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Med-Plus, Inc. v. American Casualty Co. of Reading, PA

United States District Court, E.D. New York

August 4, 2017

MED-PLUS, INC., Plaintiff,
v.
AMERICAN CASUALTY CO. OF READING, PA, d/b/a CNA, Defendant.

          MEMORANDUM & ORDER

          NICHOLAS G. GARAUFIS, UNITED STATES DISTRICT JUDGE.

         Plaintiff Med-Plus, Inc., initiated this diversity action against Defendant American Casualty Company of Reading, PA, with whom Plaintiff holds a commercial general liability insurance policy. (Compl. (Dkt. 1).) Plaintiff asserts a claim for breach of contract and seeks a declaratory judgment entitling Plaintiff to select independent defense counsel in a separate ongoing lawsuit, Abbott Labs, v. Adelphia Supply USA, No. 15-CV-5826 (CBA) (LB) (E.D.N.Y.) (the "Underlying Action"). Pending before this court are Defendant's motion to dismiss the action and Plaintiff's cross-motion for partial summary judgment. (Def. Mot. to Dismiss (Dkt. 19); PI. Cross-Mot. for Partial Summ. J. (Dkt. 20).) For the reasons stated below, the court DENIES Defendant's motion and GRANTS Plaintiff's cross-motion.

         I. BACKGROUND

         All facts summarized in this section are undisputed. (See PI. R. 56.1 Statement ("PL 56.1") (Dkt. 22); Def. Resp. to PL 56.1 ("Def. 56.1") (Dkt. 25).) Plaintiff is a New Jersey corporation that conducts a medical supply business throughout the United States. (Def. 56.1 at 1-2.) Plaintiff was a named insured in a commercial general liability insurance policy (the "Policy") issued by Defendant, effective from December 8, 2014, to December 8, 2015. (Id. at 2; see also Ex. A, Compl. ("Policy") (Dkts. 1-3 to -5).)

         A. The Underlying Action

         On October 9, 2015-i.e., during the Policy's coverage period-the Underlying Action was commenced in this district by Abbott Laboratories and certain affiliated entities ("Abbott"). (Compl. (Abbott Dkt. 1).) Abbott sells medical equipment for diabetic patients, and alleges that various medical supply companies conspired to import diverted international diabetes equipment for sale in the United States. (Id. ¶¶ 2-4.) In the original complaint, Abbott asserted claims including trademark infringement, fraud, racketeering, and unfair competition. (Id. ¶ 1.)

         Med-Plus was not initially named as a defendant in the Underlying Action, but was added as a defendant in the first amended complaint, filed on November 20, 2015. (1st Am. Compl. (Abbott Dkt. 156).) Med-Plus appeared in the Underlying Action in December 2015, and was represented by Stern & Schurin LLP, the same counsel representing Plaintiff in the instant action. (Not. of Appearance (Abbott Dkt. 228).) In early March 2016, Plaintiff notified Defendant of the pending "trade dress" claim in the Underlying Action, and Defendant responded that none of the claims in the Abbott first amended complaint were covered under the Policy. (Def. 56.1 at 4-5.)

         Abbott filed a second amended complaint (the "Abbott SAC") on March 28, 2016, which modified the substance of its trade dress claim against Med-Plus and other defendants. (Abbott SAC (Abbott Dkt. 307).) The Abbott SAC seeks compensatory and punitive damages, among other forms of relief. (Id. at 155-56.)

         B. Defendant's March 30, 2016, Letter

         Plaintiff notified Defendant of the amendment the same day it was filed. (Def. 56.1 at 5-6.) On March 30, 2016, Defendant sent a letter (the "March 30 Letter") stating that Defendant "agree[d] to defend Med-Plus [] with respect to this matter subject to a full reservation of rights." (Mar. 30, 2016, Ltr. from Pamela Ellingson to Roger Mezhibovsky ("Mar. 30 Ltr.") (Dkt. 23-6) at 2.) Defendant explained that the Policy "applies to liability for damages because of'personal and advertising injury, '" subject to certain exclusions, and concluded that the Abbott SAC "does potentially allege a claim for trade dress infringement arising out of [Med-Plus's] advertisement." (Id. at 2-3.) Defendant's reservation of rights "include[d] the right to file a declaratory judgment action to determine the parties' rights and obligations, the right to withdraw from the defense, and the right to seek reimbursement of defense payments." (Id. at 3.)

         With regard to defense costs and selection of counsel, the March 30 Letter stated the following:

[W]hen a complaint includes both covered and uncovered claims[, ] New Jersey law requires that the insurer pay the costs of the covered claims, but not the costs for defending or prosecuting uncovered claims. Thus, when an insurer is faced with an underlying complaint involving covered [and] uncovered claims, ... [the insurer] must attempt to negotiate a fair allocation of defense costs with the insured.
We have determined that five of the thirteen causes of action in the SAC potentially allege a trade dress infringement claim covered under the subject policy. The remaining eight causes of action are not covered....
[W]e propose that [American Casualty] pay 5/13 of the defense expense and Med-[Plus] pay the remaining 8/13. [American Casualty] is willing to have Stern & Schurin LLP continue as defense counsel on your behalf. Please let us know if you are in agreement with these terms or if you would like to discuss them further.

(Id. at 5-6.)

         C. The Initiation of This Action

         On June 9, 2016, Plaintiff filed the instant Complaint, asserting diversity jurisdiction under 28 U.S.C. § 1332. (Compl. ¶ 5; see also id ¶ 10 (alleging that Defendant has a principal place of business in Illinois).) Plaintiff asserts a cause of action for breach of contract and seeks declaratory judgment.[1] (Id. ¶¶ 27-37.) Plaintiffs counsel wrote to Defendant that same day, stating: "As previously expressed to you, Med Plus cannot accept the terms and rates that were offered by [American Casualty]. Frankly, we would like to resolve this ..., but if we cannot, we will move forward with service of the Complaint that has been filed." (June 9, 2016, Email from Steven Stern to Pamela Ellingson (Dkt. 23-7).)

         D. Subsequent Communication Between the Parties

         On June 28, 2016, Defendant sent a letter stating that American Casualty "agrees to defend and indemnify its insured, " Med-Plus, "against all causes of action" in the Underlying Litigation. (June 28, 2016, Ltr. from Pamela Ellingson to Steven Stern (Dkt. 23-8) at 1.) Defendant also stated "that punitive damages and damages in excess of the policy limit, claims that are excluded by public policy and policy language or by Code or Statute, do not create a conflict of interest." (Id. at 2.) Defendant instructed that "[d]efense of Med-Plus, Inc. will now be transferred" to an attorney selected by Defendant. (Id.)

         Plaintiff responded on June 30, 2016, to "acknowledge and confirm" Defendant's position that it would "defend and indemnify" Plaintiff. (June 30, 2016, Ltr. from Steven Stern to Pamela Ellison (Dkt. 23-9) at 1.) Plaintiff objected, however, that "a claim for punitive damages does indeed create a conflict of interest which entitles Med Plus to select its own independent counsel which must be paid for by" Defendant. (Id. at 1-2 (citations omitted).)

         In a July 6, 2016, email, Defendant stated that it "agrees to defend and indemnify Med-Plus against all causes of action and damages sought in the Abbott complaint, up to the available limits of the policy, without reservation, " and once again stated its intention to appoint new counsel for Med-Plus. (July 6, 2016, Email from Charles Carluccio to Steven Stern (Dkt. 23-10) (emphasis added).)

         II. DISCUSSION

         Defendant moves to dismiss the complaint for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), and also for failure to state a claim upon which relief may be granted under Rule 12(b)(6). Plaintiff moves for partial summary judgment on the issue of whether Plaintiff is entitled to select independent counsel in the Underlying Action, with reasonable costs paid by Defendant.

         The court finds an ongoing actual controversy, and therefore denies Defendant's 12(b)(1) motion. The court construes Defendant's 12(b)(6) motion as a motion for summary judgment, and adjudicates it simultaneously with Plaintiffs cross-motion for summary judgment. The court finds that the potential for punitive damages in the Underlying Action creates a conflict of interest that entitles Plaintiff to select independent counsel. The court rejects Defendant's arguments regarding Stern & Schurin's eligibility to be selected as independent counsel, while recognizing that such arguments may potentially be raised at another time or in another forum.

         A. Subject ...


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