PRODUCT SOURCE INTERNATIONAL, LLC v. FOREMOST SIGNATURE INSURANCE COMPANY et al

Filing 58

MEMORANDUM OPINION FILED. Signed by Chief Judge Jerome B. Simandle on 2/14/17. (js)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

PRODUCT SOURCE INTERNATIONAL,
LLC,
Plaintiff,

HONORABLE JEROME B. SIMANDLE

Civil Action
No. 15-8704 (JBS/JS)

v.
FOREMOST SIGNATURE INSURANCE
COMPANY, MARYLAND CASUALTY
COMPANY, and FARMER’S INSURANCE
COMPANY,

MEMORANDUM OPINION

Defendants.

SIMANDLE, Chief Judge:
Before the Court is Defendants Foremost Signature Insurance
Company, Maryland Casualty Company, and Farmer’s Insurance
Company’s motion to dismiss Plaintiff Product Source
International, LLC’s Amended Complaint. For the reasons that
follow, the Court will deny the motion to dismiss.
1.

Background. The facts of this case were summarized in

this Court’s Opinion1 on Defendants’ first motion to dismiss the
Complaint and will be recounted only as necessary to decide the
present motion. The Amended Complaint differs from the original
Complaint in only two respects: first, PSI included a new

1

Product Source Int’l, LLC v. Foremost Signature Ins. Co., -- F.
Supp. 3d --, 2016 WL 3625544 (D.N.J. July 6, 2016). See also
Docket Item 26.

footnote clarifying that because “PSI settled the underlying
litigation,” its declaratory judgment claims “now comprise
claims for duties to reimburse” (Amended Complaint [Docket Item
35] at n. 1); and second, Plaintiff alleges new factual matter
underlying Count III, insurers’ bad faith. (Id. at ¶¶ 58-83.)
2.

Plaintiff Product Source International, LLC (“PSI”)

holds an insurance policy with Defendants Foremost Signature
Insurance Company, Maryland Casualty Company, and Farmer’s
Insurance Company (collectively, “the Insurers”) that provides
“general commercial liability . . . subject to certain
conditions and exclusions.” (Id. ¶ 24.) Those exclusions do not
apply to “claims sounding in infringement of trade dress or
slogan.” (Id. ¶ 43.) Plaintiff alleges that its insurance
policies cover “personal and advertising injuries” (id. ¶ 41),
including “injury arising out of the use of another’s
advertising idea in an advertisement, or infringing upon
another’s trade dress or slogan in an advertisement.” (Id. ¶
42.)
3.

Plaintiff has been in litigation with Leonid Nahshin,

a non-party to this case, for nearly three years over
Plaintiff’s use of the phrase “NIC OUT” on the products PSI
sells. On June 21, 2013, the Trademark Trial Appeal Board
granted Nahshin’s petition to cancel Plaintiff’s registration
for the NIC OUT mark. (Id. ¶ 20.) Plaintiff appealed the
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Trademark Trial Appeal Board’s ruling to the United States
District Court for the Eastern District of Virginia (the
“Nahshin Action”). (Id. ¶ 21.) Nahshin brought counterclaims
against Plaintiff in that case, including a “false designation
of origin” claim under the Lanham Act. (Id. ¶¶ 22, 45.)
4.

Shortly thereafter, Plaintiff tendered a demand for

defense to the counterclaims in the Nahshin Action to the
Insurers. (Id. ¶ 23.) The gravamen of Plaintiff’s Amended
Complaint is that the Insurers independently investigated PSI’s
insurance claim and acknowledged their duty to defend and
indemnify PSI in the Nahshin Action, but, to date, have failed
to provide PSI any funds to cover litigation costs or the
settlement reached with Nahshin in December 2015. (See id. at ¶¶
24-49, 58-84.) According to PSI, it was forced to settle the
Nahshin Action while cross-appeals to the Fourth Circuit Court
of Appeals were pending because it could not afford to continue
litigation without financial assistance from the Insurers. (Id.
at ¶¶ 62-63, 73-74.) The Insurers have since indicated that they
believe that “only a fraction” of the legal defense costs, “if
any at all” were “potentially” covered by the policies (id. ¶
35; see also Exhibit 5 to Def. Mot. to Dismiss), despite
numerous letters sent from PSI’s counsel to the Insurers
explaining that “under well-established, cited New Jersey case

3 

law PSI was entitled to a duty to defend and a duty to
indemnify.” (Id. ¶ 82.)
5.

Plaintiff filed this action in the Superior Court of

New Jersey, Camden County, on October 27, 2015, bringing claims
against the Insurers for declaratory judgments as to the
Insurers’ duty to defend and indemnify Plaintiff in the Nahshin
Action, and for insurance bad faith in denial of coverage for
the Nahshin Action. [Docket Item 1.] Defendants timely removed
this case to the United States District Court and filed a motion
to dismiss [Docket Item 8] on the basis that Plaintiff’s request
for declaratory judgment are moot and that it failed to state a
claim for relief for insurers’ bad faith. This Court granted in
part and denied in part Defendants’ motion to dismiss, finding
that Plaintiff had set forth a justiciable controversy over
Defendants’ duties to defend and indemnify Plaintiff in the
Nahshin Action, but had not stated a plausible bad faith claim.
Product Source Int’l, LLC v. Foremost Signature Ins. Co., -- F.
Supp. 3d --, 2016 WL 3625544, at *4, *5 (D.N.J. July 6, 2016).
The Court granted Plaintiff leave to amend only its bad faith
claim, which it timely did. [Docket Item 35.] This motion to
dismiss the Amended Complaint followed. [Docket Item 39.]
6.

Standard of Review. Federal Rule of Civil Procedure

12(b)(1) enables a party to move to dismiss a complaint for lack
of subject matter jurisdiction. Because federal courts are
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courts of limited jurisdiction, the party seeking to invoke the
court’s jurisdiction bears the burden of proving the existence
of subject matter jurisdiction. See Kokkonen v. Guardian Life
Ins. Co., 511 U.S. 375, 377 (1994).
7.

Article III of the United States Constitution requires

that “an actual controversy must be extant at all stages of [the
Court's] review, not merely at the time the complaint is filed.”
Camesi v. Univ. of Pittsburgh Med. Ctr., 729 F.3d 239, 247 (3d
Cir. 2013) (quoting Genesis Healthcare Corp. v. Symczyk, ___
U.S. ____, 133 S.Ct. 1523, 1528 (2013)). With respect to actions
for declaratory judgment, litigants present a justiciable
controversy only where “the facts alleged, under all the
circumstances, show that there is a substantial controversy,
between parties having adverse legal interests, of sufficient
immediacy and reality to warrant the issuance of a declaratory
judgment.” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127
(2007) (citing Maryland Casualty Co. v. Pacific Coal & Oil Co.,
312 U.S. 270, 273 (1941). One corollary to the requirement for a
live controversy is the doctrines of mootness. "An action is
rendered moot when an intervening circumstance deprives the
plaintiff of a personal stake in the outcome of the lawsuit at
any point during the litigation.” Id. A case becomes
constitutionally moot “only when it is impossible for a court to
grant any effectual relief whatever to the prevailing party.” In
5 

re ICL Holding Co., Inc., 802 F.3d 547, 553 (3d Cir. 2015)
(citing Chafin v. Chafin, -- U.S. --, 133 S.Ct. 1017, 1023
(2013)). “As long as the parties have a concrete interest,
however small, in the outcome of the litigation, the case is not
moot.” Campbell-Ewald Co. v. Gomez, -- U.S. --, 136 S.Ct. 663,
669 (2016).
8.

Pursuant to Rule 8(a)(2), Fed. R. Civ. P., a complaint

need only contain “a short and plain statement of the claim
showing that the pleader is entitled to relief.” Specific facts
are not required, and “the statement need only ‘give the
defendant fair notice of what the . . . claim is and the grounds
upon which it rests.’” Erickson v. Pardus, 551 U.S. 89, 93
(2007) (citations omitted). While a complaint is not required to
contain detailed factual allegations, the plaintiff must provide
the “grounds” of his “entitle[ment] to relief”, which requires
more than mere labels and conclusions. Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007).
9.

A motion to dismiss under Rule 12(b)(6), Fed. R. Civ.

P., may be granted only if, accepting all well-pleaded
allegations in the complaint as true and viewing them in the
light most favorable to the plaintiff, a court concludes that
the plaintiff failed to set forth fair notice of what the claim
is and the grounds upon which it rests. Id. A complaint will
survive a motion to dismiss if it contains sufficient factual
6 

matter to “state a claim to relief that is plausible on its
face.” Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). Although a
court must accept as true all factual allegations in a
complaint, that tenet is “inapplicable to legal conclusions,”
and “[a] pleading that offers labels and conclusions or a
formulaic recitation of the elements of a cause of action will
not do.” Id. at 678.
10.

Discussion. The Insurers argue again, as in their

first motion to dismiss, that Plaintiff’s declaratory judgment
claims should be dismissed as moot, or in the alternative,
because Plaintiff made voluntary payments to Nahshin, and that
its bad faith claim should be dismissed for failure to state a
claim. Plaintiff argues that the Insurers’ arguments on the
declaratory judgment claims seek, in effect, improper
reconsideration of this Court’s earlier Opinion, and that its
developed allegations underlying the bad faith claim are
sufficient.
11.

Consistent with the undersigned’s July 6 Order on the

Insurers’ first motion to dismiss, Counts I and II of the
Amended Complaint continue to present justiciable, non-moot
claims for relief seeking a declaration that the Insurers have a
duty to defend and indemnify PSI in the Nahshin Action by, inter
alia, reimbursing PSI for the cost of counsel and settlement. As
this Court already found, with full knowledge that PSI had
7 

settled the Nahshin Action, Plaintiff’s request for a
declaratory judgment is not moot because “[d]espite an earlier
acknowledgement of the Insurers’ duty to defend Plaintiff in the
Nahshin Action, Defendants’ inconsistent conduct leaves
Plaintiff with a remaining personal stake in the answer to this
question.” Product Source Int’l, 2016 WL 3625544, at *4.
12.

The law of the case doctrine “limits relitigation of

an issue after it has been already decided in an earlier stage
of the same litigation.” Krys v. Aaron, 106 F. Supp. 3d 472, 480
(D.N.J. 2015) (citing In re Continental Airlines, Inc., 279 F.3d
226, 232 (3d Cir. 2002)). The rationale behind the doctrine is
that “a disappointed litigant should not be given a second
opportunity to litigate a matter that has been fully considered
by a court of coordinate jurisdiction, absent unusual
circumstances.” Hayman Cash Register Co. v. Sarokin, 669 F.2d
162, 169 (3d Cir. 1982). Such “unusual circumstances” include
“situations in which: (1) new evidence is available; (2) a
supervening new law has been announced; or (3) the earlier
decision was clearly erroneous or would create manifest
injustice.” Public Interest Research Group of New Jersey, Inc.
v. Magnesium Elektron, Inc., 123 F.3d 111, 117 (3d Cir. 1997).
13.

Here, none of those circumstances apply: the

allegations in the Amended Complaint surrounding these claims
are unchanged from the original Complaint, the Court has no more
8 

or better information than it did in deciding the Insurers’
first motion to dismiss, and there has been no change in the
law. As Plaintiff points out, the Insurers’ apparent
acknowledgement of a duty to defend does not change the fact
that “[f]rom the date the Complaint was filed to the December
dismissal of the Nahshin Action at the appellate court, and
through today, the issues of whether Insurers owed a duty to
defend and indemnify PSI, and from what date to what date
coverage existed, and how much coverage was owed, and the amount
of counsel fees Insurers owed under N.J. R. 4:42-9(a)(6) . . .
[are] all issues still need[ing] resolution.” (Plaintiff’s
Opposition Brief [Docket Item 41] at 6.)2 In fact, the Insurers’
alternative argument that PSI’s voluntary payments to Nahshin
are not covered by its policy belies this active dispute over
the extent, if any, of coverage for litigation costs and
settlement. Because the Court sees no reason to disrupt the law
of the case, and because Plaintiff’s requests for declaratory
judgment touch on live disputes between PSI and the Insurers,

2

Furthermore, insofar as the Insurers argue that their duty to
reimburse PSI is moot because there were never damages awarded
against it in the Nahshin Action, the Court rejects the
Insurers’ position. The Amended Complaint alleges – which
allegations the Court must accept as true at this stage of the
litigation – that the policy obligates the Insurers to pay “any
judgment or settlement that may result.” (Am. Compl. ¶¶ 49, 56.)
9 

the Court will deny the Insurers’ motion to dismiss on the basis
of a lack of jurisdiction.3
14.

Next, the Insurers argue that Plaintiff’s request for

reimbursement should be dismissed because the settlement in the
Nahshin Action constitutes a “voluntary payment” not covered by
insurance. Plaintiff argues that allegations in the Amended
Complaint make the voluntary payment doctrine inapplicable at
this stage of the litigation because it would not have engaged
in settlement discussions with Nahshin if the insurers had
defended and indemnified PSI as they had promised.4

3

The Court notes the Insurers’ representation (Def. Br. at 13)
that they “have acknowledged a duty to reimburse Plaintiff’s
reasonable and necessary costs incurred in the defense of
potentially covered claims . . . [and] stand ready to stipulate
their acknowledgment in this regard subject to rights of
allocation under applicable New Jersey law.” These
acknowledgments have not been consummated by action. Until the
Insurers take steps to fulfill their duty to reimburse – or,
until the parties actually litigate what costs are reimbursable
under the policy – the Court finds there is still a live
dispute.
4 Plaintiff also argues that this new basis for dismissal
violates Federal Rule of Civil Procedure 12(g)(2). Rule 12(g)(2)
provides that “a party that makes a motion under this rule must
not make another motion under this rule raising a defense or
objection that was available to the party but omitted from its
earlier motion.” The voluntary payment defense was unavailable
to the Insurers at the time of their first motion to dismiss:
the original Complaint alleges that settlement negotiations in
the Nahshin Action were “continued” or “ongoing,” and it was
only in Plaintiff’s Opposition Brief to the first motion to
dismiss that PSI represented, in this case, that it had settled
the Nahshin Action. Accordingly, because this defense arises
solely from allegations new to the Amended Complaint, Rule 12(g)
does not bar the Insurers’ point of argument.
10 

15.

The common law voluntary payment rule “provides that

‘where a party, without mistake of fact, or fraud, duress or
extortion, voluntarily pays money on a demand which is not
enforcible against him, he cannot recover it back.’” In re New
Jersey State Bd. of Dentistry, 423 A.2d 640, 643 (1980). Under
New Jersey law, an insurer may disclaim coverage for voluntary
payments made only where it can show “appreciable prejudice”
from such payments. Resolution Trust Corp. v. Moskowitz, 868 F.
Supp. 634, 640 (D.N.J. 1994) (discussing Solvents Recovery
Service of New England v. Midland Ins. Co., 526 A.2d 1112 (N.J.
App. Div. 1987)).
16.

In any case, the Court cannot determine, on the

pleadings alone, whether PSI’s settlement with Nahshin was truly
voluntary or necessarily made under economic duress; whether PSI
acted under a mistake of fact when it relied on the Insurers’
acknowledgment of their duty to defend and indemnify PSI in the
Nahshin Action; or whether, and how, the Insurers were
“appreciably prejudiced” by PSI’s settlement. “Application of
the voluntary payment rule cannot be resolved on a motion to
dismiss, where the complaint does not establish whether the
plaintiff’s payment was truly voluntary and made without mistake
of fact.” Rickenbach v. Wells Fargo Bank, N.A., 635 F. Supp. 2d
389, 395 (D.N.J. 2009). The Court therefore declines to dismiss
Plaintiff’s claim under the voluntary payment rule, without
11 

prejudice to the Insurers’ ability to raise such an argument on
a motion for summary judgment.
17.

Finally, Count III of the Amended Complaint, for

insurers’ bad faith, now adequately states a claim for relief.
Under New Jersey law, “To show a claim for bad faith, a
plaintiff must show the absence of a reasonable basis for
denying benefits of the policy and the defendant’s knowledge or
reckless disregard of the lack of a reasonable basis in denying
the claim.” Pickett, 621 A.2d at 453 (citing Bibeault v. Hanover
Ins. Co., 417 A.2d 313, 319 (R.I. 1980)). This Court previously
found that the original Complaint, containing barer assertions
of fact than the current Amended Complaint, adequately alleged
the first part of a claim under Pickett, and sees no reason to
now disturb that finding that is now law of the case.5
Accordingly, the Insurers’ motion to dismiss Count III requires
this Court to determine only whether Plaintiff has plausibly
alleged factual grounds that the Insurers acted with “knowledge
or reckless disregard of the lack of a reasonable basis in
denying the claim.”

5

As before, in finding that this element has been adequately
pleaded in the Complaint, the Court expresses no opinion on the
merits of these allegations, or whether Plaintiff could actually
establish on summary judgment that no factual issues exist as to
its entitlement to insurance benefits under these policies.
12 

18.

It is plain that Plaintiff’s developed allegations

regarding the Insurers’ knowledge of their claim in the Nahshin
Action are sufficient to state a claim for relief. Plaintiff now
alleges that the Insurers independently investigated PSI’s claim
for coverage in the Nahshin Action; that the Insurers’ counsel
confirmed that coverage was due under the policy; that the
Insurers were aware that proceedings in the Nahshin Action were
costly and rapidly progressing, and aware of the status of the
case; that PSI’s counsel explained in correspondence that the
Insurers owed a duty to defend under New Jersey law; and that
the Insurers “have delayed the processing of the claim knowingly
or in reckless disregard of the fact that they had no valid
reason for doing so.” (Am. Compl. ¶¶ 66-70, 73-75, 82.) These
factual allegations are more than just mere legal conclusions
which the Court need not accept, Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009), and could plausibly establish that the Insurers
acted with knowledge or reckless disregard.
19.

The accompanying Order will be entered.

February 14, 2017
Date

s/ Jerome B. Simandle
JEROME B. SIMANDLE
Chief U.S. District Judge

13