Case Information
*1 Before P OSNER , K ANNE , and W ILLIAMS , Circuit Judges . P OSNER , Circuit Judge
. Taco Bell has sued two insurance companies, Zurich and Continental, each of which had issued it a liability-insurance policy. The basis of federal jurisdiction *2 is diversity of citizenship, and the substantive issues are governed, the parties tacitly agree, by Illinois law. The suit seeks a declaration that the insurance companies have a duty to pay for Taco Bell’s defense against a diversity lawsuit that has been brought against it in a federal district court in Michigan by a design agency named Wrench. (That suit has already given rise to nine judicial opinions, beginning with Wrench LLC v. Taco Bell Corp ., 1998 WL 480871 (W.D. Mich. 1998), and is still going strong.) Taco Bell settled with Continen- tal. The district court, on summary judgment, awarded the de- claratory relief sought by Taco Bell—and despite the settlement awarded it against Continental as well as Zurich. The court also ordered Zurich to pay Taco Bell $142,000 for defense costs already incurred by the latter in the Wrench litigation and an additional $45,000 for the cost to Taco Bell of litigating this declaratory-judgment suit against Zurich. Finally, the court ordered Zurich to pay Continental $1.8 million, representing one-half the Taco Bell defense costs that Continental had paid. (We have rounded off the dollar figures.) Zurich appeals, as does Continental, which would like the judgment against it vacated and also would like Zurich to be ordered to pay a larger share of Taco Bell’s defense costs.
The amended complaint in Wrench’s suit (now on appeal to the Sixth Circuit after the award of substantial damages to Wrench) alleges the following: In 1995 Wrench developed a marketing gimmick that it called “Psycho Chihuahua,” which “involved the image of a clever, feisty Chihuahua dog with an attitude,” the idea being “to use the humor of seeing a small dog character with a big dog’s attitude.” At a trade show the following year, Taco Bell expressed interest in using the design to promote its restaurants. Wrench proposed to Taco Bell “an advertising campaign based on a Chihuahua with an attitude obsessed with Taco Bell food, describing the Chihuahua to be used in the campaign as edgy and feisty, with a spicy Mexican personality and an insatiable craving for Taco Bell food.” Beginning in the summer of 1997, Taco Bell, without obtaining *3 permission from Wrench, began running television commer- cials on the theme of “a Chihuahua obsessed with the thought of Taco Bell food to the exclusion of anything else, including a female Chihuahua.” What is more, the next year Taco Bell based its entire national advertising campaign on “the same basic idea of a Chihuahua with an attitude that is obsessed with Taco Bell food. Taco Bell has also used several of the specific commercial ideas provided by [Wrench] in its cam- paign, including the idea of using a live dog manipulated by computer graphic imaging, the idea of having a boy Chihua- hua passing up a girl Chihuahua for Taco Bell food, the idea of using a bobbing head doll in a commercial, the idea of having a Chihuahua sneaking into the rear window of a car to obtain Taco Bell food, the idea of a Chihuahua popping his head out through a hole at the end of a commercial, and the idea of using a consistent tag line at the end of every commer- cial to keep the Chihuahua as a consistent icon for Taco Bell.” These alleged appropriations of Wrench’s design ideas are, so far as bears on our case, charged as misappropriation in violation of the common law of Michigan.
The insurance policies that Continental and Zurich issued to Taco Bell were similar but covered occurrences in different periods. Continental’s covered the period January 1, 1997, to October 6, 1997, and Zurich’s ran from October 7, 1997, to the end of 1998. Both policies covered “advertising injury,” de- fined in both as “injury arising out of paid announcements in the . . . broadcast media resulting from . . . misappropriation of advertising ideas or style of doing business.” It is apparent that Wrench’s complaint charges advertising injury. But Zurich appeals to the policy exclusion for advertising injury “arising out of oral or written publication of material whose first pub- lication took place before the beginning of the policy period.” The first “Chihuahua” ads ran before the coverage under Zurich’s policy began, and Zurich argues that therefore Taco Bell’s entire Chihuaha-inspired advertising campaign, most of which occurred later, had first been published before the policy took effect; if so, Zurich is off the hook.
The purpose of the “prior publication” exclusion (a common
clause in liability-insurance contracts, though rarely litigated)
can be illustrated most clearly with reference to liability
insurance for copyright infringement. Suppose a few months
before insurance coverage began on October 7, 1997, the insured
published an infringing book that it continued selling after
October 6. The “prior publication” exclusion would bar cover-
age because the wrongful behavior had begun prior to the
effective date of the insurance policy. The purpose of insur-
ance is to spread risk—such as the risk that an advertising
campaign might be deemed tortious—and if the risk has
already materialized, what is there to insure?
Matagorda
Ventures, Inc. v. Travelers Lloyds Ins. Co
.,
The later commercials were different from the earlier ones, however, though that in itself need not be decisive. Suppose a magazine article that infringed copyright and was published before the policy period began was republished later as part of an anthology. The anthology would be a different, probably a much different, work from the magazine, but the wrongful act—the copying of the copyrighted article without au- thorization—would be the same and so the prior-publication exclusion would, we believe (we can find no reported cases on the question), click in. Zurich argues in like vein that while the commercials broadcast after October 6 were different from the earlier ones, they used the same misappropriated design, namely the idea of the Chihuahua with attitude, etc.
Zurich is wrong. Wrench’s complaint alleges—and the duty
of an insurance company to defend against a suit against its
insured is determined by the allegations of the complaint in
that suit rather than by what is actually proved,
Dixon Distrib-
uting Co. v. Hanover Ins. Co
., 641 N.E.2d 395, 398 (Ill. 1994);
American Alliance Ins. Co. v. 1212 Restaurant Group, L.L.C
., 794
N.E.2d 892, 897 (Ill. App. 2003);
Roman Catholic Diocese v.
*5
Maryland Casualty Co
.,
At some point a difference between the republished version
of an unlawful work and the original version would be so slight
as to be immaterial. See
Ringler Associates Inc. v. Maryland
Casualty Co
.,
The only thing that gives the slightest color to Zurich’s
invocation of the “prior publication” exclusion is a certain
vagueness in the misappropriation tort compared to copyright
infringement. The copyright infringer copies an expressive
work (or a significant part of it) that is “fixed in any tangible
medium of expression,” 17 U.S.C. § 102(a);
Erickson v. Trinity
Theatre, Inc
.,
Zurich has other strings to its bow, however. Its policy re- quires the insured to notify it “promptly” of an event that might trigger liability under the policy (an “occurrence,” in insurance-speak), and adds that “in the event of noncompli- ance” with the requirement Zurich “shall not be required to establish prejudice resulting from noncompliance but shall be automatically relieved of liability with respect to the claim.” Wrench filed its suit against Taco Bell on January 16, 1998; Taco Bell didn’t notify Zurich of the suit until June 8, 1998, four and a half months later.
An insurer wants to be notified of a suit against its insured
as soon as possible, to give it ample time to investigate the
case, determine whether its duty to defend has been triggered,
and if so prepare the defense of the case: hence “promptly.”
And it doesn’t want to have to prove “prejudice,” and needn’t
do so even if the policy doesn’t explicitly excuse such proof, as
it did here.
Northbrook Property & Casualty Ins. Co. v. Applied
Systems, Inc
., 729 N.E.2d 915, 922 (Ill. App. 2000);
American
Country Ins. Co. v. Bruhn
,
It argues that it did because the commercials continued to run during the four and a half months that elapsed between Wrench’s suit and the notification of the suit to Zurich, and if only it had known about the suit it would have taken steps to prevent Taco Bell from continuing to run the commercials. But what steps could it have taken? The insurance policy didn’t authorize it to review Taco Bell’s commercials and if it thought them tortious force Taco Bell to yank them. If Taco Bell was willing to take the risk of liability to Wrench by continuing to run the commercials after Wrench sued—as it was—why would it have desisted at Zurich’s urging? Maybe it would have done so had Zurich said it wouldn’t defend the suit otherwise, though we know that this would have been an empty threat. But the decisive fact is that that when Zurich did receive notice of the litigation, it took no steps to try to make Taco Bell cancel the commercials even though they were con- tinuing to run and thus increasing Wrench’s damages and *8 therefore also Zurich’s potential liability to Taco Bell on the insurance policy. There is no reason to suppose that if Zurich had received notice earlier it would have taken such steps; its incentive would not have been much greater, though a little greater because more of the injury to Wrench and the resulting liability of Taco Bell and derivately of Zurich would have lain in the future.
We conclude that Zurich’s defenses to its duty to defend fail. But Zurich has three complaints that we have now to consider about the amount of defense costs that it has been ordered to pay Taco Bell and Continental. The first has to do with a self- insured retention clause in Zurich’s policy. Only after Taco Bell paid the first $2 million of defense costs would Zurich’s duty to pay kick in. There was no similar provision in Conti- nental’s policy. Taco Bell has incurred defense costs of some $5.8 million, of which more than $3.5 million have been paid by Continental, and the district court ordered Zurich to reimburse Continental for one-half of the excess of those costs over the $2 million retention, or (roughly, for remember that we’re rounding off dollar figures) $1.8 million. Zurich argues that what the court should have done was to divide the total defense costs in half (this on the assumption, which we examine later, that 50-50 is the proper method of allocating defense costs between the two insurers) and then subtract the retention from Zurich’s share. That would yield a figure for reimbursement to Continental not of $1.8 but of $.8 million ($2.8 million—$2.0 million), which would require an adjust- ment in Zurich’s favor of $1 million.
Zurich is right. Taco Bell agreed that it would pay the first $2 million of any defense costs for which Zurich would other- wise be responsible. Were there no retention provision, Zurich would be responsible, under the district court’s 50-50 method of allocation, for $2.8 million in defense costs. But the retention provision cut this by $2 million. Continental did not negotiate a self-retention provision and is not entitled to benefit from Zurich’s provision.
Next Zurich complains about the amount of defense costs
incurred by Taco Bell. Zurich submitted an affidavit by a firm
that hires itself out to review lawyers’ bills and that opined
that Taco Bell had overpaid the lawyers who represented it in
the
Wrench
litigation. We are unimpressed, as was the district
court. When Taco Bell hired its lawyers, and indeed at all
times since, Zurich was vigorously denying that it had any
duty to defend—any duty, therefore, to reimburse Taco Bell.
Because of the resulting uncertainty about reimbursement,
Taco Bell had an incentive to minimize its legal expenses (for
it might not be able to shift them); and where there are market
incentives to economize, there is no occasion for a painstaking
judicial review.
Kallman v. Radioshack Corp
.,
Although the cases that we have just cited are all diversity
cases arising in Illinois, none discusses Illinois law; and Zurich
points us to
Kaiser v. MEPC American Properties, Inc
., 518
N.E.2d 424, 427-28 (Ill. App. 1987), which holds that even in a
case in which fee shifting is specified in a contract that does
not in so many words limit the entitlement to “reasonable fees,”
not only must the party asking for an award of fees prove that
they are reasonable but in addition “the petition for fees must
specify the services performed, by whom they were performed,
the time expended thereon and the hourly rate charged therefor.
Because of the importance of these factors, it is incumbent
upon the petitioner to present detailed records maintained
during the course of the litigation containing facts and com-
putations upon which the charges are predicated.” This was
said in general, rather than with specific reference to a case in
which there is an adequate market test of the fees. But what is
*10
more important is that even in a diversity suit the require-
ments of proof are governed by federal rather than state law.
“The decision to hold an evidentiary hearing when making an
attorney’s fee award is a matter of procedure, and is therefore
governed by federal law under the
Erie
doctrine.”
Shakey’s, Inc.
v. Covalt
,
Furthermore, although Zurich’s policy entitled it to assume
Taco Bell’s defense, in which event Zurich would have selected,
supervised, and paid the lawyers for Taco Bell in the Wrench
litigation, it declined to do so—gambling that it would be
exonerated from a duty to defend—with the result that Taco
Bell selected the lawyers. Had Zurich mistrusted Taco Bell’s
incentive or ability to economize on its legal costs, it could,
while reserving its defense that it had no duty to defend, have
assumed the defense and selected and supervised and paid for
the lawyers defending Taco Bell in the Wrench litigation, and
could later have sought reimbursement if it proved that it had
indeed had no duty to defend Taco Bell.
Clemmons v. Travelers
Ins. Co
.,
Last, Zurich complains about being ordered to reimburse the
expenses that Taco Bell incurred in obtaining a declaration that
Zurich was indeed obligated to defend against Wrench’s suit. In
Green v. J.C. Penney Auto Ins. Co
.,
What is true is that the district court was bound by
Green
, as
a lower court cannot overrule the decision of a higher one.
Reiser v. Residential Funding Corp
.,
We turn now to Continental’s cross-appeal. Continental makes two arguments. The first is that the district judge should not have entered a judgment against it after it settled with Taco Bell. This is true. The settlement ended its dispute with Taco Bell, so there was no longer a controversy for the court to resolve. Continental therefore wants us to order the judgment vacated, and neither Taco Bell nor Zurich objects. But as the judgment has no significance, we don’t see why we should vacate it. Continental has paid Taco Bell in accordance with the settlement, and the only concern Continental has ex- pressed about the judgment is that some “third party” might notice it and do something with it. But what could a third party do with a judgment that orders Continental to do what it has already done, namely reimburse Taco Bell for defense costs? The judgment is pointless, but an order vacating it would be equally so. If we’re missing something, Continental can file a motion in the district court under Fed. R. Civ. P. 60(b).
Continental argues in addition that Zurich should bear the lion’s share of the defense costs because most of the offending commercials were broadcast after October 6, 1997, when Continental’s policy expired. It wants those costs allocated between the insurers in the ratio that the time during the period of misappropriation in which Continental’s policy was in force bears to the much longer time in which Zurich’s policy was in force. But such an allocation, which would assign the lion’s share of the costs to Zurich, would be even more arbitrary than the district court’s 50-50 split. Had Wrench sued only in respect of the misappropriation that occurred before October 7, 1997, it is entirely speculative what fraction of the defense costs that Taco Bell ultimately incurred in defending against the suit would have been incurred. Remember that while the later commercials contain misappropriations that the earlier ones did not, such as the hole-in-the-commercial idea, those commercials also repeat the basic misappropriation—the misappropriation of the idea of a “Psycho Chihuahua” advertis- ing campaign. Although Zurich’s “prior publication” defense to its duty to defend Taco Bell from Wrench’s suit has failed, probably most of the damages alleged by Wrench can be traced to what we are calling the basic misappropriation, which was published while Continental’s policy was in force.
What is true though unremarked by the parties is that the
ground on which the district court split the defense costs
equally between the two insurers was highly questionable. The
court relied on “other insurance” clauses in the two policies.
An “other insurance” clause limits an insurer’s liability when
the risk he has insured against is also covered by another
insurer’s policy.
American Alliance Ins. Co. v. IARW Ins. Co.,
Ltd
.,
As if life weren’t complicated enough, however, there is an
argument for treating risks in separate periods as the same risk
when a single tortious act continues in successive periods, see
Continental Casualty Co. v. Hartford Fire Ins. Co.
,
To summarize, Zurich is entitled to a $1 million reduction in the amount that it must reimburse Continental and a $44,935.75 reduction in the amount that it must reimburse Taco Bell. In all other respects the judgment is affirmed.
A FFIRMED IN P ART , R EVERSED IN P ART . A true Copy:
Teste:
________________________________ Clerk of the United States Court of Appeals for the Seventh Circuit USCA-02-C-0072—11-5-04