TRAX, LLC v. Continental Casualty Company

Filing 206

MEMORANDUM Opinion and Order Signed by the Honorable John W. Darrah on 2/28/2013.(ym, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
TRAX, LLC, and
TRAX INTERNATIONAL CORP.,
Plaintiffs,
v.
CONTINENTAL CASUALTY
COMPANY,
Defendant.

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Case No. 10-CV-6901
Judge John W. Darrah

MEMORANDUM OPINION AND ORDER
Plaintiffs, TRAX, LLC and TRAX International Corp. (collectively, “TRAX”),
filed suit against Defendant, Continental Casualty Company (“Continental”), on October
26, 2010, alleging Continental breached its duty under an insurance policy to settle an
underlying lawsuit: nHance Technologies, Inc. v. TRAX, LLC, et al., No. 6:09-cv-00018,
United States District Court for the Western District of Virginia (“nHance Action”).
TRAX sought damages for Continental’s purported failure to settle the nHance Action
despite its duties under an insurance policy it issued. TRAX filed their Amended
Complaint on June 27, 2011.

Both parties moved for summary judgment, and on December 14, 2011, partial
summary judgment was awarded to Continental, with a ruling that Virginia law was
applicable to the substantive issues in this dispute and that, therefore, Continental might
not be required to pay the settlement costs relating to the nHance Action in its entirety
but, rather, only the allocated portion of the claims deemed to be covered by the
insurance policy. Following this ruling, a bench trial commenced on January 23, 2012,
and concluded on January 25, 2012. On August 29, 2012, the Court ruled in favor of
TRAX after the trial and found Continental breached its duty under the terms of the
insurance policy. TRAX was awarded $1.95 million in damages from Continental, the
value of the nHance Action settlement Continental was required to pay under the
insurance policy, as well as prejudgment interest. Thereafter, Continental appealed the
decision but later voluntarily dismissed the appeal pursuant to Fed. R. App. P. 42(b).
TRAX moves now for attorney fees. As Virginia law was previously determined
to apply to the substantive issues of this case, both TRAX and Continental concede that
Virginia law governs the issue of attorney fees. (Mot. at 3; Resp. at 1.) Continental
objects to the fees, arguing that, under the applicable Virginia Fee Statute, Va. Code Ann.
§ 38.2-209(A), TRAX failed to demonstrate Continental acted in bad faith. Even if
TRAX failed to show Continental acted in bad faith, Continental reasons, TRAX is not
entitled to all of the fees asserted because some of the work was excessive, unnecessary,
or duplicative. (Resp. at 1.)

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LEGAL STANDARD
Virginia statute provides for the award of attorney fees in insurance coverage
cases. The law provides, in pertinent part:
[I]n any civil case in which an insured individual sues his insurer to
determine what coverage, if any, exists under his present policy or fidelity
bond or the extent to which his insurer is liable for compensating a
covered loss, the individual insured shall be entitled to recover from the
insurer costs and such reasonable attorney fees as the court may award.
However, these costs and attorney's fees shall not be awarded unless the
court determines that the insurer, not acting in good faith, has either
denied coverage or failed or refused to make payment to the insured under
the policy.
Va. Code Ann. § 38.2-209(A) (emphasis added). Fees may be awarded under the statute
where the court determines an insurer was not acting in good faith when it denied
coverage. Nationwide Mut. Ins. Co. v. St. John, 524 S.E.2d 649, 651 (Va. 2000) (St.
John). The Virginia Supreme Court determined that Ҥ 38.2-209 was intended to be both
remedial and punitive and concluded that a standard of reasonableness should be applied
in evaluating the conduct of the insurer.” Id. (citing Scottsdale Ins. Co. v. Glick, 240 Va.
283, 397 S.E.2d 105 (1990)). In determining if an insurer acted in bad faith, the court
applies a standard of reasonableness, taking into consideration:
whether reasonable minds could differ in the interpretation of policy
provisions defining coverage and exclusions; whether the insurer had
made a reasonable investigation of the facts and circumstances underlying
the insured's claim; whether the evidence discovered reasonably supports
a denial of liability; whether it appears that the insurer's refusal to pay was
used merely as a tool in settlement negotiations; and whether the defense
the insurer asserts at trial raises an issue of first impression or a reasonably
debatable question of law or fact.
St. John, 524 S.E.2d at 651 (quoting CUNA Mutual Insurance Society v. Norman, 375
S.E.2d 724, 727 (1989) (CUNA)). The burden of showing the insurer’s bad faith is
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established by a preponderance of the evidence, and this burden is carried by the insured.
St. John, 524 S.E.2d at 651. If it is determined that attorney fees shall be awarded, Local
Rule 54.3 governs the award and the total amount.
ANALYSIS
Pleading a Request for Fees
Continental first argues TRAX is not entitled to fees because TRAX failed to
plead fees, either by reference to bad faith or the Fee Statute. (Def. Resp. at 1.)
Continental’s procedural defect argument is unavailing. Virginia law does not provide
for a separate bad-faith cause of action in insurance disputes.
There is, however, a statute-based remedy allowing a court to award
attorney's fees and costs if the insurer denies a claim in bad faith. See Va.
Code Ann. § 38.2–209. The statute does not create a cause of action, but is
merely a fee-shifting mechanism allowing for an award of costs and fees if
‘the court determines that the insurer, not acting in good faith, has either
denied coverage or failed or refused to make payment to the insured under
the policy.’
Mass. Bay Ins. Co. v. Decker, No. 7:11–cv–00342, 2012 WL 43614, at *1 (W.D. Va.
Jan. 9, 2012) (citations omitted). Moreover, in the Prayer for Relief of the Amended
Complaint, TRAX sought judgment “[f]or costs of suit, including reasonable attorneys’
fees as may be allowed by case or statutory law or by agreement of the parties . . . .”
(Am. Compl. Prayer for Relief ¶ 3.) With that request in the prayer for relief,
Continental had sufficient notice that, regardless of what state’s statutes applied, TRAX
intended to recover attorney fees. Therefore, Continental’s objection to the award of
attorney fees on the basis of pleading is denied.

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Acting in Good Faith
Next, a determination must be made as to whether or not Continental acted in bad
faith such that TRAX is entitled to attorney fees under the Virginia statute. Several
factors, as provided by the Virginia Supreme Court in its CUNA opinion, are considered
in turn. 375 S.E.2d at 727.
Could Reasonable Minds Differ in the Interpretation of the Policy?
First, TRAX posits that reasonable minds could not differ in the interpretation of
the Policy, arguing Continental’s only reason for refusing to settle the nHance Action
was that public policy discouraged restitution of profits in insurance coverage. (Mot. at
4.) However, Continental previously moved for summary judgment on the choice of law
and was granted partial summary judgment when the Court determined that Virginia law
applied to the case. Under Virginia law, it was further determined that the settlement was
to be allocated between claims covered by the Policy and those claims not covered by the
Policy. (Dec. 14, 2011 Mem. at 19-21.)
During the nHance settlement negotiations, it became apparent that Continental
and TRAX disagreed as to whether or not the entire value of the nHance settlement was
covered under the policy. To the extent a portion of the settlement was for a claim
outside the scope of the Policy, Continental was not obligated to pay the settlement.
After the bench trial regarding coverage, it was determined that the entire settlement was
covered by the Policy. However, during the nHance settlement discussions, Continental
informed TRAX of its position regarding the copyright infringement proceeds, claiming
that nHance sought damages which amounted to restitution or a disgorgement of profits,
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which Continental believed was excluded from coverage under the Policy. This position
was ultimately unavailing, as the Copyright Act directly provides for the recovery of
damages for infringement. (See Am. Aug. 29, 2012 Mem. at 12.) Despite the fact that
this argument was rejected at trial, it cannot be said that no reasonable minds might have
concluded that the so-called restitution of profits was prohibited by the Policy; rather,
Continental was unable to show other copyright cases where the recovery of profits was
uninsurable. Therefore, as to this factor, TRAX has failed to demonstrate, by a
preponderance of the evidence, that no reasonable minds might differ in the interpretation
of Continental’s disgorgement theory.
Whether Insurer Made Reasonable Investigation of the Facts
It was apparent at trial that Continental had made a reasonable investigation of the
underlying facts of the nHance Action and took the position that under Virginia law,
certain of TRAX’s claims could be denied coverage due to allocation and its view of the
disgorgement of profits. Continental’s position regarding its coverage was made
increasingly clear as it exchanged correspondence with TRAX, including the high
likelihood of TRAX’s liability if the nHance Action proceeded to trial. (See Am. Aug.
29, 2012 Mem. Op. at 6-8.) While Continental’s positions regarding the disgorgement of
profits and the allocation failed at trial, they were not wholly unreasonable or utterly
unsupported by the facts. TRAX characterizes Continental’s investigation of the
underlying facts as “superficial”; but the evidence at trial demonstrated Continental’s
genuine, though ultimately incorrect, consideration of the underlying issues in the
nHance Action. Hence, this factor does not weigh in favor of finding Continental acted
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in bad faith.
Whether Evidence Reasonably Supported a Denial of Liability
The next factor to consider is whether or not the evidence of the nHance Action
reasonably supported a denial of coverage on the part of Continental. While it was
determined at trial that the entire action was covered by the Policy, Continental
reasonably considered that some of the settlement might be apportioned to other claims,
including the trade-secret misappropriation claim, other culpable individuals, and the
value of the license granted in the settlement agreement for continued use of the
misappropriated method. After careful consideration of the facts at trial, it was
determined that no portion of the settlement was allocated to those other claims or
parties. While Continental’s position was ultimately unsuccessful at trial, TRAX fails to
demonstrate, by a preponderance of the evidence, that Continental acted in bad faith,
considering the evidence presented.
Whether Refusal to Pay was a Settlement Tool
Next, the analysis turns to whether Continental’s refusal to pay the nHance
settlement in whole was simply a settlement tactic. TRAX argues Continental’s coverage
position was a tool to force TRAX into paying the nHance settlement. However, the
evidence at trial demonstrated that Continental offered to contribute toward the
settlement, rather than flatly refusing to provide any payment on the action. The fact that
Continental reserved its rights and reiterated its position regarding coverage during the
nHance negotiations does not prove that Continental acted in bad faith or asserted its
position as a ploy to force TRAX into settlement. Rather, it was apparent to all parties
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involved that the nHance Action was ripe for settlement, and TRAX intended to (and
did) settle the action regardless of Continental’s position. Continental did not refuse to
pay the settlement in its entirety; it simply refused, during the settlement conference, to
pay the entire amount sought by nHance, for the reasons set out above. Therefore,
TRAX fails to show how Continental’s assertion of its defenses was merely a tool in the
settlement proceedings.
Whether the Insurer Asserted a Defense That Raised a Reasonable, Debatable Question
The last factor in the CUNA analysis is whether or not the defenses Continental
raised at trial raised genuinely reasonable, debatable questions of fact or law. CUNA,
375 S.E.2d at 727. As discussed above, the defenses raised by Continental at trial were
not unreasonable. There were genuine factual issues regarding the allocation of the
claims and whether or not the nHance settlement discharged other uncovered claims and
parties. The issue of whether or not the profits relating to the copyright infringement
were to be treated as disgorged profits was also a debatable issue.
In sum, while Continental’s arguments regarding allocation and disgorgement
were ultimately unsuccessful at trial, they were neither altogether unreasonable nor clear
indications of Continental acting in bad faith. As both parties acknowledge in their
briefs, the Virginia Fee Statute, Va. Code Ann. § 38.2-209(A), governs this fee dispute
and provides for the award of fees unless the court determines the insurer denied
coverage or refused to make payments to the insured while “not acting in good faith.”
Va. Code Ann. § 38.2-209(A). TRAX has failed to demonstrate, by a preponderance of
the evidence, that Continental failed to act in good faith when it asserted its defenses
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against coverage. Hence, TRAX’s Motion for Attorneys’ Fees is denied.
CONCLUSION
Based on the foregoing analysis, TRAX’s Motion for Fees is denied.

Date:

February 28, 2013

______________________________
JOHN W. DARRAH
United States District Court Judge

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