged by advising an insured to contact its IP insurance broker providing notice to the insurer on risk as of the date of the filing of the complaint. This notice may not sufficiently protect an insured’s right to policy proceeds in many cases. Relying on a corporation’s internal resources (or that of its insurance brokers) to assure that appropriate notice given to all potentially covered claims will not guarantee they attain all available policy benefits.
The Role of IP Counsel in Insurance Coverage Disputes
Fed. R. Civ. P. 26(f) contemplates that clients will look to their IP defense counsel for advice on all aspects of the case. Some IP defense counsel include this paragraph in their retainer agreement:
The following additional paragraph is preferable:
We recommend you retain insurance coverage counsel in addition to consulting your insurance broker to assure notification is properly provided for all claims asserted against your company and seek their advice on what additional facts beyond the pleadings should be forwarded to your insured to enhance your company’s projects for securing insurance coverage.
Conclusion
The safest course is to advise clients in writing to always investigate the potential for coverage whenever damages are sought against them, whether by way of complaint or counterclaim. If a client seeks advice or the prospects for a favorable recovery against its insurer, the client should be promptly referred to coverage counsel. Such counsel’s expertise may be required to analyze, in light of applicable choice of law rules, which forum is best to address late notice issues.
In either event, a client’s exercise of business judgment to not pursue such a claim would not be chargeable to intellectual property counsel unless the defense counsel had an opportunity to persuade the insured not to abandon coverage benefits and did not seek to associate coverage counsel to have the insured revisit that issue in light of advice pertinent to the risks and opportunities where coverage was available.
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