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Sunham Home Fashions, LLC v. Diamond State Insurance Company

August 29, 2011

SUNHAM HOME FASHIONS, LLC, PLAINTIFF,
v.
DIAMOND STATE INSURANCE COMPANY,
DEFENDANT.
DIAMOND STATE INSURANCE COMPANY, THIRD-PARTY PLAINTIFF,
v.
LUMBERMANS MUTUAL CASUALTY COMPANY A/K/A LUMBERMANS MUTUAL GROUP A/K/A KEMPER CASUALTY INSURANCE COMPANY, THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Denise Cote, District Judge:

OPINION & ORDER

Plaintiff Sunham Home Fashions, LLC ("Sunham"), a textile manufacturer and designer, brings this action against its excess insurance carrier Diamond State Insurance Company ("Diamond") seeking reimbursement of the settlement amount paid in a copyright infringement action and recovery of its defense costs. Diamond in turn seeks indemnification from Sunham's primary insurer, Lumbermans Mutual Casualty Company ("Lumbermans").

This Opinion addresses the parties' cross-motions for summary judgment.

BACKGROUND

The Complaint asserts one cause of action against Diamond for a declaratory judgment. Sunham principally seeks a declaration that Diamond had a duty to defend it in an action for copyright infringement of certain quilt designs, and that Diamond must therefore reimburse Sunham for all attorneys' fees and settlement costs associated with the copyright infringement action. Diamond has filed a third-party complaint against Lumbermans (the "Third-Party Complaint") asserting two causes of action for declaratory judgment and equitable subrogation. Diamond contends that as the primary insurer for Sunham, Lumbermans must indemnify Diamond to the extent that Diamond is found liable to Sunham for the costs of defending the infringement action.

The following facts are not in dispute. On February 27, 2003, Pem-America, Inc. ("Pem-America") filed an action for copyright infringement against Sunham in the United States District Court for the Southern District of New York (hereinafter the "Velvet Garden action").*fn1 Pem-America alleged that it was the owner of a copyright registration for a quilt design known as "Velvet Garden" and that Sunham had begun to sell quilts under the design names "Sage Garden" and "Canterbury" with patterns that were substantially similar in look and feel to the Velvet Garden design sold by Pem-America. The Velvet Garden complaint sought to enjoin Sunham from further sale of the "Sage Garden" and "Canterbury" designs; it also requested that the court require Sunham to "deliver up for disposition all 'Sage Garden' and 'Canterbury' quilts and related goods, and all packaging, advertising and/or promotional materials that violate the Court's injunction" (emphasis supplied). Attached to the complaint were three pages of photographs of Sunham's quilts. The pages appear to be from catalogs advertising the quilts, although they were not identified as advertisements in the Velvet Garden complaint.

Lumbermans issued a commercial general liability policy to Sunham for the period October 20, 2002 to October 20, 2003. The policy provided that Lumbermans will "pay those sums that the insured becomes legally obligated to pay as damages because of 'personal injury' or 'advertising injury' to which this insurance applies." The policy defined "advertising injury" as follows:

'Advertising injury' means injury, other than 'bodily injury' or 'personal injury,' arising solely out of one or more of the following offenses committed in the course of 'your advertising activities':

a. Misapropriation of advertising ideas;

b. Infringement of copyrighted advertising materials;

c. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services; or

d. Oral or written publication of material that violates a person's right of privacy.

The policy provided that it did not apply to advertising injury "[a]rising out of actual or alleged infringement of patent, trademark, service mark, trade name, trade dress, trade secrets, or copyright, other than copyrighted advertising materials." The Lumbermans policy also contained a so-called "voluntary payments" provision which provided that "[n]o insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without [Lumbermans'] consent."

Diamond issued an excess umbrella policy to Kam Hing Enterprises, Inc. for the term October 20, 2002 to October 20, 2003; Sunham was an additional named insured under this policy. The policy provided that Diamond had a duty to ...


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