Opinion
Nos. A04-518, A04-920.
Filed December 28, 2004.
Appeal from the District Court, Blue Earth County, File No. C8-02-1252.
Robert F. Johnson, Cook Franke S.C., (admitted pro hac vice); and James R. Gray, William A. Celebrezze, Aafedt, Forde, Gray, Monson Hager, (for respondent General Casualty)
R. Mark Halligan, Welsh Katz, Ltd., (admitted pro hac vice); and James Brian Sheehy, (for appellant Four Seasons)
Considered and decided by Wright, Presiding Judge, Peterson, Judge, and Halbrooks, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).
UNPUBLISHED OPINION
In this consolidated appeal, appellant Four Seasons Greetings, LLC (Four Seasons) challenges the district court's determination that the duty of respondent General Casualty Company (GCC) to defend Four Seasons in an underlying copyright-infringement action terminated on May 22, 2003, arguing that an offer of settlement is not a dismissal of damages with finality. GCC challenges the district court's determination that GCC had a duty to defend before May 22, 2003, arguing that there was no causal connection between the alleged copyright infringement and any advertising activity by Four Seasons. GCC also challenges the district court's award of attorney fees and the expenses of a court-appointed referee, contending that the work billed by Four Seasons' attorneys was duplicative and billed at too high a rate. Because we conclude that GCC did have a duty to defend Four Seasons in the underlying action, but that the district court erred in its determination of the termination date of that duty, we affirm in part, reverse in part, and remand.
FACTS
I. The Underlying Action
Four Seasons, an Illinois limited-liability company, manufactures and sells preformatted and personalized greeting cards. Taylor Corporation (Taylor) is a Minnesota corporation that produces and sells stationery and greeting cards. In July 2001, Taylor filed suit in the United States District Court for the District of Minnesota (federal court) alleging copyright infringement by Four Seasons regarding three of Taylor's greeting-card designs. Specifically, Taylor alleged that "Four Seasons has infringed the copyright in [Taylor's] Works by copying, manufacturing, producing, publishing, selling, promoting and/or advertising, in the United States, greeting cards bearing designs . . . substantially similar to [Taylor's] Works." One month later, this complaint was amended to allege copyright infringement against Four Seasons with respect to three additional greeting-card designs. The complaint sought both a permanent injunction against Four Seasons and money damages.
In October 2001, the federal court issued a preliminary injunction against Four Seasons. But this injunction was later stayed pending appeal to the Eighth Circuit Court of Appeals. In January 2003, the Eighth Circuit affirmed the federal court's issuance of the preliminary injunction. Taylor Corp. v. Four Seasons Greetings, LLC, 315 F.3d 1039 (8th Cir. 2003).
On April 1, 2003, Taylor offered to settle the underlying action upon payment by Four Seasons of approximately $73,000 and an agreement to a permanent injunction. Four Seasons rejected this offer. On May 22, 2003, Taylor made a second settlement offer, proposing a permanent injunction, but foregoing any claim for damages and offering to file a second amended complaint relinquishing its damages claims. Taylor's proposal stated:
Taylor Corporation will promptly dismiss this action with prejudice upon Four Seasons' agreement to be bound by a Stipulated Order of Permanent Injunction addressing all six (6) of the designs in dispute.
Taylor Corporation has concluded that it will not pursue its claim for money damages in this case. If you would like us to formalize the withdrawal of the damages claims by amending the Complaint, please advise. A copy of the proposed Second Amended Complaint is enclosed for your review.
The proposed second amended complaint contained the same allegations of infringement as the amended complaint, but sought only injunctive relief and dropped Taylor's demand for a jury trial. On May 29, Four Seasons rejected this offer, stating:
[O]n the eve of trial, Taylor has suddenly decided to abandon its damages claim. . . . If this is Taylor's decision, then please be advised that Four Seasons will move for the entry of a directed verdict and the entry of judgment dismissing Taylor's claims with prejudice. . . .
We will not stipulate to the filing of a Second Amended Complaint. Four Seasons has been preparing for a jury trial for months and Four Seasons would be severely prejudiced if Taylor were permitted to drop the damages claim on the eve of trial, prejudice the defense of the insured, and attempt to deprive Four Seasons of the right to a jury trial that Taylor itself demanded in the original and first amended complaint.
Taylor subsequently filed a motion for leave to serve and file a second amended complaint. The court never explicitly granted or denied this motion; instead, both the magistrate and the federal district court judge noted that Taylor had control over its lawsuit and could choose to present or not present evidence of damages at trial. At the motion hearing, the magistrate stated:
[T]he Court sort of grants the plaintiff's motion; that is, I don't view it either really as a motion to amend or a Rule 41 dismissal, but rather an election of remedies going forward. The Court will, to be clear, permit the plaintiff to choose to go forward on injunctive relief only.
(Emphasis added.) Four Seasons' counsel then attempted to clarify the court's ruling on the motion.
MR. HALLIGAN: So you are granting the leave to file a second amended complaint?
THE COURT: What I am doing is I am permitting the plaintiffs to elect to proceed on injunctive relief only.
MR. HALLIGAN: I don't understand, Your Honor. The . . . present complaint pleads damages, and [Taylor] ha[s] filed a motion for leave to amend and file a second amended complaint. My question is: Are you granting or denying that?
THE COURT: I have tried to make myself clear. For instance, oftentimes in other settings there are alternative causes of action pled in the complaint, and prior to trial the plaintiff needs to elect how to proceed. This plaintiff is electing to proceed on injunctive relief only.
. . . .
MR. HALLIGAN: So I'm just asking: Are you granting or denying the motion?
THE COURT: I am . . . telling [Taylor] I don't think that's the way to bring the motion to me. This is not a motion to amend to add a party or claim to a case. . . . In this Court's view [Taylor] is choosing to proceed with one remedy versus another. [Taylor] is electing to go forward with one remedy, and I am permitting [Taylor] to do that. . . .
. . . .
With respect to a clarification of the ruling, I am construing [Taylor's] motion to be a motion to proceed to trial electing one remedy over another; that is injunctive relief. I am construing the motion to be an election of remedies motion, and I am granting that motion.
. . . .
MR. HALLIGAN: And your — The implications of this order that you are dismissing the money damages claims with prejudice.
THE COURT: I am doing nothing of the sort. I am permitting [Taylor] to elect that — to proceed to trial on one remedy only.
. . . .
MR. HALLIGAN: And you're not ruling that that's a dismissal with prejudice?
THE COURT: That's correct.
MR. HALLIGAN: All right. So [Taylor] could file a damages claim two months after this trial against us again.
THE COURT: No. . . . [T]hey cannot. They are electing forevermore this remedy. They may not bring a damages claim against you again. You are protected from that.
This decision was raised to the federal district court judge. Once again, there was not a clear ruling on the issue. The judge noted that
[Taylor] ha[s] total control over the lawsuit. . . . [Taylor] can put in evidence of no damages or not damages.
. . . .
[Taylor] can make up [its] own mind what [it] do[es]. As long as [Taylor] follow[s] certain rules, [Taylor is] going to be able to do what [it] want[s] to do. . . .
[Taylor's attorney] is going to have a chance to do what she has to do to make sure [Taylor] get[s] whatever [it] want[s]. To be honest, if [Taylor's attorney] after hearing what she has heard today goes back and reinstates a damages claim and lays into [Four Seasons] for five million dollars in damages, it wouldn't surprise me a bit. I think she can still do that.
The underlying case then proceeded to trial, which was held in two parts. The infringement issues were tried to a jury, which found that Four Seasons had infringed on copyrighted material. The second trial, regarding ownership of the copyrights at issue, was tried to the federal court.
On December 11, 2003, the federal court issued its findings of fact, conclusions of law, and order for judgment, finding that Four Seasons was liable for copyright infringement and entering a permanent injunction. The federal court's decision is silent on the issue of damages. This judgment is currently on appeal to the Eighth Circuit Court of Appeals.
II. The Declaratory Judgment Action
GCC, an Illinois corporation licensed to do business in Minnesota, is a commercial insurer. GCC issued to Four Seasons the following insurance policies covering the period during which the alleged copyright infringement occurred — November 1, 1999 to November 1, 2001 (collectively, the "1999-2001 policies"): (1) Cornerstone Policy (11/1/99-11/1/00); (2) Commercial Umbrella Liability Policy (11/1/99-11/1/00); (3) Commercial Marketplace Policy (11/1/00-11/1/01); and (4) Commercial Umbrella Liability Policy (11/1/00-11/1/01). Each of these policies contain the following relevant language:
A. COVERAGES
1. Business Liability
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury", "property damage", "personal injury" or "advertising injury" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury"," property damage", "personal injury" or "advertising injury" to which this insurance does not apply. . . .
. . . .
b. This insurance applies:
. . . .
(2) To:
. . . .
(b) "Advertising injury" caused by an offense committed in the course of advertising your goods, products or services[.]
. . . .
F. LIABILITY AND MEDICAL EXPENSES DEFINITIONS
1. "Advertising injury" means injury arising out of one or more of the following offenses:
. . . .
d. Infringement of copyright, title or slogan.
"Suit" is defined as "a civil proceeding in which damages because of . . . `advertising injury' to which this insurance applies are alleged." The term "advertising" is not defined in the 1999-2001 policies.
Four Seasons initially notified GCC of the underlying action on October 26, 2001. Four Seasons made a follow-up phone call to GCC on December 19. On the same date, GCC sent Four Seasons a letter denying coverage. Specifically, GCC stated that "it is quite clear Taylor alleges harm from Four Seasons' alleged infringement of Taylor's copyrighted greeting card designs, not its advertising. Thus, it is apparent the copyright infringement occurred `independent and irrespective' of any advertising." GCC then requested any additional facts that Four Seasons felt "should be brought to [GCC's] attention that would have a bearing on [GCC's] position."
In its brief, GCC states that notice of the claim was tendered on December 19, 2001. But in a letter from GCC's attorney to the referee, dated April 11, 2003, GCC concedes that "[t]he initial tender in this case was made via telephone on October 26, 2001." The latter date was accepted by the referee in his report regarding fee applications.
On February 27, 2002, GCC sent a second request for information to Four Seasons, stating:
On December 19, 2001, we wrote to you articulating [GCC's] position concerning coverage in this matter. In that letter, we outlined the facts as we were aware of them, the applicable law, and the relevant policy terms, conditions and exclusions of [GCC's] policy. We invited you to contact us if you had any questions concerning [GCC's] position, required further clarification, or there were additional facts that you felt should be brought to [GCC's] attention so we could consider them. We further requested you contact us after you had considered [GCC's] letter and the authorities cited therein to let us know whether or not your client agreed with [GCC's] position. More than two months have passed and we have not heard from you. Please contact us to let us know your client's position on this matter.
On April 3, 2002, Four Seasons wrote to GCC, challenging GCC's decision not to defend it in the underlying action. Four Seasons contended that GCC's duty to defend was triggered by the language in Taylor's complaint. Four Seasons further stated that "[i]t is well settled that an insurer may not justifiably refuse to defend an action against its insured unless it is clear from the face of the Complaint that the allegations fail to state facts which bring the case within, or potentially within, the policy's coverage."
GCC responded on April 17, 2002, reiterating its denial of coverage. GCC stated that Four Seasons' "letter d[id] not address the `cause' issue [GCC] outlined in detail in [GCC's] correspondence, with the exception of [Four Seasons'] mention of the single reference to advertising identified in the Underlying Complaint." Furthermore, GCC requested "any additional comments, authorities, or materials to support [Four Seasons'] position."
On June 11, 2002, GCC filed a declaratory-judgment action in state district court, seeking a declaration that GCC's policies did not provide coverage for the claims stated in the underlying complaint. On July 15, Four Seasons moved for summary judgment. GCC then moved for summary and declaratory judgment on September 10. On November 6, the district court granted Four Seasons' motion for summary judgment, holding that GCC had a duty to defend Four Seasons and denying GCC's motion for summary judgment on the issue of indemnification as premature. On January 10, 2003, the district court filed a second amended order for summary judgment, expressly directing entry of final judgment on the issue of the duty to defend pursuant to Minn. R. Civ. P. 54.02. GCC then appealed from the second amended summary judgment. This court dismissed the appeal as "taken from a nonappealable, partial adjudication." Gen. Cas. Co. of Ill. v. Four Seasons Greetings, LLC, No. C4-03-98 (Minn.App. Feb. 11, 2003).
After the trial on the underlying claim was completed, GCC again moved for summary and declaratory judgment. Following a hearing, the district court entered summary judgment, holding that GCC's duty to defend Four Seasons terminated as of May 22, 2003, and that GCC had no duty to indemnify. In its order, the district court included a memorandum, noting:
As of May 22, 2003, Taylor Corporation abandoned its claim for monetary damages. The issue was addressed in an offer to settle on that date. Notwithstanding the best efforts of Four Seasons Greetings, the trial conducted . . . in Federal District Court was focused exclusively upon equitable grounds. The Judge issued an injunction, not an award for damages. . . .
[GCC] is compelled to defend an action for damages. [GCC] is compelled to indemnify [Four Seasons] for an award of damages. Upon the issuance of the injunction, the duty to indemnify was rendered null and void. Moreover, upon the abandonment of the claim of damages as well as the issuance of the injunction, the duty to defend was also rendered null and void.
These consolidated appeals follow.
DECISION
I. Initiation of Duty to Defend
On appeal from summary judgment, this court asks (1) whether there are any genuine issues of material fact, and (2) whether the district court erred in its application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). Interpretation of an insurance policy is a question of law, which this court reviews de novo. Iowa Kemper Ins. Co. v. Stone, 269 N.W.2d 885, 887 (Minn. 1978).
A. Existence of Duty
GCC contends that it had no duty to defend Four Seasons because the underlying claim falls outside of the scope of the policies. An insurer's duty to defend is contractual. Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 415 (Minn. 1997). To determine whether there is a duty to defend, this court begins by "compar[ing] the allegations in the underlying complaint with the relevant language in the insurance policy." St. Paul Fire Marine Ins. Co. v. Seagate Tech., Inc., 570 N.W.2d 503, 506 (Minn.App. 1997).
A duty to defend an insured on a claim arises when any part of the claim is `arguably' within the scope of the policy's coverage, and an insurer who wishes to escape that duty has the burden of showing that all parts of the cause of action fall clearly outside the scope of coverage.
Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 165-66 (Minn. 1986).
The insurer's duty to defend is not determined solely by the allegations in the complaint. St. Paul Fire Marine Ins. Co. v. Nat'l Computer Sys., Inc., 490 N.W.2d 626, 632 (Minn.App. 1992), review denied (Minn. Nov. 17, 1992).
If the complaint states a cause of action excluded from coverage, but the insurer is aware of facts outside the complaint which establish the inapplicability of the exclusion, the insurer must defend. By the same token, if the insurer is aware of facts outside of the complaint which conclusively establish that the acts giving rise to the claim are not covered under the policy, the insurer is not obligated to defend.
Id. (citation omitted) (emphasis added). Any doubts regarding the duty to defend should be resolved in favor of the insured. Crum v. Anchor Cas. Co., 264 Minn. 378, 390, 119 N.W.2d 703, 711 (1963).
The policies at issue provide coverage for "advertising injury." GCC contends that the advertising-injury provisions do not arguably cover any of the claims in the underlying action. To establish advertising-injury liability, three elements must be met: (1) the injury must fall within the scope of the policy's definition of "advertising injury," (2) advertising activity must directly or proximately cause the alleged injury, and (3) there must be no applicable policy exclusions. Polaris Indus. v. Continental Ins. Co., 539 N.W.2d 619, 621-23 (Minn.App. 1995), review denied (Minn. Jan. 25, 1996).
1. Advertising
Here, the pertinent policies provide that GCC has a "duty to defend the insured against any `suit' seeking . . . damages" arising from "advertising injury." Coverage applies to "`[a]dvertising injury' caused by an offense committed in the course of advertising [Four Seasons'] goods, products or services." "Advertising injury" includes "injury arising out of . . . [i]nfringement of copyright, title or slogan." "Suit" is defined as "a civil proceeding in which damages because of . . . `advertising injury' to which this insurance applies are alleged."
GCC argues that to focus on the complaint "ignores the `civil proceeding' portion of the Policies' definition of the term `suit.'" But the complaint is an integral component of the proceeding. As the supreme court has stated, "a proceeding `may include in its general sense all the steps taken or measures adopted in the prosecution or defense of an action, including the pleadings and judgment.'" Baker v. Ploetz, 616 N.W.2d 263, 269 (Minn. 2000) (citation omitted).
The policies do not define the term "advertising." Therefore, it must be given its plain and ordinary meaning. Polaris, 539 N.W.2d at 622. Advertising is "[t]he activity of attracting public attention to a product or business." The American Heritage Dictionary 26 (3d ed. 1992). Public is defined as "[t]he community or the people as a whole" or "[a] group of people sharing a common interest." Id. at 1464.
Four Seasons promotes the sale of its greeting cards to retail stores, direct mail retailers, and retail customers by providing wholesale and retail catalogs that include product samples or "mock-ups" and pricing information. The purpose of such catalogs is to attract attention to Four Seasons' products. The targets of the catalogs include retail customers who may certainly be considered the public. But even if such customers are excluded, a target of the catalogs is retailers, arguably a group of people sharing a common interest — selling greeting cards. Thus, we conclude that the actions of Four Seasons in promoting its cards falls within the plain and ordinary meaning of the term "advertising."
The United States District Court for the Northern District of California has noted in N.H. Ins. Co. v. R.L. Chaides Constr. Co., 847 F. Supp. 1452, 1456 (N.D. Cal. 1994), that
[a]dvertising activity must be examined in the context of the overall universe of customers to whom a communication may be addressed; to hold otherwise would effectively preclude small businesses . . . from ever invoking their rights to coverage for advertising injury liability. . . . [W]here the advertising audience is small but nonetheless constitutes all or a significant portion of the insured's client base, the advertising activity element is satisfied.
GCC argues that Four Seasons did not engage in advertising because it simply "provided the samples and price information to retailers, distributors, etc.[;] any further distribution was done by those entities." We disagree. Adopting GCC's perspective would mean that wholesalers cannot engage in advertising because they market to retailers rather than the final customer. Such a view is unreasonably narrow and violates the rule that any doubts regarding the duty to defend should be resolved in favor of the insured. See Crum, 264 Minn. at 390, 119 N.W.2d at 711.
2. Causation
In order to show that advertising activity was a direct or proximate cause of the alleged injury, Four Seasons must demonstrate that the injury was "the actual result of the advertising activity, not merely the result of some other activity that happens to be advertised." Polaris, 539 N.W.2d at 622. An insured has a "reasonable expectation that advertising-injury coverage should apply to injuries from advertising, rather than injuries arising out of other activities that coincidentally were advertised." Id.
Taylor's complaint in the underlying action alleges that "Four Seasons has infringed the copyright in [Taylor's] Works by copying, manufacturing, producing, publishing, selling, promoting and/or advertising, in the United States, greeting cards bearing designs . . . substantially similar to [Taylor's] Works." Under the Copyright Act, infringement occurs when "any of the exclusive rights of the copyright owner" are violated. 17 U.S.C. § 501(a) (2000). These exclusive rights include the rights
(1) to reproduce the copyrighted work in copies . . .; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies . . . to the public by sale or other transfer of ownership . . .; and (5) . . . to display the copyrighted work publicly.
17 U.S.C. § 106 (2000). As the Ninth Circuit has noted, in a copyright infringement case, the injury may "emanate within the advertisement itself and require no further conduct." Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 339 n. 3 (9th Cir. 1996).
The Supreme Court noted in Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S. Ct. 1282, 1296 (1991), that two elements must be proven to establish infringement: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.
Instances of copyright infringement may occur in the advertising of a product and constitute injuries separate from those occurring in the production and sale of the same product. In Amway Distribs. Benefits Ass'n v. Fed. Ins. Co., 990 F. Supp. 936 (W.D. Mich. 1997), advertising injury was found where the complaint alleged that the insured used infringing videotapes for a variety of purposes, including advertising. Id. at 946-47. The court noted that "[t]he distinguishing feature . . . is that the alleged infringing activity is not limited to the production of the videotapes, but also includes the display of the tapes to lower level distributors and to potential distributors for the purpose of advertising." Id. at 947. Here, the complaint likewise includes allegations of injury resulting from the "promotion and/or advertising" of the greeting cards. Thus, the causal standard set forth in Polaris has been met. 539 N.W.2d at 621-22.
GCC relies on the holdings in a number of cases in support of its argument that there is no causal connection between the copyright infringement and Four Seasons' course of advertising. But all of these decisions are distinguishable from the present case. First, GCC does not mention that three of the cases it cites specifically note that the underlying complaints failed to allege any wrongdoing with respect to the plaintiff's advertising. In the other cases cited, no evidence is presented that the underlying complaints alleged that the injury occurred in the course of advertising. Here, in contrast, the complaint specifically includes allegations that Four Seasons infringed on Taylor's copyrights by, among other things, "promoting and/or advertising" the greeting cards at issue in the underlying action. Thus, these cases cited by GCC are readily distinguishable.
GRE Ins. Group/Tower Ins. Co., Inc. v. Complete Music, Inc., 271 F.3d 711 (8th Cir. 2001) (holding that copyright infringement did not occur in the course of advertising); IDG, Inc. v. Cont'l Cas. Co., 275 F.3d 916 (10th Cir. 2001) (holding that the copyright infringement claims did not contemplate or depend upon the insured's promotional activity); Simply Fresh Fruit, Inc. v. Continental Ins. Co., 94 F.3d 1219 (9th Cir. 1996) (holding that misappropriation and patent infringement claims were outside the scope of advertising injury coverage where the injury had no causal connection to the advertising activities); Farmington Cas. Co. v. Cyberlogic Techs., Inc., 996 F. Supp. 695 (E.D. Mich. 1998) (holding that there was no causal connection between copyright infringement and advertising); Winklevoss Consultants, Inc. v. Fed. Ins. Co., 991 F. Supp. 1024 (N.D. Ill. 1998) (holding that trade secret violations were not committed in the course of advertising and did not constitute a misappropriation of advertising ideas); Bank of the West v. Superior Court, 833 P.2d 545 (Cal. 1992) (holding that unfair competition claims in underlying complaint did not have sufficient causal connection with advertising activity).
See IDG, 275 F.3d at 923 (noting that the underlying infringement claims do not contemplate or depend on promotional activity); Simply Fresh, 94 F.3d at 1222 (noting that the underlying complaint failed to allege any wrongdoing with respect to advertising); Winklelvoss, 991 F. Supp. at 1033 (noting that the complaint never alleged that the offense was committed in the course of promotional activity).
Additionally, of the cases cited, only three, GRE, IDG, and Cyberlogic, involve copyright infringement claims: Simply Fresh entails misappropriation of trade secrets and patent infringement; in Winklevoss, the insured was sued for unfair competition and misappropriation of trade secrets; and Bank of the West involves an unfair competition claim. Thus, these cases are not on point. Interestingly, the court in Bank of the West notes, in dicta, that "other types of `advertising injury' enumerated in the policy often do have a causal connection with advertising. . . . `Infringement of copyright, title or slogan' typically occurs upon unauthorized reproduction or distribution of the protected material." 833 P.2d at 560 (citation omitted).
In the remaining cases, copyright infringement is the underlying cause of action. But IDG is distinguishable because, as we have noted, the decision rests primarily on the fact that neither the complaint, pleadings, "[n]or any other relevant source," alleged that injuries arose from advertising activity. 275 F.3d at 922-23.
In GRE, the insured, a franchiser of mobile disc-jockey services, solicited new franchisees by advertising the services it supplied. 271 F.3d at 712. One of these services was the distribution of compilation music discs. Id. These discs contained songs for which proper licensing had not been obtained. Id. When the insured was sued, it submitted the case to the insurer under the advertising-injury portion of its policy. Id. In a declaratory-judgment action, the district court found for the insurer, holding that no causal connection had been established between the insured's advertising and the injury. Id. at 713. The Eighth Circuit affirmed the district court, noting that the primary purpose of the advertising was to sell franchises, and that although the distribution of the discs to franchisees may have indirectly led to copyright infringement when the songs were later played, such infringement did not occur in the course of advertising. Id. at 714. Thus, in GRE, any infringement necessarily occurred after the advertising activity had occurred. Id. But here the alleged infringement could have occurred during the advertising activity, when copyrighted material was "distributed" to Four Seasons customers. GRE may thus be distinguished.
As the briefs in GRE make clear, although the advertisements touted the infringing CDs, the discs themselves were not distributed until after a franchise agreement had been signed. 996 F. Supp. at 698.
In Cyberlogic, the insured was sued for copyright infringement, among other causes of action. 996 F. Supp. at 697. The insured then tendered notice of the case to the insurer, claiming coverage under the advertising-injury section of the applicable insurance policy. Id. at 698. This assertion was based on the fact that the insured distributed promotional copies of the alleged infringing computer program that was at the heart of the underlying case. Id. The court found for the insurer, holding that a product could not be an advertisement for itself. Id. at 703-04. The court noted that an advertisement must "make a statement about its subject. The product itself cannot meet this requirement. It does not convey an independent message about the product; it simply is the product." Id. at 703.
The promotional copy was substantively the same as the actual program and differed only in one respect: it had a "life-span" of only four hours. GRE, 996 F. Supp. at 698.
Here, the catalogs distributed by Four Seasons are more than simply "the product." The catalogs include samples or mock-ups of the cards, but also include other information such as pricing and the selection of verses available for imprint in the cards. Thus, Four Seasons' catalogs do "make a statement" about the product. Accordingly, Cyberlogic is distinguished.
3. Exclusions
GCC suggests that Four Seasons' coverage for advertising injury is barred by a "knowledge of falsity" exclusion contained in the policies, which excludes coverage for advertising injury "[a]rising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity."
The Eleventh Circuit has discussed the "knowledge of falsity" exclusion in some detail.
We recognize, of course, that a court could construe the term "false" to encompass conduct or statements arguably giving rise to a false or misleading impression. Such a definition, however, is significantly broader than one including only direct assertions of untrue facts, and we find it no more plausible.
As we've discussed, the most common use of the term "false" is to mean "untrue" or failing to correspond to a set of known facts — not creating a false impression or, maybe, only customer confusion. According the term the broadest definition would undermine the clear directive . . . that ambiguous insurance policy exclusions are construed against the drafter and in favor of the insured. In fact, exclusionary clauses are construed even more strictly against the insurer than coverage clauses.
Because we must construe the exclusion narrowly and in favor of coverage, we find that [the insured's] actions were not "false" inasmuch as they did not amount to direct assertions of untrue facts.
Hyman v. Nationwide Mut. Fire Ins. Co., 304 F.3d 1179, 1196 (11th Cir. 2002) (quotations and citations omitted) (emphasis in original); see also Interface, Inc. v. Standard Fire Ins. Co., No. 99-CV-1485, 2000 WL 33194955, at *5 (N.D. Ga. Aug. 15, 2000) ("With respect to the `knowledge of falsity' exclusion, defendants contend that [the insured] willfully and deliberately infringed [the] copyright. Knowledge of falsity, as a layman would read it, has nothing to do with copyright infringement. Nor is it an element of a claim for copyright infringement." (Emphasis added.)). The cases cited by GCC generally concern defamation and product-disparagement claims. As such, they have no bearing on the present case. The exception, A.J. Sheepskin Leather Co. v. Colonial Ins. Co., 709 N.Y.S.2d 82 (N.Y.App. Div. 2000), involves a trademark-infringement case. But it is a memorandum decision that presents little or nothing in the way of pertinent facts or context and is, therefore, not useful here. Thus, we conclude that the knowledge of falsity exclusion does not bar coverage in this case.
The three elements outlined in Polaris for advertising-injury coverage are met in this case. As a result, the injury was "arguably" within the scope of the policies and GCC had a duty to defend Four Seasons upon tender of the defense by the insured.
B. Tender
The issue of what constitutes legal tender of an insurance claim is a question of law, which this court reviews de novo. Home Ins. Co. v. Nat'l Union Fire Ins. of Pittsburgh, 658 N.W.2d 522, 527 (Minn. 2003). Although an insurer's duty to defend exists from the time an action is filed against the insured, the insured does not invoke that duty until it tenders a defense to the insurer. See SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 316-17 (Minn. 1995) (holding, in the context of a state-agency action, that, although the insurer's duty to defend arose when the agency issued a request for information to the insured, the duty was not invoked by the insured until it tendered a defense to the insurer). Tender occurs when an insured's actions give an insurer notice of a lawsuit and the opportunity to defend. Home Ins. Co., 658 N.W.2d at 534. An insurer is not responsible for defense costs incurred prior to tender. Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 739 (Minn. 1997).
GCC contends that "the first possible date a duty to defend could have been triggered" is July 15, 2002 — the date Four Seasons moved for summary judgment in this case. But Four Seasons initially notified GCC of the underlying complaint on October 26, 2001. The referee found that GCC's duty to defend was triggered on this date and the district court affirmed. GCC argues, however, that its duty to defend was not invoked on this date because Four Seasons did not provide GCC with the additional information GCC requested.
GCC's initial request for additional information was made on December 19, 2001.
This court addressed a similar situation in Westling Mfg. Co. v. W. Nat'l Mut. Ins. Co., 581 N.W.2d 39 (Minn.App. 1998), review denied (Minn. Sept. 22, 1998). In Westling, the insured was notified by the Minnesota Pollution Control Agency (MPCA) that the MPCA wanted to conduct testing to determine whether the insured was responsible for groundwater pollution. Id. at 42. The insured tendered a defense to its insurers, noting that the MPCA was threatening to issue a request for response action. Id. The insurers denied a duty to defend for a variety of reasons, "including a claim that the groundwater contamination was not sudden and accidental." Id. The insured then sued. Id. at 43. Based on a special verdict issued by the jury, the trial court found for the insured. Id.
On appeal, the primary insurer argued that it had no duty to defend because, when the insured tendered the defense, it did not claim that the release of contaminants had been "sudden and accidental" as required by the policy. Id. at 47. The insurer expressly notified the insured that it believed coverage was barred by a policy exclusion and, prior to the summary-judgment hearing, the insured produced no evidence to the contrary. Id. Nonetheless, this court found that the insurer had a duty to defend. Id.
[W]e conclude that coverage was "arguable" until further investigation of the facts revealed that the exception to the exclusion was inapplicable. . . . [T]here is no authority for the proposition that tender of the claim must await completion of an ongoing investigation of facts such that all conditions of coverage are made evident. We are mindful in resolving this issue of the insurer's burden to establish the applicability of its exclusions and of partiality in the law for the insured on the issue of the insurer's duty to defend.
Id. (emphasis added). Here, Four Seasons' claim was likewise "arguable." That Four Seasons did not provide GCC with additional information does not alter this fact. See id. When a policy "arguably" covers a claim tendered by the insured, the insurer should defend the claim and "reserve its right to contest coverage based on facts developed at trial." Dixon v. Nat'l Am. Ins. Co., 411 N.W.2d 32, 33 (Minn.App. 1987). Accordingly, Four Seasons invoked GCC's duty to defend on the date it initially tendered the defense, October 26, 2001. If GCC felt that the claim was not within the scope of the policy, it should have defended under a reservation of right.
II. Termination of Duty to Defend
Four Seasons argues that the district court erred in finding that GCC's duty to defend terminated on May 22, 2003, when Taylor proposed a settlement offer in which it abandoned its claim for damages. As an element of the interpretation of an insurance policy, termination of the duty to defend presents a question that this court reviews de novo. Meadowbrook, 559 N.W.2d at 415. "An insurer's duty to defend claims arguably within the policy's coverage extends until it can be concluded as a matter of law that there is no basis on which the insurer may be obligated to indemnify the insured." Id. at 416 (emphasis in original). "When it can be concluded as a matter of law that there is no basis upon which an insurer may be obligated to indemnify the insured, the insurer is relieved of its duty to defend." Woida v. N. Star Mut. Ins. Co., 306 N.W.2d 570, 574 (Minn. 1981). This duty to defend continues until no further right exists to appeal arguably covered claims. Meadowbrook, 559 N.W.2d at 417.
Four Seasons' policies with GCC limit coverage to situations in which damages may be assessed. Accordingly, GCC has no duty to defend claims for injunctive relief, unless the possibility of damages also exists. Cf. Fallon McElligott, Inc. v. Seaboard Sur. Co., 607 N.W.2d 801, 805 (Minn.App. 2000) (finding no obligation of an insurer to respond to a claim for an injunction unless that claim was coupled with a claim for damages). The question is thus whether a potential claim for damages still existed in this case after May 22, 2003, or whether, as a matter of law, there was no possibility that GCC would be obligated to indemnify Four Seasons.
Although it does not present exactly the same set of circumstances, Meadowbrook is instructive. There, four employees filed claims against the insured asserting, among other things, defamation. Meadowbrook, 559 N.W.2d at 413. The insurer admitted that the defamation claims were arguably covered by the insured's policy and assumed defense of the entire claim under a reservation of rights. Id. After the court in the underlying action dismissed a number of the claims, including the defamation claims, the insurer withdrew its defense of the entire action. Id. at 413-14. The insured brought a declaratory-judgment action and the insurer moved for summary judgment, contending that its duty to defend had terminated because the dismissal of the defamation claims left no claim to which the policy arguably applied. Id. at 414. The district court denied the motion on the ground that the dismissal of the defamation claims was not final under Minn. R. Civ. P. 54.02. Meadowbrook, 559 N.W.2d at 414. The insurer subsequently settled the defamation claims and again moved for summary judgment. Id. The district court once again denied the motion, holding that even if the defamation claims had been settled, arguably covered claims remained. Id. This court affirmed with respect to the insurer's duty to defend. Id. at 415.
Minn. R. Civ. P. 54.02 states:
When multiple claims for relief or multiple parties are involved in an action, the court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment. In the absence of such determination and direction, any order or other form of decision, however designated, which adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties shall not terminate the action as to any of the claims or parties, and the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties.
The supreme court reversed, holding that the duty to defend concluded when the insurance company settled the defamation claims. Id. at 417. The district court's partial dismissal did not terminate this duty. Id. The court noted that absent an express rule 54.02 determination, "the plaintiffs in a multi-claim lawsuit cannot appeal the dismissal of some of the claims until the remaining claims within the complaint have been adjudicated." Id. Because the possibility of appeal remained, the duty to defend also remained. Therefore, "an insurer cannot withdraw from a defense until its duty to defend all arguably covered claims has been completely extinguished — in other words, when no further rights to appeal those arguably covered claims exist." Id. Once the insurer settled and paid the claims, there was no further right of appeal and no further duty to defend. Id. The Hawaii Supreme Court has found similarly, noting that
[a]n insurer has a duty to proceed in defense of a suit to the point of establishing that liability upon which the plaintiff is relying is in fact not covered by the policy, and not merely that it might not be. The duty to defend continues until the potential for liability is finally resolved. . . .
Commerce Indus. Ins. Co. v. Bank of Hawaii, 832 P.2d 733, 737 (Haw. 1992) (emphasis added), cited in Meadowbrook, 559 N.W.2d at 417. We conclude that GCC's duty to defend ends when, as a matter of law, Four Seasons no longer faces the potential for liability on any arguably covered claim.
A settlement is contractual in nature and is not enforceable until accepted. Jallen v. Agre, 264 Minn. 369, 373, 119 N.W.2d 739, 743 (1963). "To constitute a full and enforceable settlement, there must be such a definite offer and acceptance that it can be said that there has been a meeting of the minds on the essential terms of the agreement." Id. Because Four Seasons did not accept Taylor's settlement offer, the May 22, 2003 proposal to drop the damages claim and file a second amended complaint was not enforceable.
On June 5, Taylor moved for leave to serve and file a second amended complaint. The record is unclear, but indicates that this motion was not granted. The federal magistrate "sort of grant[ed]" the motion, viewing it as an election of remedies and allowing Taylor to proceed "on injunctive relief only." Subsequent discussion did not render the decision any more clear; the magistrate did not dismiss the damages claim with prejudice, but stated that Taylor could not bring a damages claim in the future.
The record contains a notice of election of remedies and withdrawal of jury demand in which Taylor "elects to pursue only the equitable remedy of permanent injunctive relief." It is unclear from the record whether this notice was filed with the federal court. Even assuming, however, that the notice was filed, our analysis does not change. The timing of the notice is odd, occurring after the magistrate's hearing and before the hearing with the federal district court judge. Moreover, it is not a motion on which the court need rule. Taylor is not asking the federal court to decide the issue; it is simply providing additional notice that Taylor does not plan to put forth proof of money damages.
Copyright law provides for an election of remedies by the copyright owner. See 17 U.S.C. § 504(c)1 (2000) (providing that "the copyright owner may elect, at any time before final judgment is rendered, to recover, instead of actual damages and profits, an award of statutory damages for all infringements involved in the action"). But such election refers to the type of damages recovered (statutory or actual), not to an election of injunctive relief in lieu of damages.
MR. HALLIGAN: And you're not ruling that that's a dismissal with prejudice?
THE COURT: That's correct.
MR. HALLIGAN: All right. So [Taylor] could file a damages claim two months after this trial against us again.
THE COURT: No. . . . [T]hey cannot. They are electing forevermore this remedy. They may not bring a damages claim against you again. You are protected from that.
The federal district court judge's subsequent ruling is also vague, but suggests that potential liability for damages remains.
[Taylor's attorney] is going to have a chance to do what she has to do to make sure [Taylor] get[s] whatever [it] want[s]. To be honest, if [Taylor's attorney] after hearing what she has heard today goes back and reinstates a damages claim and lays into [Four Seasons] for five million dollars in damages, it wouldn't surprise me a bit. I think she can still do that.
Accordingly, although Taylor may have given up its claim for damages as a practical matter, it cannot be "concluded as a matter of law that there is no basis on which the insurer may be obligated to indemnify the insured." Meadowbrook, 559 N.W.2d at 416 (emphasis in original). Because the matter has not been resolved with finality, the possibility of liability remains. Thus, the district court erred in holding that the duty to defend terminated on May 22, 2003. We remand to the court for a determination of the termination date in accordance with this opinion.
Four Seasons also appeals from the district court's finding that GCC has no duty to indemnify. This issue is presently tangential to the duty to defend. The policies obligate GCC to indemnify Four Seasons for "sums that [Four Seasons] becomes legally obligated to pay as damages." Any duty to indemnify thus depends on whether Four Seasons is legally obligated to pay damages. Final resolution of this question must therefore wait until the issue of damages is decided with finality by the federal court.
III. Award of Attorney Fees
A. Underlying Action
GCC contends that the district court erred in affirming the referee's determination of attorney fees for the underlying action. A reviewing court will not reverse a district court's award or denial of attorney fees absent an abuse of discretion. Becker v. Alloy Hardfacing Eng'g Co., 401 N.W.2d 655, 661 (Minn. 1987). "An insured may recover from its insurer attorney fees that the insured has incurred defending itself against claims by a third party when the insurer has a contractual duty to defend the insured but has refused to do so." SCSC, 536 N.W.2d at 316. "[T]he reasonable value of attorneys' fees is a question of fact, and the findings of the [district] court must be upheld by a reviewing court unless clearly erroneous." Amerman v. Lakeland Dev. Corp., 295 Minn. 536, 537, 203 N.W.2d 400, 400-01 (1973). "The findings of a referee when adopted by the court appointing him have the same force on appeal as the findings of a court and they will not be disturbed, whether based on oral or written evidence, unless they are manifestly and palpably contrary to the weight of the evidence." Prior Lake State Bank v. Nat'l Sur. Corp., 248 Minn. 383, 389, 80 N.W.2d 612, 617 (1957). The ability of an insurer to dispute the reasonableness of attorney fees is diminished when it has improperly declined a tender of defense. Gopher Oil Co. v. Am. Hardware Mut. Ins. Co., 588 N.W.2d 756, 770 (Minn.App. 1999).
Here, the referee made substantial findings of fact and reviewed an extensive amount of evidence in determining attorney fees. GCC first contends that the referee erred in finding that the date of tender was October 26, 2001. But in a letter to the referee dated April 11, 2003, GCC acknowledged that "[t]he initial tender in this case was made via telephone on October 26, 2001." Accordingly, the referee did not err.
GCC next challenges the billing rates approved by the referee. In determining these rates, the referee considered a number of factors, including the expertise of the attorneys, the complexity of the claims, and the rates charged by comparable attorneys. After weighing the evidence, the referee reduced the rates initially billed by Four Seasons' attorneys by approximately 30%. In addition, GCC objects to the format of the billing and to the supposed duplicative nature of the services billed. But the referee noted that insurance companies sometimes accept "block billing" and assessed the services performed by each person submitting a bill. The evidence does not support a contention that the referee clearly erred on these issues.
GCC also argues that the referee erred in awarding interest from the date that Taylor served the underlying complaint on Four Seasons. Minnesota law provides that "where defense costs are awarded against an insurer, prejudgment interest must be paid from the time the bills for the defense costs were first submitted to the insurer for payment." Seaway Port Auth. of Duluth v. Midland Ins. Co., 430 N.W.2d 242, 252 (Minn.App. 1988). Thus, the referee clearly erred in computing interest from the date of service of the complaint. We remand for a calculation of interest from the date that Four Seasons submitted defense bills to GCC for payment.
B. Declaratory-Judgment Action
As we have noted, this court will not reverse a district court's award or denial of attorney fees absent an abuse of discretion. Becker, 401 N.W.2d at 661. An insured may recover from its insurer attorney fees it has incurred in a declaratory-judgment action only if there was a breach of a contractual duty or statutory authority exists to support such recovery. SCSC Corp., 536 N.W.2d at 319 (citing Morrison v. Swenson, 274 Minn. 127, 137-38, 142 N.W.2d 640, 647 (1966)). In the insurance context, attorney fees are recoverable when an insurer breaches its duty to defend. In re Silicone Implant Ins. Coverage Litig., 667 N.W.2d 405, 422 (Minn. 2003) (citing Morrison, 274 Minn. 127, 142 N.W.2d 640); see also Am. Standard Ins. Co. v. Le, 551 N.W.2d 923, 926 (Minn. 1996) (stating that the Morrison exception is limited to damages resulting from breach of contract by the insurer's failure to defend).
Here, GCC breached its duty to defend Four Seasons in the underlying action. The evidence does not clearly establish that the district court abused its discretion in awarding fees in the declaratory-judgment action. We thus conclude that the court did not err in awarding such fees to Four Seasons.
C. Fees and Costs in Proceeding Before Referee
When a breach of the duty to defend occurs, the insured "is entitled to be reimbursed for attorneys fees and costs expended" to force the insurer to pay for the defense. Indep. Sch. Dist. No. 697 v. St. Paul Fire Marine Ins. Co., 515 N.W.2d 576, 581 (Minn. 1994). The fees and costs incurred by Four Seasons in the proceeding before the referee fall into this category.
GCC cites Chicago Title Ins. Co. v. Fed. Deposit Ins. Corp., 172 F.3d 601 (8th Cir. 1999), for the proposition that the insured may not recover costs related to the time establishing reasonableness of fees and expenses where those fees and expenses are found to be unreasonable. In Chicago Title, the Eighth Circuit did reduce the fees awarded to the insured for the time expended before a special master to establish the reasonableness of fees. Id. at 606. But the decision cites no Minnesota law requiring this action. See id.
Here, the fees originally submitted by Four Seasons were reduced. Thus, at least some of these fees were found to be "unreasonable." Accordingly, the district court ordered the referee to deduct "[t]he legal fees and expenses generated by [GCC] in opposing the objections of Four Seasons to [the] Supplemental Report . . . from the next application for fees submitted by Four Seasons." The referee consequently directed GCC to submit "whatever documentation it desires concerning the legal fees and expenses it incurred in opposing the objection of Four Seasons to the Supplemental Report of the Referee." GCC argues that this is not the issue that should have been addressed; rather the issue was "whether [GCC] should be required to pay the fees generated by Four Seasons in the proceedings before the Special Master and, if the answer is yes, whether the fees should be reduced in proportion to the reduction of fees determined to be reasonable and necessary." The record does not conclusively establish whether this issue was actually considered by the referee or the court; nonetheless, the court indicated that it would take the issue "under advisement." The record does, however, contain detailed time reports and explanatory memoranda regarding the award of fees. Considering the record as a whole, we conclude that the district court did not abuse its discretion in awarding reasonable attorney fees. See Automated Bldg. Components, Inc. v. New Horizon Homes, Inc., 514 N.W.2d 826, 831 (Minn.App. 1994) (affirming attorney fees award because, even in absence of specific findings relating to award, record contained detailed time reports and explanatory affidavit which supported amount of award), review denied (Minn. June 15, 1994).
IV. Fees and Expenses of Referee
GCC argues that the district court abused its discretion in requiring GCC to pay all of the referee's fees and expenses because GCC successfully challenged a portion of the attorney fees for the underlying action. But GCC cites no legal authority for this proposition. Rule 53.01 allows for the appointment of a referee by the court and provides that "the compensation to be allowed to a referee shall be fixed by the court, and shall be charged upon such of the parties . . . as the court may direct." Minn. R. Civ. P. 53.01. The district court notes that GCC's objection regarding this issue "has been addressed numerous times by the Court and the Special Master." The record does not clearly indicate that the district court abused its discretion in requiring GCC to pay for the referee. Accordingly, we will not disturb the court's award of fees and expenses.