Minnesota Lawyers Mutual, Insurance Co. v. Protostorm, LLC

Citations: 197 F. Supp. 3d 876; 2016 U.S. Dist. LEXIS 81888; 2016 WL 3447892Docket: 1:15-cv-1485 (JCC/JFA)

Court: District Court, E.D. Virginia; June 22, 2016; Federal District Court

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Cross-motions for summary judgment were filed regarding Minnesota Lawyers Mutual Insurance Company's (MLM) duty to indemnify a Virginia law firm for a malpractice judgment. The insurance policy provides $10 million coverage for claims arising from acts after October 25, 2006, and $5 million for acts before that date. The court determined that the $5 million limit applies, granting summary judgment for MLM. 

The case involves an insurer's duty to indemnify, focusing on the underlying malpractice lawsuit and the relevant facts. In 2000, Protostorm, LLC hired the law firm Antonelli, Terry, Stout & Kraus, LLP to handle patent applications for an advertising-based internet game. The firm filed a provisional patent application in June 2000 but failed to check the box for U.S. patent protection on a subsequent Patent Cooperation Treaty (PCT) Application submitted in June 2001. This oversight jeopardized Protostorm’s U.S. patent rights. 

Although the firm could have corrected this error until September 2001, it abandoned Protostorm’s application on September 20, 2001, without notifying the client. Furthermore, despite additional deadlines for filing, the firm ceased all work on the application and failed to communicate with Protostorm for five years, leading to missed opportunities for patent protection. Protostorm only managed to contact the firm in June 2007 after numerous unanswered attempts.

Schiavelli informed Faulisi that the Firm had submitted Protostorm's international patent application but encountered issues. Faulisi, surprised by this information, hired attorney Jonathan Moskin for an investigation. Moskin's correspondence led to Schiavelli admitting that the Firm had unilaterally abandoned the application in September 2001. On January 25, 2008, Schiavelli disclosed that the Firm had not designated the United States in the application, despite the Firm still being listed as Protostorm's counsel at the PTO and the World Intellectual Property Organization.

In March 2008, Protostorm initiated a legal malpractice lawsuit against the Firm, Schiavelli, and two former attorneys, Frederick D. Bailey and Carl I. Brundidge. Protostorm’s second amended complaint, filed on August 24, 2009, detailed several negligent acts by the Insured, including failure to designate the United States on the PCT Application, not taking corrective steps, not preparing necessary documents, failing to keep Protostorm informed, not prosecuting the application in designated countries, neglecting to disclose the abandonment of U.S. patent rights, and not filing a new U.S. application by January 2003.

Protostorm sought damages for the abandonment of patent rights, punitive damages, and costs. Prior to trial, both parties filed cross-motions for summary judgment. The Insured contended that New York's three-year statute of limitations barred Protostorm's claim, noting that the complaint was filed over six years after the negligent submission. However, the court acknowledged a dispute regarding whether the Firm's representation continued into 2008, which could toll the statute of limitations under New York's continuous representation doctrine, leading to a denial of the Firm's summary judgment motion.

The court also denied Protostorm's cross-motion for summary judgment on the malpractice claim's merits, recognizing that while the Firm's lapses indicated a failure to exercise ordinary skill, it was unclear if the Firm was retained to fully prosecute the patent or just to perform ministerial tasks. Consequently, the court granted Protostorm summary judgment on the specific issue of the Firm's breach of duty to prosecute the patent by early 2003, contingent on the existence of that duty.

Jury instructions clarified the elements necessary for proving legal malpractice in New York, focusing on duty, breach, proximate cause, and damages. The court established that if the jury found that the defendants were retained to substantively manage the PCT application and that the attorney-client relationship persisted after September 2001, they must conclude that the defendants did not meet the professional standard of care. For proximate cause, Protostorm needed to show that, but for the defendants’ negligence, they would have received a valid U.S. patent or a corresponding foreign patent. Damages were calculated based on estimated royalties from a patent’s 20-year lifespan, starting from the PCT application date of June 25, 2001.

The court also addressed affirmative defenses, indicating that the statute of limitations could be tolled under the continuous representation doctrine if Protostorm proved that the defendants represented them until at least March 2005. However, if representation ended before March 4, 2005, the malpractice claim would be barred. The jury was informed that the statute of limitations would not apply if defendants engaged in intentional wrongdoing or concealed material facts that delayed Protostorm's awareness of the malpractice until at least March 2005.

The jury ultimately found that the Firm and certain attorneys maintained an attorney-client relationship with Protostorm and that this relationship continued past September 2001, resulting in damages due to negligence. They determined there was no attorney-client relationship with one attorney, Schiavelli. The jury ruled that the statute of limitations was tolled because the Firm continued to represent Protostorm after March 4, 2005, and that the Firm and Brundidge concealed the malpractice. They awarded Protostorm $6,975,000 in compensatory damages.

In a separate matter, the Firm's professional liability insurer, MLM, initiated a declaratory judgment action in November 2015 to clarify its obligation to indemnify the malpractice judgment, with the policy covering all sums the insured may be legally obligated to pay due to claims arising from professional services rendered in law practice.

MLM's liability for claims is capped at $5 million for acts prior to October 25, 2006, and $10 million for acts occurring after that date. A "CLAIM" is defined as a lawsuit seeking "DAMAGES," which excludes non-compensatory damages such as punitive or treble damages. MLM acknowledges coverage for a legal malpractice judgment against the Insured. The central issue is whether MLM's liability should be assessed at $5 million or $10 million, with MLM seeking a declaration for the former and counterclaims filed by Protostorm, Brundidge, Bailey, Schiavelli, and the Firm asserting entitlement to the latter amount. Cross-motions for summary judgment have been submitted, and the court will assess each motion based on the absence of genuine disputes regarding material facts. The interpretation of the insurance policy, governed by Virginia contract law, is a legal question suitable for summary judgment. The court will consider the policy as a whole and apply principles of construing ambiguous terms against the insurer. The distinction between the duty to indemnify—based on proven facts—and the duty to defend—based on allegations—is significant, as the former depends on the actual circumstances of the underlying lawsuit. The primary legal question is whether the malpractice judgment arises from acts occurring after October 25, 2006, determining whether MLM is liable for $10 million or $5 million.

The Court needs to interpret the terms “CLAIM” and “arising out of” as defined in the Policy. “CLAIM” is defined as a lawsuit served on the INSURED seeking DAMAGES, which are monetary judgments or settlements, excluding certain noncompensatory judgments like punitive damages. The context for “CLAIM” is within an endorsement related to MLM's obligation to indemnify an insured, specifically covering claims arising from the rendering or failing to render PROFESSIONAL SERVICES. Therefore, “CLAIM” should be interpreted narrowly to mean the specific cause of action that obligates MLM to pay damages covered by the Policy, rather than encompassing all theories of recovery in a lawsuit.

The phrase “arising out of” is not defined in the Policy but has been clarified by the Virginia Supreme Court, indicating it implies a broad causal connection between a fact or source of law and the essential elements of the cause of action. The Court will determine if any act, error, or omission after October 25, 2006, was necessary for the jury to find the elements of the malpractice claim satisfied. The New York court has established that a legal malpractice action requires an attorney-client relationship at the time of a breach that causes economic loss. The jury indicated that the Insured's breach occurred through a failure to prosecute patent applications, which was irrevocable by early 2003. Consequently, the only economic loss from this breach related to potential royalty payments from 2001 to 2021. Therefore, all elements for the malpractice cause of action were established by early 2003, meaning any subsequent acts could not impact the accrual of the claim. The malpractice action did not arise from actions after October 2006, and the defendants' argument suggesting the entire malpractice lawsuit constitutes the CLAIM has not been persuasive.

Defendants argue that the ongoing attorney-client relationship into 2008 establishes a causal connection to the lawsuit's success, suggesting the claim arises from post-October 2006 actions. However, this argument lacks factual and legal support. Factually, no post-October 2006 act was necessary to toll the statute of limitations, which only needed to be tolled until March 4, 2005, as determined by the jury. The continuation of the attorney-client relationship or acts of concealment did not influence the timeline for the lawsuit’s success. Legally, New York law dictates that tolling actions do not affect the accrual date of a cause of action. This principle aligns with Virginia Supreme Court instructions to assess the “elements of the cause of action.” Several cases, including Colip v. Claire and Coregis Insurance Co. v. Blancato, illustrate that ongoing attorney-client relationships do not extend the temporal scope of malpractice claims under liability insurance policies. Specifically, in Colip, the court dismissed the claim as falling outside coverage, despite continued representation. Similarly, in Ferguson v. General Star Indemnity Co., the court rejected the argument that post-policy conduct related to previous negligent actions brought claims within coverage. Defendants fail to rebut these precedents, reinforcing the notion that the claim arose from the attorney's negligence in early 2003, not from actions taken after October 2006. Furthermore, the argument that the Firm committed malpractice post-October 2006 by failing to inform Protostorm was not presented to the jury and did not factor into the damages for which MLM seeks indemnification. The jury was not instructed on this potential malpractice theory, nor was there evidence of damages related to any failure to inform after October 2006.

The Court determines that the malpractice judgment relevant to the declaratory judgment actions is strictly related to acts, errors, or omissions that occurred before October 25, 2006, thus limiting MLM’s liability for indemnification to $5 million. Summary judgment is granted in favor of Minnesota Lawyers Mutual Insurance Company, while the requests for summary judgment from the defendants—Protostorm, LLC; Antonelli, Terry, Stout & Kraus, LLP; Alan Schiavelli; and Carl Brundidge—are denied. The Court clarifies that references to 'October 2006' should be understood as 'October 25, 2006.' The parties agree that punitive damages, which total $1 million, are not covered by the MLM Insurance Policy. All parties concur that Virginia law governs the policy's interpretation, and complete diversity of citizenship exists among the parties involved. The interpretation of 'arising out of' is established to have a broad meaning, but the Court ultimately finds that the CLAIM in question does not extend beyond the acts occurring before the specified date. The Policy’s ambiguity regarding liability limitations applicable to claims arising from both before and after October 25, 2006, is resolved in favor of allowing greater coverage, but the Court affirms that the current CLAIM pertains solely to actions prior to that date.