State Farm Fire & Casualty Company v. King Sports, Inc.

Facts

D is a business that advertises and sells golf clubs online. In 2001, D applied to P for a business liability policy. The application listed Jui-Chen 'Jimmy' Chang (D) as the owner and primary contact. In December 2002, P issued the policy to D. In late 2007, P received notice of two separate lawsuits filed against D for alleged trademark infringement of golf clubs and accessories. Callaway Golf filed an action against D in a California federal court. One month later, Nike filed suit against D in an Illinois federal court. Through counsel hired by P, King Sports settled both suits, paying Callaway $18,500 and Nike $17,500. In June 2008, Cleveland Golf sent D a cease-and-desist letter alleging that D was violating Cleveland Golf's trademarks by advertising and selling golf clubs that looked like clubs manufactured by Cleveland Golf. P sent D a reservation-of-rights letter informing D that P reserved its right to not defend or indemnify D under certain policy exclusions. P sent another letter to D, alerting Chang (D) that P was attempting to speak with him about Cleveland's letter and requesting that Chang (D) contact P immediately to discuss the matter. D continued to advertise and sell the allegedly infringing products. On August 18, 2009, Cleveland Golf filed suit against D alleging direct trademark infringement, unfair competition, false advertising, trade dress infringement, trademark dilution, trademark counterfeiting, unfair and deceptive trade practices, violations of the Georgia anti-dilution statute, and common-law trademark infringement. In early November 2009, P sent Ds a letter, which informed them that (1) P had hired attorney Bruce Hedrick to represent them in the underlying suit, and (2) the policy required them to cooperate with P in defending Cleveland Golf's suit. Throughout the litigation Ds completely failed to communicate with Hedrick, severely hampering his ability to defend them. Hedrick repeatedly attempted to contact Ds through telephone calls, text messages, email, and regular mail, but his messages largely went unreturned. Hedrick actually communicated with Andy Lee, an employee. Lee told Hedrick that he was authorized to act on behalf of D. But then he told Hedrick that he was 'not in charge of this,' i.e., the lawsuit, and that he was 'only the one that just passed on this information to the right person.' Hedrick's contact with Lee ceased in February 2010 when Lee informed Hedrick that he was no longer affiliated with D and requested that Hedrick no longer contact him. Hedrick received no further communications from anyone. On nine occasions between August 20, 2009, and July 21, 2010, P sent letters requesting that Ds contact P. On November 6, 2009, P's claim representative visited D's business address only to find the space vacant. P had no working telephone number for Ds. P searched the web and utilized its own internal investigation division to search for names, addresses, and phone numbers for Ds. In January 2010, Hedrick filed an answer in the underlying suit on behalf of Ds. On March 9, 2010, Hedrick filed a motion to withdraw as attorney due to his clients' complete lack of cooperation. Cleveland Golf sent Ds an email, in Mandarin and English, stating that a failure to cooperate and communicate with Hedrick could jeopardize insurance coverage under the policy issued by P. The email also supplied all of Hedrick's contact information, including his email address, direct office phone number, general office phone number, and personal cell phone number. On March 30, 2010, the Court granted Hedrick's motion to withdraw. Cleveland Golf was in contact with Lee. Cleveland Golf told him that if he signed a settlement agreement with Cleveland Golf, then Cleveland Golf would stop contacting D. P learned about the settlement discussions. On June 25, 2010, P sent a letter reiterating its request that they contact P immediately and informing them that the policy expressly prohibited D from settling with Cleveland Golf. No one contacted P. On July 7, 2010, D and Cleveland Golf entered into a settlement agreement executed by Lee as 'owner' of D. In the agreement, D consented to a judgment of $1,000,000, a decidedly larger sum than Cleveland Golf had negotiated in prior settlement agreements with other alleged infringers in similar cases. Cleveland Golf had settled approximately fifty cases against alleged infringers; in none of those settlements was the amount to be paid more than $10,000. D assigned to Cleveland Golf any claims that D might have against P under the policy. Cleveland Golf did not inform P of the agreement, much less obtain P's consent. The Court entered a consent judgment in favor of Cleveland Golf and against D in the amount of $1,000,000. On January 15, 2010, P filed a complaint for a declaratory judgment against D and Cleveland Golf, seeking a declaration that P's policy does not provide Ds coverage for any liability incurred by D. P seeks a declaration that it owed no coverage Ds because both failed to abide by, satisfy, comply with or fulfill the duties imposed on them pursuant to the policy's 'general conditions.'

Issues

Rule of Law

Holding and Decision

Legal Analysis

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