In the early 1990s, the O’Quinn law firm began representing women in
a class-action lawsuit against breast-implant manufacturers.
As litigation continued, the firm began to allocate the general expenses
associated with the lawsuits by deducting 1.5 percent of each woman’s
gross recovery, even though the contingent fee contracts did not provide
for such a deduction and clients were not informed of the deduction.
In 1999, a group
of former breast-implant clients filed
suit against the firm,
alleging they were
those expenses. A
similar lawsuit was
filed by other former
clients in 2002,
and it was later
the 1999 litigation.
Fire Insurance Co.,
which had issued a
The dispute entered arbitration, which ruled in 2007 that the law firm
was liable for $41.5 million for breach of contract, attorneys’ fees and
interest, as well as forfeiture of $25 million of its $263.4 million fee for
the underlying breast-implant litigation. The firm later settled the final
award for $46.5 million in 2009.
The firm also settled with a group of insurers that had issued an excess
professional liability policy in separate actions, except for Lexington
Insurance Co., which was sued by O’Quinn seeking indemnification up to
the limit of liability.
Lexington asked the court to dismiss the case, arguing that the
policy excluded losses that consisted of fines; penalties; sanctions;
reimbursement of legal fees, costs, or expenses; or “matters which may be
deemed uninsurable under the law,” which includes “the restoration of an
ill-gotten gain,” according to court documents.
The insurer also argued that O’Quinn’s “improper billing practices”
were not professional legal services, noting that the policy covers “only
those acts which use the inherent skills typified by that professional, not
all acts associated with the profession.”
The court agreed that the billing practices do not require specialized
legal knowledge and that the law firm had received a “profit or advantage
to which [it] was not legally entitled.” It dismissed the case.
SCORECARD: The insurer did not need to pay up to the limits of its
excess policy liability limits for the $46.5 million in damages and fees
paid by the law firm.
TAKEAWAY: Billing practices were not covered by the “professional legal
services” policy issued by the insurer.
MILLIONS PROVIDED IN D&O COVERAGE
Faced with six lawsuits seeking more than $1 billion in damages from
the now-bankrupt MF Global Holdings, which is accused of improperly
accessing customer money to cover trading losses, executives of the
company sought defense coverage from D&O and E&O policies.
In April 2012, the U.S. Bankruptcy Court in the Southern District of
New York set a “soft cap” of $30 million for insureds to use for defense.
In May 2013, the insureds requested additional funds and eventually the
court agreed to increase the cap to $43.8 million.
Later, the insureds asked the court to focus just on the D&O primary
and excess policies, and eliminate the cap altogether. They argued the
D&O proceeds should not be subject to bankruptcy court oversight or
And even though the judge found the amount of money spent so far for
defense was “staggering, even before the first deposition has been taken,”
he agreed with that position.
In September, Judge Martin Glenn withheld only $2.5 million for
self-retention and $13.06 million that is the amount of a possible claim
against the D&O policies if it pays the indemnification of former CEO
Jon Corzine, Bradley Abelow, former president, and ex-CFO Henri
Steenkamp. That decision provides up to an additional $200 million in
SCORECARD: Former executives of MF Global were given access to an
additional $200 million for defense of stockholder lawsuits.
TAKEAWAY: Insurance policies that provide exclusive coverage
to directors and officers are not part of the estate for bankruptcy
LAWSUIT FIRES BLANKS
Marion E. “Bud” Wells, the sole shareholder of SSO, a retail firearm and
security safety store, and Rex McClanahan agreed in 2007 to be owners of
BGS, which used to be known as Bud’s Gun Shop in Paris, Ky.
All of its employees, including employee Matthew Denninghoff, were
asked to execute noncompete agreements.
About that time, Wells began to liquidate his interest in SSO via a stock
purchase agreement with Earley M. Johnson II. As part of the transaction,
SSO assigned the federal and state trademark rights in the Bud’s Gun Shop
name to Wells,
who licensed the
rights back to
For a time, BGS
and SSO shared
a building, but
in January 2009,
Ky., opening its
own retail store.
to supply product
and fulfill orders
for it, however,
until April 2010.
At some point
before January 2010, Denninghoff — who quit that month without notice
and began working for SSO — “deliberately erased” his work email and
other contents but “secretly kept” BGS’s customer database, giving them to
SSO, where his sister was a vice president, according to court documents.
SSO then opened a competing online firearms operation and sent mass
promotional emails to BGS customers, according to court documents. BGS
sued for misappropriation of trade secrets and breach of contract, among
SSO sought defense and indemnification under its commercial general
liability policy with Liberty Corporate Capital Ltd. It claimed that BGS’s
accusation that it stole customer information that was used for emails fell
under the “advertising idea” section of the policy.
It also argued that trademark infringement claims constitute “property
Liberty Corporate Capital sought to dismiss the request for coverage,
and the U.S. 6th Circuit Court of Appeals agreed.
Electronic data is not “tangible” property, and the use of customer
database information did not involve advertising ideas, it ruled.
SCORECARD: Liberty Corporate Capital did not have to indemnify or
defend an insured accused of theft of trade secrets.
TAKEAWAY: Because Kentucky law did not define “advertising idea,” it
must be interpreted “according to the usage of the average man.”
—By Anne Freedman
LEGAL FEES MUST BE RETURNED