Assignment of Claims Results in Zero for Trademark Owner Despite $1,000,000 Settlement

State Farm Fire and Casualty Company v. King Sports, Inc., No. 11-16169 

(11th Cir. September 4, 2012).

State Farm sought and obtained a declaration that it need not afford coverage to its insured, Kings Sports, Inc. ("King Sports"), with respect to a lawsuit brought by and a judgment obtained by Cleveland Golf because King Sports failed to abide by, satisfy, comply with, or fulfill the duties imposed on it by the policy's general conditions," including an obligation to cooperate in the defense of claims made against it.

            Cleveland Golf sent King Sports a cease-and-desist letter, alleging that King Sports was violating Cleveland Golf's trademarks by advertising and selling golf clubs that looked like clubs manufactured by but which were not, in fact, manufactured by or with the permission of Cleveland Golf. State Farm sent King Sports a reservation-of-rights letter informing King Sports that State Farm reserved its right to not defend or indemnify King Sports with respect to Cleveland Golf's claims under certain policy exclusions. Eventually, when no resolution of the dispute was reached, Cleveland Golf filed suit. In the Complaint, Cleveland Golf averred direct trademark infringement, unfair competition, false advertising, trade dress infringement, trademark dilution, trademark counterfeiting, unfair and deceptive trade practices, violations of the Georgia anti-dilution statute, and common-law trademark infringement.

            State Farm retained an attorney to represent King Sports and Chang. In a November 2009, letter addressed to King Sports and received by King Sports, State Farm again made a reservation of rights, outlined King Sports' duty to cooperate in the investigation and defense of Cleveland Golf's lawsuit, and then advised the insured’s that it had retained an attorney as counsel for King Sports and Chang.

            An individual who had worked with the attorney on behalf of King Sports told the attorney that he was no longer employed by it.

           King Sports did not cooperate with the attorney hired by State Farm and the attorney was allowed to withdraw from the case.

The alleged former employee of King Sports then entered into a settlement discussions with Cleveland Golf.  When State Farm learned of these settlement discussions, it sent King Sports yet another letter, reiterating its request that it contact State Farm immediately and pointing out that portion of the insurance policy which provided that, "[e]xcept at their own cost, no insureds will voluntarily make a payment, assume any obligation or incur any expense, other than for first aid, without our consent." 

In the settlement agreement entered into by King Sports, the alleged former employee of King Sports agreed to a $1,000,000 judgment, which he executed as the "owner" of King Sports.

Cleveland Golf agreed not to pursue King Sports for the amount of the judgment, agreeing that it would, instead, seek to collect the amount from State Farm, and King Sports assigned any claims it might have against State Farm to Cleveland Golf under its insurance policy.  

King Sports did not inform State Farm of the Settlement Agreement, nor did anyone obtain State Farm's consent to it. Cleveland Golf understood that approval of any settlement was required under the terms of the insurance policy in order for coverage to apply.

The district court entered a consent judgment in favor of Cleveland Golf and against King Sports in the amount of $1,000,000, in accordance with the settlement agreement.         

This declaratory judgment action to obtain a no-coverage declaration then ensued. The Appeals Court sustained summary judgment for State Farm. It held that because King Sports failed to cooperate in the defense of that lawsuit, notwithstanding State Farm's efforts, recovery on the policy is appropriately foreclosed for King Sports, and, by extension, Cleveland Golf.   

The moral of the case is always invite the insurer to the settlement conference or mediation, even though the insurer is denying coverage. Be sure to read the language of the insurance policy and check for cooperation and consent clauses such as those contained in the above case. Always communicate with your insurer, and keep it informed of the status of the case, even if it is denying coverage.