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January 9, 2004.


The opinion of the court was delivered by: SIDNEY SCHENKIER, Magistrate Judge


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 and Page 2 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 Page 3 (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 structure here.

 A. The Xaloy Litigation.

  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 when Arent Page 4 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.) — although Xaloy Page 5 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). Page 6

  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 present Page 7 evidence supporting, any potential defense to Xaloy's claims at trial; nor did that order limit IDM's right to seek leave to assert counterclaims.*fn4

  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 ...

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