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A company that allegedly didn’t notify its insurers that it had been sued for trademark infringement until after the trial had begun breached its insurance policies, a federal judge in Houston held recently. U.S. District Judge Vanessa Gilmore also held in New Era of Networks Inc. v. Great Northern Insurance Co., et al. that the insurers don’t have to show that the late notice of the suit against the company detrimentally affected their ability to defend it. That finding clarifies an area of law muddied by a 1997 ruling by the 5th U.S. Circuit Court of Appeals, says Ileana Blanco, a partner in the Houston office of Bracewell & Patterson and one of the attorneys representing Great Northern and Federal Insurance Co. in the case. In its suit against the three insurers, New Era cited the 5th Circuit’s holding in Hanson Production Co. v. Americas Insurance Co. and argued that there is a “modern trend” requiring proof of prejudice in late-notice affirmative defenses. The 5th Circuit held in Hanson, a case involving property damage, that an insurer must show that it was prejudiced by its insured’s failure to timely inform it of a claim in order to assert a defense based on the late notice. In New Era, Gilmore concluded that Hanson “stands for the proposition in cases involving property damage, that an insurer issuing liability policies to a Texas resident must establish prejudice as part of the late notice.” She also found that the defendant insurers in New Era, a case involving an advertising injury, do not have to show prejudice to assert a late-notice defense. The judge’s findings came in two orders filed earlier this month. In an Aug. 4 order, Gilmore denied New Era’s motion for partial summary judgment on the insurance companies’ late-notice defenses. She granted the insurers’ motions for summary judgment and dismissed all of New Era’s claims against them in an Aug. 5 order. In New Era, Gilmore has put the Southern District of Texas in line with a ruling from the Northern District that no prejudice element is required for an insurer to assert a late-notice defense to coverage for advertising injury claims, says Christine Kirchner, lead counsel for Hartford Fire Insurance Co., another defendant in the case. Advertising injury claims often involve trade name or trademark infringement. Kirchner, a partner in Houston’s Chamberlain, Hrdlicka, White, Williams & Martin, says Gilmore’s findings also establish that waiting until trial to provide insurers notice that an insured has been sued is “too late as a matter of law.” She says there are no other Texas cases in which the notice of a suit against an insured was given to insurers in the middle of a trial. “This is the defining case,” she says. New Era’s attorney, Martin H. Myers, a partner in San Francisco’s Heller, Ehrman, White & McAuliffe, did not return three phone calls seeking comment by presstime on Aug. 14. Rick Myllendeck, spokesman for California’s Sybase Inc., which acquired New Era in April 2001, says, “The facts of when the insurance companies were on notice are hotly disputed and we are evaluating our options, including appeal.” Regarding Gilmore’s ruling that the insurers don’t have to show they were prejudiced by late notice, Myllendeck says, “We feel that the ruling on the issue is wrong.” New Era’s problems arose in June 1999, when Neon Systems Inc. sued New Era alleging in its petition that New Era had no right to use the “Neon” mark, which had been part of Neon’s name since 1991 — two years before New Era was founded. [ See "Deals & Suits," Texas Lawyer, June 18, 2001, page 12.] According to Gilmore’s Aug. 4 order, Neon had asked New Era to stop using the trademark in a September 1996 cease-and-desist letter but New Era continued using the mark. On June 1, 2001, a jury in Fort Bend County’s 268th District Court returned a $39 million verdict in favor of the plaintiff in Neon Systems Inc. v. New Era of Networks Inc., according to Gilmore’s orders. On the same day, New Era sued the three insurance companies. Mike Kuhn, another Bracewell & Patterson partner who served as lead attorney in the defense of Great Northern and Federal Insurance, says New Era settled the suit with Neon for $16.5 million in September 2001. New Era sued the insurance companies months before the settlement was reached and before the companies had made a decision on New Era’s claim, he says. In New Era, the company sought coverage from the insurers for the judgment entered against it and the costs of defending the suit brought by Neon. Jeff Knight, a Chamberlain, Hrdlicka associate who along with Amanda Snowden, another associate at the firm, also represents Hartford Fire, says New Era sought treble damages, which would have amounted to about $60 million. In its petition, New Era asserted two claims against the insurers for breach of contract, alleging a failure to defend and a failure to indemnify New Era, as well as other claims, including that the insurers violated the Texas Deceptive Trade Practices Act and the Texas Insurance Code. New Era alleged that it received a settlement demand for $8 million from Neon during the pretrial stage in Neon Systems and forwarded the demand to the insurers, who did not respond. Great Northern and Federal alleged in a brief filed with Gilmore in conjunction with their motion for summary judgment that they were notified of the trademark infringement suit against New Era on May 17, 2001, two days after trial began. Hartford alleged in a separate brief that it received notice of Neon’s suit against New Era on the third day of the trial. New Era alleged in its petition that language in its 1997 prospectus, June 1997 quarterly and 1997 annual reports and subsequent reports gave the insurers notice of Neon’s claims and the suit. In its June 18, 1997, report, New Era stated that it had received notices from Neon Systems Inc. and Neon Software Inc., alleging that New Era’s use of the Neon mark violated Neon Systems’ proprietary rights. “Such claims or additional claims against the company alleging trademark or trade name infringement could be time consuming and result in costly litigation,” the report said. “Nothing in the language of [New Era's] reports alerts defendants to the fact that New Era was sued by Neon in June 1999,” Gilmore said in the Aug. 5 order. Also in that order, Gilmore said that no reasonable jury could find that New Era’s alleged verbal notification to the insurance companies regarding the dispute with Neon satisfies the insurers’ contractual requirements that notice of lawsuits be provided in writing. New Era’s almost two-year delay in providing notice of Neon’s suit is clearly a breach of the insurance agreement, thereby voiding the policies with regard to its claims against the insurers, the order said. New Era argued in its brief that the insurers must establish that they were prejudiced by the alleged late notice before they could raise a late-notice defense. The 5th Circuit’s opinion in Hanson, written by Judge Thomas Reavley who was joined by then-Chief Judge Henry Politz and Judge James Dennis, said a surplus lines insurer, in order to avoid its coverage obligations, must show proof of prejudice if the insured has failed to provide prompt notice of a claim. The decision is based on Texas State Board of Insurance Order 23080, issued in 1973, requiring prejudice as an element in late notice defenses, and the Texas Supreme Court’s reasoning in 1994′s Hernandez v. Gulf Group Lloyds that an insurer should not be relieved of its obligation to provide coverage to an insured that breached its contract if the insurer is not prejudiced by the breach and the breach is not material. But Gilmore said in her Aug. 4 order in New Era that State Board Order 23080 requiring prejudice as an element in a late-notice defense is limited to cases involving bodily injury and property damage claims. The 5th Circuit’s holding in Hanson is based on that order, Gilmore wrote. COVERAGE A VS. COVERAGE B James L. Cornell, chairman of the State Bar of Texas Insurance Law Section, says he’s not persuaded by Gilmore’s reasoning. Cornell, of counsel at Haynes and Boone in Houston, says Hanson involved a commercial general Coverage A policy, which covers property damage and bodily injury, while New Era involved Coverage B policies, which cover advertising injury claims. “The Hanson opinion is very broad and says the prejudice requirement applies to late notice; it doesn’t say under Coverage A or Coverage B,” Cornell says. “There is no principled reason for making a distinction.” Cornell says he’s concerned that Gilmore’s conclusions will be adverse to Texas businesses and to Texas consumers. Kuhn says consumers aren’t involved in New Era, and New Era is part of a Fortune 500 corporation. In reaching her conclusion that the insurers sued by New Era don’t have to show that the late notice prejudiced their ability to provide a defense for the company, Gilmore analyzed rulings in advertising injury claim cases decided in two federal courts in Texas. U.S. District Judge Samuel B. Kent of the Southern District, Galveston Division, cited Hanson in his 1999 decision in Bay Electric Supply Inc. v. Travelers Lloyds Insurance Co., which also involved an advertising injury claim. “Under Texas law, an insurer cannot avoid its contractual obligations merely based upon a delay in notice unless it can affirmatively prove that it has been prejudiced by the delay,” Kent said in Bay Electric. Gilmore said in the Aug. 4 order that Kent’s Bay Electric decision is distinguishable from New Era because the insurer’s denial of coverage to Bay Electric wasn’t premised on late notice. Also, the notice delay in Bay Electric was about five months, while the delay notice in New Era “is arguably five years,” Gilmore said in the order. Also in her order, Gilmore said that the facts in New Era are analogous to the facts in Gemmy Industries Corp. v. Alliance General Insurance Co., also an advertising injury case, decided in the Northern District in 1998. In his memorandum opinion in Gemmy, U.S. Magistrate Judge Jeff Kaplan of Dallas said the State Board of Insurance order requiring a showing of prejudice is limited to bodily injury and property damage liability cases. The 5th Circuit affirmed Kaplan’s decision in an unpublished opinion on Nov. 5, 1999. Hartford Fire had argued in its response to New Era’s motion for partial summary judgment that “the affirmation of the [ Gemmy] trial court’s judgment necessarily means that the 5th Circuit has determined that the limited prejudice requirement does not apply in cases involving ‘advertising injury.’ “ Kirchner says the 5th Circuit had an opportunity to rule in Gemmy that prejudice must be shown to argue the late-notice defense in advertising injury claims. Notes Kirchner: “They declined to do so.”

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