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Santa's Best Craft, LLC, A Delaware Limited Liability Company v. St. Paul Fire and Marine Insurance Company

April 14, 2011

SANTA'S BEST CRAFT, LLC, A DELAWARE LIMITED LIABILITY COMPANY; SANTA'S BEST, AN ILLINOIS GENERAL PARTNERSHIP; AND H.S. CRAFT MANUFACTURING CO., A TAIWANESE CORPORATION (REPUBLIC OF CHINA), PLAINTIFFS,
v.
ST. PAUL FIRE AND MARINE INSURANCE COMPANY, A MINNESOTA CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

Plaintiffs Santa's Best Craft, LLC, Santa's Best and H.S. Craft Manufacturing Co. (jointly as "SBC") brought a two count amended complaint against defendant St. Paul Fire and Marine Insurance Co. ("St. Paul") alleging breach of contractual obligations under a general liability policy (the "Policy") by refusing to defend SBC in a lawsuit filed in the Southern District of Ohio, JLJ, Inc. v. Santa's Best Craft, No. C-3-02-00513, 2004 WL 5655875 (S.D. Ohio 2004) (the "JLJ Action"). On July 20, 2004, this court held that St. Paul had a duty to defend SBC in the JLJ Action. Santa's Best Craft LLC v. St. Paul Fire and Marine Insurance Co., 2004 WL 173032 (N.D. Ill. 2004) (Santa's Best I).

St. Paul moved for reconsideration of that order, and the parties also filed cross-motions for summary judgment regarding St. Paul's duty to reimburse defense expenses of Monogram Licensing, Inc., a licensee of SBC, as well as SBC's settlement expenses. On September 16, 2008, the court denied St. Paul's motion to reconsider, and held that St. Paul was not responsible for the Monogram defense expenses or for reimbursement of SBC's settlement expenses. The court also denied SBC's motion for prejudgment interest. Santa's Best Craft, LLC v. St. Paul Fire and Marine Insurance Co., 2008 WL 4328192 (N.D. Ill. 2008) (Santa's Best III).

Both parties appealed and on July 1, 2010, the Seventh Circuit affirmed this court's decision that St. Paul had but did not breach a duty to defend SBC, and that St. Paul was not required to reimburse SBC for Monogram's expenses. The court of appeals remanded for further proceedings on the issues of whether St. Paul is required to reimburse SBC for its settlement expenses, and whether St. Paul owes prejudgment interest on SBC's litigation defense expenses. Santa's Best Craft LLC v. St. Paul Fire and Marine Insurance Co., 611 F.3d 339, 343 (7th Cir. 2000) (Santa's Best IV).

On remand, the parties filed additional briefs on plaintiffs' motion for an award of settlement reimbursement and prejudgment interest. For the reasons explained below, that motion is denied.

FACTS

A full description of the facts underlying this protracted litigation can be found in the Seventh Circuit's opinion, Santa's Best IV, 611 F.3d at 343-44. Only a brief summary is necessary for resolution of the instant motion.

In August 2002 JLJ sent SBC a cease-and-desist letter, demanding that SBC change the packaging of its "Stay-On" lights. JLJ claimed that SBC's Stay-On lights boxes copied the look and slogan of JLJ's Stay Lit lights. SBC sent the letter to St. Paul, which responded that SBC's commercial general liability ("CGL") coverage policy did not cover the claims in the demand letter. St. Paul claimed that JLJ's false representation claims were not covered in the first place, and that it owed no defense with respect to the remaining claims because of two policy exclusions relating to intellectual property and material previously made known or used.

JLJ filed suit against SBC in the Southern District of Ohio alleging Lanham Act trademark infringement, false designation of origin, false advertising, trademark dilution and deceptive trade practices. JLJ Inc. v. Santa's Best Craft LLC, 2004 WL 5655875 (S.D. Ohio 2004). St. Paul denied coverage. Almost two years later, after JLJ added two members of SBC, Santa's Best Craft Manufacturing Co. and H.S. Craft Manufacturing Co., and SBC's licensee, Monogram, as defendants, St. Paul continued to investigate its duties but reserved the right to deny any coverage.

In February 2004 SBC initiated the instant declaratory action seeking to compel St. Paul to defend it. St. Paul counterclaimed for a declaration that it had no duty to defend. In December 2004 SBC settled with JLJ, paying it $3.5 million and agreeing not to use the Stay-On mark or any colorable imitation of the Stay Lit mark.

DISCUSSION

In Santa's Best III, this court concluded that St. Paul was not required to reimburse SBC for the $3.5 million settlement amount because SBC could not establish that it had settled an otherwise covered loss in reasonable anticipation of personal liability. Santa's Best III, 2008 WL 43228192 at *7. Specifically, this court concluded that SBC acted reasonably in entering into the settlement, but that the only claim brought by JLJ that was even potentially covered by the policy was the trade dress claim, and reimbursement was not required because SBC was unable to allocate between amounts paid for claims actually covered and those not actually covered. Id. at *8. Because SBC was unable to provide that allocation, the court did not reach whether JLJ's trade dress claims were actually covered. Id.

As noted, the Seventh Circuit disagreed slightly with this court's analysis, concluding that allocation was not required and that the proper inquiry in cases such as the instant case "in which it is possible that none of the settlement was attributable to the dismissal of claims for damages covered by the insurer's policy," is whether a "`primary focus' of the claims that were settled was a potentially covered loss (burden on the insured). Conversely, if it can be established that the claims were not even potentially covered (burden on the insurer), then the insurer is not required to reimburse the settlement." Santa's Best IV, 611 F.3d at 352.

The court of appeals agreed with this court that the only possible covered claim is the "infringement of slogan" claim that was part of JLJ's trade dress claim. Id. Thus, it is SBC's burden to establish that a "primary focus of settlement was damages payment for a covered ...


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