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An insurer breached the covenant of good faith and fair dealing in failing to pay the cost of defending a trademark infringement suit filed against its policyholder, a federal judge has ruled. Concept Enterprises Inc. v. Hartford Insurance Company of the Midwest (No. CV 00-7267 NM, C.D. Calif.) However, in her May 22 order, U.S. Judge Nora M. Manella of the Central District of California denied the motion of Concept Enterprises Inc. and Coustic Inc. (collectively, Coustic) for summary judgment on the amount of attorneys’ fees recoverable from Hartford Insurance Company of the Midwest. At issue is coverage for a patent and trademark action filed against Coustic by Southern Audio Services Inc. (SAS) in the U.S. District Court for the Middle District of Louisiana. PAYMENT SOUGHT Coustic’s counsel in the SAS action sent Hartford a letter in May 1997, seeking payment for services rendered from Nov. 1, 1996, through April 1, 1997. The letter included a chart summarizing $12,294.15 in fees related to the SAS trademark claims. The letter also demanded payment of all fees, including those related to defense of the patent claims. A second letter sent in June 1997 again sought reimbursement for the entire defense of the SAS action and included copies of invoices for Feb. 1, 1996, to Oct. 31, 1996, as well as duplicates of the invoices for Nov. 1, 1996, to April 1, 1997. In July 1997, Hartford sent Coustic $12,294.15 in response to the May 1997 letter. Subsequently, Coustic’s counsel in the coverage action sent Hartford copies of invoices covering April 1, 1997, to March 30, 1998. In May 1998, Hartford conceded that California law requires an insurer to defend a “mixed” action in its entirety and offered to compromise Coustic’s claim for reimbursement by paying $84,492,78 in fees incurred in the SAS action. Coustic declined the offer and filed suit. On motions for summary judgment, Judge Manella ruled March 6 that Hartford owed Coustic a duty to pay for defense of the entire SAS action until that duty ceased on Aug. 7, 1997, when only patent claims remained. The judge ruled further that Hartford had no duty to defend Coustic after Aug. 7, 1997, but that no allocation agreement relieved Hartford of its duty before that date. Coustic then moved for summary judgment on the amount incurred in defending the SAS action and for recovery of attorneys’ fees for prosecution of the declaratory judgment and breach of contract action. SAS ACTION Partially granting Coustic’s motion, Judge Manella rejected Hartford’s contention that the dispute over fees incurred in the SAS action is subject to arbitration under Section 2860 of the Civil Code, finding that application of the arbitration provision is contingent on the insurer’s agreement to defend under a reservation of rights. “In this case, Hartford refused to accept tender of the entire defense as required under California law,” the judge said, adding that Hartford waived the Section 2860 defense by failing to raise it in its answer to Coustic’s complaint. However, the judge said, Hartford is entitled to additional discovery with respect to the reasonableness of the fees sought by Coustic. DECLARATORY JUDGMENT / CONTRACT ACTION With respect to the declaratory judgment and bad faith action, Judge Manella held that though Coustic has proven that Hartford breached the covenant of good faith and fair dealing, entitling it to recover fees, it has not provided a detailed breakdown of its costs. “Though Coustic is entitled to reasonable attorneys’ fees incurred with respect to its breach of contract claim, Coustic has submitted a blanket request for the entire amount incurred in this suit,” the judge said. “Coustic must separate out those fees attributable to the breach of contract claim (as opposed to its bad faith claim), and further specify those fees incurred with respect to its ‘mixed action’ argument — which persuaded the court — and those fees incurred with respect to its patent coverage argument — which did not.” Coustic is represented by David A. Gauntlett of Gauntlett & Associates in Irvine, Calif. Hartford is represented by D. Douglas Shureen of Rivkin, Radler & Kremer in Santa Rosa, Calif., and Celeste M. Butera, James J. Jennings and Robert Tugander of Rivkin, Radler & Kremer in Uniondale, N.Y.

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