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SMART STYLE INDUS. v. PENNSYLVANIA GEN. INS. CO.

July 10, 1996

SMART STYLE INDUSTRIES, INC. and H.W. CARTER & SONS, INC., Plaintiffs, against PENNSYLVANIA GENERAL INSURANCE COMPANY, Defendant.


The opinion of the court was delivered by: CHIN

 CHIN, D.J.

 In this diversity action, plaintiffs Smart Style Industries, Inc. ("Smart Style") and H.W. Carter & Sons, Inc. ("H.W. Carter") seek reimbursement of legal fees incurred during an underlying trademark action, H.W. Carter & Sons, Inc. and American Marketing Enterprises Inc. v. The William Carter Co., 913 F. Supp. 796 (S.D.N.Y. 1996) (Chin, J.) (the "Underlying Action"), pursuant to an insurance policy issued by defendant Pennsylvania General Insurance Company ("Penn General"). Plaintiffs have moved for judgment on the pleadings under Fed. R. Civ. P. 12(c) or, in the alternative, for summary judgment under Fed. R. Civ. P. 56. Penn General has cross-moved for summary judgment under Fed. R. Civ. P. 56.

 H.W. Carter was the principal plaintiff in the Underlying Action, which involved trademark claims raised by both sides and a Lanham Act claim asserted by H.W. Carter. *fn1" Nevertheless, plaintiffs argue, and Penn General concedes, that some aspects of the Underlying Action placed H.W. Carter in a defensive posture and thus at some point Penn General's duty to defend was triggered. Thus, I must determine when the duty to defend was triggered and which aspects of the Underlying Action placed H.W. Carter in a defensive posture. As discussed more fully below, Penn General's duty to defend arose when H.W. Carter submitted notice of the Underlying Action. Also, the trademark claims, but not the Lanham Act claim, placed H.W. Carter in a defensive posture. Thus, Penn General is liable for attorneys' fees incurred after March 6, 1995 relating to the trademark claims raised in the Underlying Action.

 BACKGROUND

 The relevant facts are undisputed. In October 1994, Penn General issued a Commercial General Liability policy (the "Policy") to Smart Style; H.W. Carter is named as an additional insured under the policy. Among the coverages provided by the Policy is coverage for "Personal and Advertising Injury Liability." Under this provision, Penn General was required to defend any suit against plaintiffs seeking damages for advertising injury. Under the terms of the Policy, advertising injury includes copyright and trademark infringement. The Policy also contains a condition to coverage providing that "no insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent."

 In early 1995, American Marketing Enterprises ("AME") and H.W. Carter launched a line of boys' clothing under the mark "CARTER'S WATCH THE WEAR." H.W. Carter & Sons, Inc., 913 F. Supp. at 801. In response, attorneys for The William Carter Company ("Wm. Carter") wrote a letter to H.W. Carter's attorneys, contending that H.W. Carter had infringed on Wm. Carter's trademark "CARTER'S." The letter stated that Wm. Carter would commence a trademark infringement suit if H.W. Carter did not cease its use of the purportedly infringing trademark. Id. at 801-02.

 On February 22, 1995, with controversy brewing over the use of their competing trademarks, H.W. Carter (and AME) commenced an action against Wm. Carter, seeking a declaration that H.W. Carter's trademark did not infringe on Wm. Carter's trademark. The next day, Wm. Carter asserted its counterclaims. Thus, even though H.W. Carter was the nominal plaintiff, the principal issue presented in the Underlying Action was whether H.W. Carter's use of its trademark violated Wm. Carter's rights to its trademark. Id. at 802.

 After asserting its counterclaims, Wm. Carter sent a letter to several of its customers, alleging that H.W. Carter was infringing on its trademark. The letter also stated that Wm. Carter "has sued [AME] and its partners for trademark infringement, unfair competition and damages." Id. In response, on April 14, 1995, H.W. Carter amended its complaint to assert a claim under the Lanham Act, seeking damages for purportedly false and misleading statements contained in the letter.

 On April 5, 1995, H.W. Carter's general counsel, Stephen Selden, wrote General Accident to follow-up on the March 6, 1995 notice of claim letter. Selden characterized the letter as "[his] tender of [his] client's request for defense of the counterclaim" to Penn General. Selden noted that H.W. Carter had retained Townley & Updike to commence the declaratory judgment action and continued to retain Townley & Updike, because Penn General had not responded to the notice of claim letter. Finally, Selden requested that Townley & Updike remain as H.W. Carter's counsel, because it had already accumulated knowledge of the lawsuit.

 On May 5, 1995, General Accident responded to H.W. Carter's request by agreeing "to take over the defense of the counterclaim" in the Underlying Action. *fn2" On May 12, 1995, General Accident agreed to allow Townley & Updike to remain as H.W. Carter's counsel. After a bench trial, I concluded that H.W. Carter's use of its mark did not infringe on Wm. Carter's trademarks. Id. at 804. I also rejected the Lanham Act claim based on the trade letter. Id. at 805.

 Penn General concedes liability for legal fees incurred after May 5, 1995 in defending the counterclaims asserted in the Underlying Action. It contests liability, however, for any attorneys' fees incurred before May 5, 1995 and for attorneys' fees incurred after that date that relate to H.W. Carter's role as plaintiff in the Underlying Action. Conversely, H.W. Carter contends that Penn General is liable for all attorneys' fees that were incurred during the Underlying Action. Thus, three issues exist, all of which can be decided as a matter of law: (1) when did Penn General's duty to defend begin, thereby giving rise to its obligation to pay for attorneys' fees, (2) whether Penn General is responsible for attorneys' fees ...


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