The opinion of the court was delivered by: SIDNEY SCHENKIER, Magistrate Judge
MEMORANDUM OPINION AND ORDER
This case involves a dispute between the plaintiff, Inductametals
Corporation ("Inductametals" or "IDM") and its former legal counsel,
Arent Fox Kintner Plotkin & Kahn, PLLC ("Arent Fox" or "AF"). In its
complaint, Inductametals alleges three claims for relief: in Count I,
Inductametals seeks a declaratory judgment that it has no further
obligation to pay attorneys' fees or costs for legal services Arent Fox
rendered before Inductametals terminated the relationship, and that Arent
Fox is required to return certain amounts that have been paid; in Counts
II and III, Inductametals asserts claims of legal malpractice, in the
form of claims for breach of fiduciary duty (Count II) and breach of
contract (Count III). For its part, Arent Fox has asserted a counterclaim
third-party action, asserting various theories in aid of its effort
to recover unpaid legal fees and expenses allegedly due to Arent Fox in
connection with its representation of Inductametals.*fn1
Arent Fox has filed a motion for partial summary judgment on Counts II
and III of Inductametals' complaint (doc. #36). For the reasons stated
below, Arent Fox's motion is granted.*fn2
Summary judgment is proper if the record shows that there is no genuine
issue as to any material fact, and that the moving parties are entitled
to judgment as a matter of law. Fed.R.Civ.P. 56(c). A genuine issue
for trial exists only when "the evidence is such that a reasonable jury
could return a verdict for the nonmoving party." Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986). If the evidence is merely
colorable, or is not significantly probative, summary judgment may be
granted. Id. at 249-50; see also Flip Side Productions, Inc.
v. Jam Productions, Ltd., 843 F.2d 1024, 1032 (7th Cir.), cert.
denied, 488 U.S. 909 (1988). In deciding a motion for summary
judgment, the Court must view all evidence in the light most favorable to
the nonmoving party, Valley Liquors, Inc. v. Renfield Importers,
Ltd., 822 F.2d 656, 659 (7th Cir.), cert. denied,
484 U.S. 977 (1987), and must draw all reasonable inferences in the
nonmovant's favor. Santiago v. Lane, 894 F.2d 218, 221 (7th Cir. 1990).
When a material fact or a set of facts yields competing, but
reasonable, inferences, then there is a genuine issue that precludes
summary judgment. The non-moving party's burden is to identify facts that
are both material and genuinely disputed. Celotex Corp. v.
Catrett, 477 U.S. 317, 324
(1986) To be material, a fact must be outcome determinative under
the substantive law governing the motion. Insolia v. Philip Morris
Inc., 216 F.3d 596, 598 (7th Cir. 2000). A "genuine issue" exists
when the party opposing the motion for summary judgment serves and files,
pursuant to local Rule 56.1, a concise statement outlining the material
facts that require denial of summary judgment, supported by citations to
the evidentiary materials that support those denials (e.g.,
affidavits, depositions, answers to interrogatories, admissions etc.).
Fed.R.Civ.P. 56(c). Although the party seeking summary judgment bears
the initial burden of proving that there is no genuine issue of material
fact, Celotex, 477 U.S. at 323, the non-moving party cannot rely
upon the pleadings alone, but must use the evidentiary tools outlined
above to identify the material facts that show there is a genuine issue
for trial. Id. at 324; Insolia, 216 F.3d at 598.
We begin with the following material facts, which are not genuinely in
dispute. The parties organize the facts into two categories: the Xaloy
litigation and the insurance coverage disputes. We will adopt that
In January 2000, Xaloy Incorporated ("Xaloy") filed a patent
infringement suit against IDM in the United States District Court for the
Western District of Virginia (AF's Rule 56.1 Statement of Undisputed
Material Facts (hereinafter, "AF 56.1 St.," ¶ 6). The case was
assigned to Judge James C. Turk (Id.). In February 2000, IDM
contacted Arent Fox about representing it in connection with the Xaloy
litigation. On February 9, 2000, James H. Hulme, a partner at Arent Fox,
sent IDM's Chairman and CEO, Theodore Krengel, an engagement letter
outlining the terms of Arent Fox's proposed representation of IDM
(Id., ¶ 8). Although the parties dispute the precise date
Fox began to bill IDM for legal services, the parties agree that
IDM retained Arent Fox as legal counsel in the Xaloy litigation sometime
after the February 9, 2000 engagement letter was sent to IDM
(Id., ¶ 8).
Xaloy sought approximately $6 million in damages from IDM and an
injunction against infringing sales. An adverse judgment would have
effectively put IDM out of business (AF 56.1 St. ¶ 11). By no later
than October 2000, IDM and Xaloy were involved in settlement discussions
(see AF 56.1 St., Ex. 16). Settlement discussions between IDM
and Xaloy continued, from time to time, until Arent Fox withdrew from its
representation of IDM in June 2001 (AF56.1 St. ¶¶ 12, 14, 15 and Exs.
16-22). At least until April 2001, IDM's point person for the settlement
discussions with Xaloy was Howard Gilbert, a partner at the law firm of
Wildman, Harrold, Allen & Dixon and a Director of IDM (AF 56.1 So.
¶¶ 9, 12 and Exs. 16-22). In April 2001, Arent Fox took the lead in
the negotiations (AF 56.1 St., Ex. 22). However, prior to April 2001,
Arent Fox knew about the settlement discussions between IDM and Xaloy
(Id., ¶ 12).*fn3
In February 2001, IDM and Xaloy discussed a settlement involving
payment by IDM to Xaloy of $500,000.00 and the parties' mutual agreement
to a variety of other settlement terms (see AF 56.1 St., Exs.
17-18). When the parties could not reach agreement on all terms, on March
22, 2001, Xaloy informed IDM that Xaloy's settlement proposals was
withdrawn (Id., Ex. 19). On April 13, 2001, Xaloy sought to
revive the settlement negotiations (Id., at ¶ 14 and Ex.
20). At that time, Xaloy informed IDM that Xaloy would accept the terms
it had proposed in February 2001, but that Xaloy had increased its
monetary demand from $500,000.00 to $1 million (Id.)
offered to allow payment to be made in installments over two years,
rather than within 10 days as previously proposed (compare AF
56.1, Exs. 18 and 20). Between April 2001 and June 1, 2001, Mr. Hulme, an
Arent Fox attorney, in consultation with Ted Krengel and Mr. Gilbert,
drafted a settlement and license agreement that included the payment to
Xaloy of $1 million, over time and without interest (AF 56.1 St. ¶
15, Exs. 21-22). On May 31, 2001, Arent Fox strongly recommended to IDM
that it accept the settlement terms (Id., Ex. 22). IDM did not
do so, and on June 1, 2001, Xaloy again withdrew its settlement proposal
and discontinued negotiations (Id., ¶ 15 and Ex. 23).
On or about May 31, 2000, IDM retained the law firm of Jenner &
Block to replace Arent Fox as its lead counsel in the Xaloy litigation.
On June 5, 2001, IDM, through Jenner & Block and IDM's new local
counsel, Jones & Glenn, filed a motion for leave to substitute
counsel and for continuance of the trial date (AF 56.1 St., Ex. 25). The
motion for continuance stated, inter alia, that, while Xaloy had
conducted extensive discovery, IDM, through its then counsel
Arent Fox, had not conducted "such basic discovery as taking the
depositions of [Xaloy's] officers or employees, including key witnesses
such as the inventors of the patent at issue who remain officers or
employees of Xaloy." (AF 56.1 St., Ex. 25, ¶ 4). The motion assigned
as the "apparent" reason for the failure to complete this discovery the
parties efforts to settle the case (Id., Ex. 25, ¶ 4). The
motion also acknowledged that Judge Turk had continued the trial date
once before, at the parties' mutual request, but asked that IDM not be
punished because it "expended most of its efforts during that additional
period in a good faith pursuit of an amicable settlement with Plaintiff,
rather than on costly and burdensome discovery that at least initially
appeared would be rendered unnecessary by a settlement, . . ."
(Id., Ex. 25, ¶ 8).
In the motion, IDM asked Judge Turk to continue the trial date for 45
days to July 23, 2001 in order to allow IDM to "fulfill
its discovery obligations, complete basic discovery pertaining to
plaintiff Xaloy, Inc. . . ., and prepare for a trial on the merits" (AF
56.1 St., Ex. 25, Introductory Paragraph and ¶ 6). IDM set forth in
detail the discovery it planned to do in this 45-day period, including
responding to outstanding discovery IDM owed to Xaloy (Id., Ex.
25, ¶ 6); deposing key Xaloy witnesses, including retained expert
witnesses (Id. ¶¶ 4, 10-11); serving additional written
discovery on Xaloy (Id., ¶ 12); and disclosing its own
retained expert witnesses and presenting them for depositions
(Id., ¶ 10). IDM stated that this discovery was necessary to
permit IDM to present "a basic defense" (Id. ¶ 6), which IDM
stated would include a "significant patent invalidity defense based on
prior art" (Id., ¶ 7). IDM further stated that it intended
to file a Request for Reexamination of Xaloy's patent with the United
States Patent & Trademark Office ("PTO"). IDM also stated that during
this 45-day period, it anticipated that "settlement talks will continue"
(Id., ¶ 17).
In an order dated June 8, 2001 ("June 8 Order"), Judge Turk granted
IDM's motion for continuance (AF 56.1 St., Ex, 27). The order stated that
"[h]aving fully considered the parties' briefs, oral arguments and the
relevant law, it is this Court's opinion that the trial date should be
continued to allow newly substituted counsel adequate time to prepare for
trial" (AF 56.1 St. ¶ 18, Ex. 27). The June 8 Order required IDM to
"reimburse" Xaloy $10,000.00 "for reasonable attorney's fees and costs"
(AF 56.1, Ex. 27), although the order did not state the reason for this
reimbursement (IDM's rule 56.1 Statement of Additional Facts (hereinafter
"IDM Add'l Facts") ¶ 2, Ex. 27). The June 8 Order did not comment on
or impose any limits on IDM's proposed discovery program.
Moreover, nothing in the June 8 Order limited IDM's right to assert, or
evidence supporting, any potential defense to Xaloy's claims at
trial; nor did that order limit IDM's right to seek leave to assert
Judge Turk's order triggered a flurry of activity in the case. On or
about June 8, 2001, Xaloy filed a renewed motion for preliminary
injunction (AF 56.1 St. ¶ 19 and Ex. 28).*fn5 On June 19, 2001, 1DM
filed a 37-page brief in opposition to the motion, supported by 40
exhibits, as well as a motion for a preliminary construction of the
patent claims in suit, which EDM asserted was necessary before Xaloy's
preliminary injunction motion could be addressed (Id., ¶ 19
and Exs. 29-31). Soon thereafter, Xaloy withdrew its preliminary
injunction motion (See AF 56.1 St., Ex. 36, at 13).
IDM also pursued discovery. On June 19, 2001, IDM provided Xaloy with a
supplemental discovery response (AF 56.1 St. ¶ 20 and Ex. 32). In
that response, IDM among other things identified four
expert witnesses, as well as 17 citations to prior art that IDM claimed
rendered Xaloy's patent invalid (Id.). I DM also served expert
reports on Xaloy's counsel (Id., Ex. 35). In addition, although
there is no evidence that JDM served new written discovery requests on
Xaloy, IDM did seek further responses to written discovery that
previously had been served on Xaloy by predecessor counsel (Id.,
Ex. 34, at 2). IDM also worked by Xaloy to schedule the depositions of
seven current or former employees of Xaloy, as well as five ...