Summary
In Concept Enterprises, the court refused to compel arbitration or calculate fees under section 2860 because the insurer breached its duty to defense by paying some, but not all, of the defense costs owed.
Summary of this case from Seagate Technology LLC v. National Union Fire Ins. Co. of Pittsburgh, PAOpinion
Case No. CV 00-7267 NM (JWJx).
May 21, 2001
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
I. INTRODUCTION
On September 10, 1999 plaintiffs Concept Enterprises, Inc., and Coustic, Inc., (collectively, "Coustic") filed a complaint for breach of contract and declaratory relief against defendant Hartford Insurance Company of the Midwest ("Hartford") for failure to defend Coustic in a Louisiana patent and trademark infringement action (the "SAS action"). On March 6, 2001, this court issued an order deciding the parties' cross-motions for summary judgment and partial summary judgment. The court granted in part and denied in part Coustic's motion for partial summary judgment. It found that Hartford owed Coustic a duty to pay for the defense of the entire SAS action until that duty ceased August 7, 1997, when only patent claims remained in the suit. The court granted in part and denied in part Hartford's cross-motion for summary judgment. It found that Hartford did not have a duty to defend the SAS action after August 7, 1997, but that — contrary to Hartford's assertion — no allocation agreement relieved Hartford of its duty prior to that date.
Presently before the court is plaintiff's motion for summary judgment regarding the sums incurred in defending the SAS action, and for recovery of attorney's fees incurred in the instant suit.
II. FACTS
The court has set out the facts of this action in its prior order. For purposes of the instant motion, the court restates a few relevant facts here.
By letter dated May 15, 1997, Victor Cooper of Merchant Gould ("MG"), Coustic's counsel for the SAS action, forwarded invoices for services rendered from November 1, 1996 through April 1, 1997 to Hartford claims representative James McClenny. Suppl. Wood Decl. ¶ 6, Ex. B. This letter included a chart summarizing certain fees related to the SAS trademark claims, totaling $12,294.15, calculated at the rates Hartford demanded. The letter further demanded payment of all MG fees, including those attributable to defense of the SAS patent claims. By letter to Hartford's David Burch dated June 10, 1997, Cooper again demanded reimbursement for the entire defense of the SAS action. He included with this letter copies of the invoices generated in the SAS action for the period between February 1, 1996 and October 31, 1996, and provided duplicate copies of the invoices for the period between November 1, 1996 and April 1, 1997. Suppl. Wood Decl. ¶ 7, Ex. C. On April 3, 1998, Mark Plager of Gauntlett Assoc. ("Gauntlett"), Coustic's coverage counsel, sent Hartford copies of invoices covering the period from April 1, 1997 to March 30, 1998. Gauntlett Decl. ¶ 8, Ex. G. By letter dated July 11, 1997, in response to Cooper's May 15 letter, Hartford sent Coustic a check for $12,295.15. To date — almost four years later — no further payments have been made by Hartford.
By letter dated May 11, 1998, Hartford's McClenny acknowledged that California law requires an insurer to defend a "mixed" action in its entirety. In this letter, McClenny offered to compromise Coustic's claim against Hartford for reimbursement by paying 15% of all the MG fees Coustic incurred in the "mixed" action. Suppl. McClenny Aff. Ex. L ("[W]e agree that Buss can be read as holding that, as a practical matter, when an insured is being sued for covered and non-covered claims, the insurer should lay out the defense costs and then seek repayment from the insured for those defense costs resulting from those claims which are not covered."). McClenny calculated that 15% of $563,285.22 — the amount MG actually billed Coustic — was $84,492.78. By letter dated May 15, 1998, Coustic declined Hartford's offer to pay it 15% of the fees incurred to defend the SAS action. Suppl. McClenny Aff. Ex. M.
III. ANALYSIS A. Standard
Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Summary judgment is "properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy and inexpensive determination of every action.'" Celotex Corporation v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2555 (1986) (quoting Fed.R.Civ.P. 1). Determinations of credibility, however, should be left to the trier of fact. See Hanon v. Dataproducts Corp., 976 F.2d 497, 507 (9th Cir. 1992). Accordingly, issues that turn on such determinations should not be resolved at the summary judgment stage. See id.; see also Palacios v. City of Oakland, 970 F. Supp. 732, 738 (N.D. Ca. 1997) ("In judging evidence at the summary judgment stage, the Court does not make credibility determinations or weigh conflicting evidence[.]")
In a trio of 1986 cases, the Supreme Court clarified the applicable standards for summary judgment. See Celotex, supra; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505 (1986); Matsushita Electrical Industry Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348 (1986). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. See Anderson, 477 U.S. at 256, 106 S.Ct. at 2514. The governing substantive law dictates whether a fact is material; if the fact may affect the outcome, it is material. See id. at 248, 2510. If the moving party seeks summary adjudication with respect to a claim or defense upon which it bears the burden of proof at trial, it must satisfy its burden with affirmative, admissible evidence. By contrast, when the non-moving party bears the burden of proving the claim or defense, the moving party can meet its burden by pointing out the absence of evidence submitted by the non-moving party. The moving party need not disprove the other party's case. See Celotex, 477 U.S. at 325, 106 S.Ct. at 2554.
If the moving party meets its initial burden, the "adverse party may not rest upon the mere allegations or denials of the adverse party's pleadings, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). When assessing whether the non-moving party has raised a genuine issue, the court must believe the evidence and draw all justifiable inferences in the non-movant's favor. Anderson, 477 U.S. at 255, 106 S.Ct. at 2513 (citingAdickes v. S.H. Kress and Company, 398 U.S. 144, 158-59, 90 S.Ct. 1598, 1608-09 (1970)). Nonetheless, "the mere existence of a scintilla of evidence" is insufficient to create a genuine issue of material fact. Id. at 252, 2512. As the Supreme Court explained in Matsushita,
[w]hen the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no "genuine issue for trial."Id., 475 U.S. at 586-87, 106 S.Ct. at 1356 (citations omitted).
To be admissible for purposes of summary judgment, declarations or affidavits must be based on personal knowledge, must set forth "such facts as would be admissible in evidence," and must show that the declarant or affiant is competent to testify concerning the facts at issue. Fed.R.Civ.P. 56(e). Declarations on information and belief are insufficient to establish a factual dispute for purposes of summary judgment. See Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989).
B. Application 1. SAS v. Coustic Fees
a. Hartford is not entitled to apply Cal. Civ. Code § 2860 retroactively, as it did not immediately and completely defend the SAS action.
Hartford contends that Coustic's defense costs must be calculated according to the directives of Cal. Civ. Code § 2860, and that any dispute over the amount of those fees is arbitrable. Section 2860 provides, inter alia:
If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured. . . .
For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. . . .
The insurer's obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. . . .
Any dispute concerning attorney's fees . . . shall be resolved by final and binding arbitration. . . .
Hartford's reliance on § 2860 is unavailing. Though Hartford contends the court must put Coustic in the position it would have occupied had Hartford accepted defense of the entire action, Hartford misses the import of its failure to defend the entire mixed SAS action as required under California law. To take advantage of the provisions of § 2860, an insurer must meet its duty to defend and accept tender of the insured's defense, subject to a reservation of rights. In this case, Hartford refused to accept tender of the entire defense as required under California law. See Buss v. Superior Court, 16 Cal. 4th 35, 59 (1997) ("To defend meaningfully, [the insurer] must defend immediately. To defend immediately, it must defend entirely."). Having failed to satisfy the factual predicate to § 2860, Hartford cannot belatedly invoke that section's arbitration and rate provisions. See California v. Pacific Indem. Co., 63 Cal. App. 4th 1535, 1544, 1554 (1998) (noting the trial court's unchallenged finding "that [Insurer] had materially breached its duty to defend, and therefore had forfeited its right to participate in or control the . . . defense, whether based on Civil Code section 2860 or otherwise"); Foxfire, Inc. v. New Hampshire Ins. Co., Nos. C-91-2940 MHP ARB and C-91-4364 MHP, 1994 WL 361815 at *3 (N.D. Cal. July 1, 1994) (following determination that insurer breached duty to defend, holding that "[Insurer's] first argument — that [Insured] is only entitled to be reimbursed at a rate of pay equal to what [Insurer] would have paid its panel counsel — is without merit. . . ."); id. ("[A breaching insurer] cannot complain of paying marketplace rates rather than those it can negotiate by reason of its position");cf. Stalberg v. Western Title Ins. Co., 230 Cal. App. 3d 1223, 1233 (1991) ("When [Insurer] refused plaintiff's tender . . ., it breached the contract. Once [Insurer] wrongfully denied a defense, it gave up the right to control the litigation and could not insist that plaintiffs use the [Insurer's preferred] firm in order for [Insurer] to cover fees. . . ."). Hartford "had ample opportunity to step in and hire counsel at its own set rates. Having wrongfully refused to defend [Coustic], it cannot now insist that [Coustic] should have paid defense counsel only what [Hartford] itself would have paid its counsel. This is one of the foreseeable consequences of failing to defend, as opposed to defending under a reservation of rights."Foxfire, 1994 WL 361815 at *3.
Hartford should not be unfamiliar with this concept. For example, in Sentex Systems, Inc. v. Hartford, Acc. Indem. Co., 882 F. Supp. 930, 946-47 (C.D. Cal. 1995), aff'd, 93 F.3d 578 (9th Cir. 1996), after finding that Hartford had breached its duty to defend, Judge Paez found that the insured was entitled to all the attorneys' fees it incurred in representing itself — not a reduced percentage calculated according to the provisions of § 2860. See id. ("[Insured] will be able to recover all attorneys' fees and other defense costs it incurred after [Insured] tendered its defense."); cf. Federal Ins. Co. v. Southwestern Wire Cloth, Inc., No. 95-C-689-K, 1999 U.S. Dist. LEXIS 4273 at *19 (N.D. Okla. Feb. 5, 1999) (after finding Hartford breached its duty to defend case involving trademark and patent claims, declining Hartford's request for allocation of costs between covered and non-covered claims; "[W]hen an insurer, under a duty to defend, refuses to so defend, the insurer is liable for all reasonable expenses incurred by the insured in defense of a third-party action.") (emphasis added).
Hartford's citations to San Gabriel Valley Water Co. v. Hartford Accident Indem. Co., 82 Cal. App. 4th 1230 (2000),Fidelity Deposit Co. v. First Commercial Bank, No. C-92-2252, 1992 U.S. Dist. LEXIS 13418 (N.D. Cal. Aug. 13, 1992), Northern Ins. Co. v. Allied Mut. Ins. Co., 955 F.2d 1353 (9th Cir. 1992), and Truck Ins. Exch. v. Superior Court, 41 Cal. App. 4th 985 (1996) are inapposite. In those cases, the insurer accepted tender of the defense. See 82 Cal. App. 4th at 1233 ("Defendants each agreed to provide a defense of the actions subject to reservations of rights affecting indemnity coverage. . . ."); 1992 U.S. Dist. LEXIS 13418 at *4 (same); 955 F.2d 1353 at 1356 (same); 51 Cal. App. 4th at 989 ("Petitioner agreed to provide a defense under a reservation of rights. . . ."). In this case, Hartford failed to provide a complete and meaningful defense by refusing to pay for the defense of the entire mixed action.
b. Hartford is not entitled to § 2860's arbitration provision.
Though Hartford contends that any dispute over the fees should be submitted to arbitration, Hartford itself notes elsewhere in its opposition that a court is the proper forum for the determination of attorneys' fees after an insurer has breached its duty to defend. See Opp. at 9 n. 5 ("[O]nce California courts determine that the insurer is liable for the insured's fees in an insurance coverage dispute, the trier of fact must determine the amount of such fees.") (citing Zurich Ins. Co. v. Killer Music, Inc., 998 F.2d 674 (9th Cir. 1993) (following determination that insurer breached its duty to defend, Ninth Circuit remanded to trial court for determination of reasonable settlement and attorneys' fees); Etchell, 165 F.R.D. 523 (N.D. Cal. 1996) (following determination that insurer breached duty to defend, court referred to magistrate judge the determination of reasonable attorneys' fees)); see also Foxfire, 1994 WL 361815 (following determination that insurer breached duty to defend, court decided reasonable attorneys' fees).
Furthermore, Hartford has waived any purported right to arbitration. Hartford answered Coustic's complaint October 20, 1999 and did not assert § 2860 arbitration as a defense. Hartford has yet to petition to compel arbitration, delaying in asserting its purported right to such arbitration until filing its opposition to the instant motion — though Coustic and Hartford have been disputing the rates of reimbursement since the tender of the SAS action over five years ago. The California Court of Appeal, under similar facts, has found a defendant waived its right to arbitration. See Gunderson v. Superior Court, 46 Cal. App. 3d 138, 144 (1975) (defendant failed to plead contract's arbitration clause as affirmative defense, delayed in seeking to enforce clause, and failed to designate an arbitrator within the time limit prescribed by contract, belying any true intent to arbitrate), disapproved on other grounds, Doers v. Golden Gate Bridge, Highway Transp. Dist, 23 Cal. 3d 180, 185, 188 (1979). Accordingly, the determination of the amount of SAS attorneys' fees to be reimbursed to Coustic is not subject to arbitration.
c. Hartford is not liable for pre-tender defense costs.
The Hartford insurance contracts contain a voluntary payments clause that provides, "[N]o insured will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense . . . without our consent." Statement of Genuine Issues ("SGI") ¶ 51. "California courts have consistently honored voluntary payment provisions such as the one in the subject policy in this case[,]" and do not require insurers to pay for voluntarily incurred pre-tender expenses, as the duty to defend does not attach until tender of the defense. See Faust v. Travelers, 55 F.3d 471, 472 (9th Cir. 1995) (affirming summary judgment that insurer was not liable for pre-tender costs);Jamestown Builders, Inc. v. Gen. Star Indem. Co., 77 Cal. App. 4th 341, 346 (1999) (noting same, citing Gribaldo, Jacobs, Jones Assocs. v. Agrippina Versicherunges A.G., 3 Cal. 3d 434, 449 (1970)). Because Coustic has not provided evidence sufficient to justify departure from this rule, it is not entitled to pre-tender fees, which amount to roughly $7,500.00. See Suppl. Wood Decl. Ex. A; Reply Wood Decl. at 3:15; Foxfire, 1994 WL 361815 at *6 (after determination that insurer had breached its duty to defend, holding that insured was "not entitled to pretender fees").
Plaintiff's reliance on Jamestown Builders for the proposition that an insurer's breach of its duty to defend entitles an insured to pre-tender expenses is misplaced. That case recognizes the standard entitlement to expenses incurred after refusal. See 77 Cal. App. 4th at 348 ("The no-voluntary payments provision is superseded by an insurer's antecedent breach of its coverage obligation.") (emphasis added). Plaintiff's reliance on Fiorito v. Superior Court, 226 Cal. App. 3d 433 (1990), and Shell Oil Co. v. Nat'l Union Fire Ins. Co., 44 Cal. App. 4th 1633 (1996), is likewise misplaced.Fiorito and Shell Oil recognized that pre-tender expenses might be recoverable if the insured were "compelled" to incur them due to circumstances beyond its control. See Fiorito, 226 Cal. App. 3d at 438-440 (plaintiffs alleged situation required immediate response, precluding insurer's demurrer);Shell Oil, 44 Cal. App. 4th at 1649 (affirming recovery of pre-tender expenses where insured was "unaware either of its insurer's identity, the contents of the policy, or both"). Here, Coustic has not explained how it was "compelled" to incur fees before tendering defense to Hartford. Coustic submits only the declaration of MG lawyer Gregory Wood, who states "[s]imply, it was necessary that Merchant Gould immediately undertake the defense of Coustic, especially in light of Hartford's subsequent refusal to honor its defense obligation." Wood Reply Decl. ¶ 5. This backward looking statement does not provide any evidence of "compulsion." Coustic waited almost three weeks from the time it received a copy of the SAS complaint (January 25, 1996) before it tendered notice of the claim to Hartford February 14, 1996, yet offers no explanation other than its alleged attempt to locate the Hartford policies. Id. Accordingly, it is not exempted from the general rule that insurers are not liable for pre-tender defense costs. Cf. Jamestown Builders, 77 Cal. App. 4th at 348 (affirming denial of pre-tender expenses where "[insured] failed to plead that the [sum] paid . . . was involuntarily made").
d. Hartford is entitled to a Rule 56(f) continuance.
In recovering its SAS fees, Coustic bears the burden of proving the amount of attorneys' fees and costs it incurred in the SAS action, while Hartford bears the burden of proving that amount is unreasonable or unnecessary. See California v. Pacific Indemnity Co., 63 Cal. App. 4th 1535, (1998) (quotingAerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 64 (1997) ("Where the insurer has breached its duty to defend, it is the insured that must carry the burden of proof on the existence and amount of the . . . expenses, which are then presumed to be reasonable and necessary defense costs, and it is the insurer that must carry the burden of proof that they are in fact unreasonable or unnecessary.").
Hartford's citation to Etchell v. Royal Ins. Co., 165 F.R.D. 523, 545 (N.D. Cal. 1996), for the opposite proposition is unavailing. In that case, the magistrate judge's opinion asserted without any citation that the plaintiff bore the burden of proving reasonableness. Furthermore, Etchell preceded the California Supreme Court's Aerojet explanation of the burden by almost two years.
Hartford contends it needs to conduct discovery with respect to the reasonableness of plaintiff's attorneys' fees, and requests a continuance of plaintiff's motion under Fed.R.Civ.P. 56(f). "Under Rule 56(f) of the Federal Rules of Civil Procedure, if it appears that a party opposing a summary judgment motion cannot present facts essential to the opposition of such motion, the Court may deny the motion or order a continuance." Everett Assocs., Inc. v. Transcontinental Ins. Co., 57 F. Supp. 2d 874, (N.D. Cal. 1999) (granting defendant insurer's Rule 56(f) request and continuing insured's motion for defense costs). Coustic and Hartford agreed at the commencement of this action not to conduct any discovery pending adjudication of the summary judgment motions resolved by the court's March 6 order, and specifically contemplated that discovery on any potential damages would be conducted after such adjudication. See Joint Report of Early Meeting ("JREM") at 5:13-17 ("[T]he parties request that they be permitted to formulate a discovery schedule within two weeks after this Court's decision on the summary judgment motion. Discovery was stayed by agreement and order pending determination of the motion for summary adjudication while the case was pending in Louisiana."). Indeed, Coustic is currently engaged in such discovery. See Suppl. Gauntlett Decl. ¶ 8-9. Finally, in its Rule 56(f) request, Hartford has identified the discovery it desires and the reasons therefor. See Suppl. McClenny Aff. ¶ 3, 6 (citing, inter alia, alleged excessive time entries and extraneous attorneys, and requesting to take depositions and to receive evidence of the actual amounts paid by Coustic and the actual time sheets of MG attorneys). Accordingly, Hartford has made a sufficient showing that it requires discovery under Rule 56(f).See Visa Int'l Serv. Assoc. v. Bankcard Holders of America, 784 F.2d 1472, 1475 (9th Cir. 1986) ("[D]enial of a Rule 56(f) application is generally disfavored where the party opposing summary judgment makes (a) a timely application which (b) specifically identifies (c) relevant information, (d) where there is some basis for believing that the information sought actually exists. Summary denial is especially inappropriate where the material sought is also the subject of outstanding discovery requests.").
Hartford shall have until June 29, 2001 to conduct discovery.
Hartford's ex parte application of April 18, 2001 sought a one-month continuation of the hearing date of this motion, in order to conduct discovery.
2. Coustic v. Hartford Fees
a. Hartford was sufficiently on notice of Coustic's bad faith claim.To collect attorneys' fees for this action, Coustic must prove that Hartford breached the covenant of good faith and fair dealing. See infra. Though Hartford contends that Coustic's bad faith claim must fail because it was not specifically alleged in the complaint, Fed.R.Civ.P. 8(e)(1) requires "[n]o technical forms of pleading . . .," and Coustic's complaint repeatedly notifies Hartford of its intent to collect payment of Coustic's attorneys' fees incurred in this action. See Compl. ¶ 51-54, 56(3), Count I ¶ 2, Count II ¶ 3 (requesting payment for coverage counsel, and characterizing Hartford's behavior as "arbitrary and capricious"). The gravamen of several paragraphs is that Hartford's denial of coverage was unreasonable. See Compl. ¶ 27, 34, 35, 37, 40, 63-65, 67-68. Furthermore, the parties' Joint Report of Early Meeting reiterated Coustic's demand for attorneys' fees incurred in this action. JREM at 2:9-10. Therefore, Coustic has adequately pled a claim for breach of the covenant of good faith and fair dealing. See Self Directed Placement Corp. v. Control Date Corp., 908 F.2d 462, (9th Cir. 1990) (finding defendant had been put on sufficient notice of unfair competition claim, where complaint did not include an explicit claim for unfair competition but included allegations in the body sufficient to state such a claim).
b. Hartford breached the covenant of good faith and fair dealing.
To establish breach of the good faith covenant, an insured must demonstrate that "(1) benefits under the policy have been withheld; and (2) the reason for withholding benefits [was] unreasonable or without proper cause." Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136, 1151 (1990). In this case, it is undisputed that benefits under the policy were withheld. It further cannot be disputed that such withholding was unreasonable.
For over thirty years, California courts have imposed a duty on insurers to provide a complete defense for any mixed action.See Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1966) ("[T]he carrier must defend a suit which potentially seeks damages within the coverage of the policy."); Buss v. Superior Court, 16 Cal. 4th 35, 48 ("[I]n a mixed action, the insurer has a duty to defend the action in its entirety."); Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081 (1993) ("Once the defense duty attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered. . . ."); Hogan v. Midland Nat'l Ins. Co., 3 Cal. 3d 553, 563-64 (1970) ("The rule is settled that an insurer is under a duty to defend a claim whenever the allegations of a complaint would support a recovery upon a risk covered by the policy.").
Though Hartford points to pre-Buss cases allowing for up-front allocation of defense costs, it has conceded that Buss specifically requires an insurer to wait until the action ceases to be mixed before seeking reimbursement of monies it expended on claims presenting no potential for coverage. See Supp. McClenny Aff. Ex. L ("[W]e agree that Buss can be read as holding that, as a practical matter, when an insured is being sued for covered and non-covered claims, the insurer should lay out the defense costs and then seek repayment from the insured for those defense costs resulting from those claims which are not covered."). Given the California Supreme Court's clear directive, and Hartford's conceded understanding of that directive — any failure to pay Coustic's fees for the entire mixed action is patently unreasonable. TheBuss decision was rendered almost four years ago, and did not purport to establish new law; yet Hartford has still failed to reimburse Coustic more than a fraction of its defense costs incurred months before the SAS action ceased to be "mixed."
Furthermore, patent claim expenses aside, Hartford never fully paid the costs of the concededly covered trademark claims. The one payment that Hartford sent Coustic covered trademark expenses incurred between November 1, 1996 and April 1, 1997. Though the trademark claims were not dismissed until August 1997, Hartford never forwarded payment for the trademark fees incurred during those final five months — despite having in its possession by April 3, 1998 — over three years ago — invoices covering the entire duration of the mixed action. Hartford simply paid nothing further, either pursuant to its so-called "allocation agreement" or California law, which required Hartford to pay for the entire defense immediately and fully.
In sum, despite Coustic's repeated requests, Hartford consistently refused to honor its obligation to fund the defense of the entire mixed SAS action, thumbing its nose at three decades of California Supreme Court decisions dating back toZurich and Hogan. Roughly three years ago Hartford conceded that California law was premised on a "pay now, seek reimbursement later" theory. To date, however, Hartford has failed to pay for the entire mixed action, and has declined to pay even the costs it conceded from the outset that it owed. Accordingly, no reasonable jury could fail to conclude that Hartford's blatant intransigence has breached the covenant of good faith and fair dealing. Cf. Arnette Optic Illusions, Inc. v. ITT Hartford Group, Inc., 43 F.Supp. 2d 1088, (C.D. Cal. 1998) (where Hartford breached duty to defend trademark action, sending bad faith issue to jury because law on which Hartford relied was unclear at time of coverage denial).
c. Coustic is entitled to Brandt fees.
When an insurer breaches the covenant of good faith and fair dealing, its insured is entitled to recover the reasonable attorneys' fees it incurs in obtaining policy benefits, i.e., fees incurred in litigating the breach of contract portion of this action. These fees are called Brandt fees, after the California Supreme Court's decision clarifying the insured's entitlement. See Brandt v. Superior Court, 37 Cal. 3d 813, 817 (1985). ("When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney's fees are an economic loss — damages — proximately caused by the tort."). However, "these fees must be distinguished from recovery of attorney's fees qua attorney's fees, such as those attributable to bringing the bad faith [claim of the] action. . . ." Id.;see also Campbell, 62 Cal. App. 4th at 571 ("[Brandt] cautioned that the recoverable fees do not extend to fees incurred in pursuing the bad faith action itself."); Foxfire, Inc. v. New Hampshire Ins. Co., Nos. C-91-2940 MHP ARB and C-91-4364 MHP, 1994 WL 361815 at *6 (N.D. Cal. July 1, 1994) ("[Insured] may recover attorneys' fees for the time it expended in obtaining benefits under the policy, but may not recover attorneys' fees for efforts expended in proving that [Insurer] had breached its duty of good faith and fair dealing."). Because Hartford breached the covenant of good faith and fair dealing, Coustic is entitled to Brandt fees.
To be recoverable, the fees must be reasonable. See Brandt, 37 Cal. 3d at 815 (holding "attorney's fees, reasonably incurred to compel payment of the policy benefits, recoverable as an element of the damages resulting from" an insurer's breach of the good faith covenant); see also Campbell, 62 Cal. App. 4th at 572 (noting that insurer did not challenge reasonableness of fees charged by insured's coverage counsel). Coustic admits its recovery for fees paid to Gauntlett is limited by the bounds of reasonableness. See Mem. P.A. at 15:12-13 ("Hartford is therefore obligated to pay Coustic's reasonable attorneys' fees and costs incurred herein in their entirety.").
d. Coustic must provide a detailed breakdown of its Brandt fees.
Though Coustic is entitled to reasonable attorneys' fees incurred with respect to its breach of contract claim, Coustic has submitted a blanket request for the entire amount incurred in this suit. Coustic must separate out those fees attributable to the breach of contract claim (as opposed to its bad faith claim), and further specify those fees incurred with respect to its "mixed action" argument — which persuaded the court — and those fees incurred with respect to its patent coverage argument — which did not. Cf. Wallace v. Consumers Cooperative, 170 Cal. App. 3d 836, 850 (1985) ("If plaintiff failed to prevail on claims unrelated to his successful claims, work on the unrelated claims cannot be deemed to be expended in pursuit of the ultimate successful result. In contrast, where a plaintiff's claims for relief involve a common core of facts or are based on related legal theories, the court should focus on the significance of the overall relief obtained in relation to the hours reasonably expended. . . ."); Hensley v. Eckerhart, 461 U.S. 424, 440 (1983) ("Where the plaintiff has failed to prevail on a claim that is distinct in all respects from his successful claims, the hours spent on the unsuccessful claim should be excluded in considering the amount of reasonable fee. Where a lawsuit consists of related claims, a plaintiff who has won substantial relief should not have his attorney's fee reduced simply because the district court did not adopt each contention raised.").
Coustic's claim of privilege is unavailing. It cannot request attorneys' fees and simultaneously claim that information about the genesis of those fees is protected information. By requesting the fees as damages, Coustic has clearly put them at issue. By putting the fees at issue, Coustic has waived any claim of privilege. See Xebec Dev. Partners, Ltd. v. Nat'l Union Fire Ins. Co., 12 Cal. App. 4th 501, 569 (1993) ("A party who asserts a privilege as to evidence essential to some element of his or her case will usually be obliged as a practical matter to forsake that element. . . ."); Slottow v. Am. Cas. Co., 10 F.3d 1355, 1362 (9th Cir. 1993) ("Because the [insured] made no effort to segregate its litigation expenses as required byBrandt, we affirm the district court's decision not to award fees.").
None of plaintiff's citations are on point. In none of these cases was the evidence at issue necessary to prove an element of plaintiff's claim. See Rockwell Int'l Corp. v. Superior Court, 26 Cal. App. 4th 1255 (1994) (insurer sought discovery of privileged documents relevant to underlying dispute); Remington Arms Co. v. Liberty Mut. Ins. Co., 142 F.R.D. 408 (D. Del. 1992) (same); North River Ins. Co. v. Philadelphia Reinsurance Corp., 797 F. Supp. 363 (D.N.J. 1992) (insurer sought discovery of privileged documents relevant to insured's ADR tactics). Though in Clarke v. American Commerce Nat'l Bank, 974 F.2d 127, 130 (9th Cir. 1992), the court noted that information revealing "specific research or litigation strategy" is often the subject of attorney-client privilege, the court also noted that there were exceptions to the rule of privilege. See id. Furthermore, in Clarke, information about "specific research or litigation strategy" was not necessary to prove an essential element of the plaintiff's case. In this action, however, plaintiff has put the specific research at issue by requesting reimbursement for work that Brandt specifically requires plaintiff to identify and segregate.
Finally, though plaintiff cites Northern District Local Rule 54-5 for the proposition that the court should review the billing records in camera, the rule (assuming, arguendo, its persuasive authority in this district) does not apply to the present situation. The rule is the companion local rule to Fed.R.Civ.P. 54, which provides the procedure for attorneys' fees motions except where "the substantive law governing the action provides for the recovery of such fees as an element of damages to be proved at trial." Fed.R.Civ.P. 54(d)(2)(A). Brandt clearly provides that attorneys' fees are damages resulting from an insurer's breach of the good faith covenant. See 37 Cal. 3d at 817 ("The attorney's fees are an economic loss — damages — proximately caused by the tort."); id. at 819 ("Since the attorney's fees are recoverable as damages, the determination of the recoverable fees must be made by the trier of fact unless the parties stipulate otherwise."). Accordingly, plaintiff's reliance on Local Rule 54-5 is unavailing.
Plaintiff has submitted Gauntlett invoices detailing only the hours worked and the rates charged for such work. Plaintiff has failed to provide any description of the nature of work comprising each entry, or the qualifications, experience, and title for each individual responsible for each entry. To be awarded its Brandt fees, plaintiff must substantiate those fees, with evidence of the time spent by each Gauntlett attorney on the breach of contract claim, and the portion specifically allocable to plaintiff's successful "mixed action" argument.
e. Plaintiff is not entitled to attorneys' fees pursuant to the "supplemental payments" provision.
The Hartford insurance policies provide that Hartford will pay "[a]ll reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or 'suit,' including actual loss of earnings up to $100 per day because of time off from work." Gauntlett Decl. ¶ 23. Plaintiff claims that, by compelling plaintiff to file an action for coverage, Hartford has "requested" plaintiff to "assist it" in understanding its coverage obligations, and that, therefore, this language provides plaintiff an additional entitlement to attorneys' fees incurred in this action — as requested expenses. However, in Carroll v. Hanover Ins. Co., 266 Cal. App. 2d, 47, 50 (1968), the court rejected the insured's argument that he was entitled to attorneys' fees based upon a similar "supplemental payments" provision of his policy. Subsequently, in Brandt, the court left the holding of Carroll intact. See Brandt, 37 Cal. 3d at 818-19. Accordingly, California law precludes the award of attorneys' fees based on such "supplemental payments" provisions. Therefore, to the extent plaintiff relies on the "supplemental payments" provision to obtain attorneys' fees without proving bad faith, its reliance is unavailing.
IV. CONCLUSION
Plaintiff's motion for summary judgment regarding the amount of reasonable attorneys' fees incurred in defending the SAS action is DENIED pursuant to Hartford's Rule 56(f) request. The court grants plaintiff summary adjudication that Hartford breached the covenant of good faith and fair dealing, entitling plaintiff to Brandt fees, but finds plaintiff has failed to perform the allocation of those fees required under Brandt. Accordingly, plaintiff's motion for summary judgment regarding the amount of attorneys' fees incurred in this action is DENIED.