Weiss v. St. Paul Fire & Marine Insurance (283 F.3d 790, 2002)

OPINION

BATCHELDER, Circuit Judge.

St. Paul Fire and Marine Insurance Company (“St.Paul”) appeals the judgment of the district court holding that it owed its insured, Mor-Flo Industries, Inc. (“Mor-Flo”), a duty to defend in a patent infringement action and that it was liable for the attorney’s fees and costs incurred by Mor-Flo in defending that action. Ronald Weiss appeals the district court’s order vacating Weiss’s default judgment against St. Paul and the district court’s judgment that St. Paul had no duty to indemnify Mor-Flo for the judgment against it in the patent infringement action. We will affirm the order vacating the default judgment and the judgment in favor of St. Paul on the issue of indemnification. We will reverse the district court’s judgment in favor of Mor-Flo on the issue of St. Paul’s duty to defend and the award of fees and costs.

I. Procedural Background

St. Paul provided liability coverage for Mor-Flo, a manufacturer of water heaters. In 1984, Mor-Flo was sued for patent infringement and St. Paul declined to defend, contending that it had no duty either to defend or indemnify. Mor-Flo lost the patent infringement suit and paid the patent holder $9,925,638.00 in damages and $2,250,158.24 in fees and costs. In 1992, Mor-Flo was sold and its former chairman, Walter L. Abt, purchased the rights to Mor-Flo’s duty-to-defend claim against St. Paul for $1000.00.

Abt filed this action against St. Paul, seeking a declaratory' judgment that St. Paul had a duty to defend Mor-Flo in the patent infringement action and a duty to indemnify Mor-Flo for the judgment against it in that action. Due to the failure of St. Paul and its outside counsel to file an answer, a default judgment was entered against St. Paul. The district court granted St. Paul’s motion to vacate the default judgment pursuant to Rule 60(b), and both parties then moved for summary judgment. The district court held that St. Paul had a duty to defend Mor-Flo in the patent litigation but did not have a duty to indemnify. The district court further found that, having breached its duty to defend Mor-Flo in the patent litigation suit, St. Paul was liable for the reasonable attorney’s fees and costs incurred by Mor-Flo in defending that action. The court awarded prejudgment interest from the date of the conclusion of the patent litigation. This timely appeal followed.

II. Facts

In 1979, State Industries, a manufacturer of water heaters, applied for a patent to cover its new process for making water heaters that used foam insulation as opposed to the prior industry standard of fiber glass insulation. Shortly thereafter, Mor-Flo developed its own foam-insulated water heater, using a slight variation of State’s design, and by 1981, Mor-Flo was producing foam insulated heaters. By 1984, Mor-Flo was one of the largest water heater manufacturers in the nation.

On May 8,1984, the Patent Office granted State a patent on State’s method of manufacturing foam insulated heaters. State immediately sued Mor-Flo for patent infringement. Relying on the advice of patent counsel, Mor-Flo contested the suit and continued to produce foam insulated water heaters. The district court ruled that Mor-Flo had infringed State’s patent and that judgment was affirmed. The district court awarded State approximately $8.7 million in damages. By January 26, 1990, Mor-Flo had paid State a total of $9,925,638.00 in damages and had also paid $2,250,158.24 in fees and costs.

When the patent litigation began, Mor-Flo had three insurance policies through St. Paul. The Comprehensive General Liability plan provided coverage for “advertising injury claims resulting from your business activities.” Advertising injury was defined as “Piracy; Unfair competition; Infringement of copyright, title or slogan” that resulted in interference with another’s rights. Advertising claims that were the result of “infringement of trademark, service mark or trade name” were excluded from coverage. Another policy, the Umbrella Excess Liability plan, covered essentially the same activities in relation to advertising injuries. The third policy was a Director’s and Officer’s Liability plan.

In May of 1985, Mor-Flo requested that St. Paul defend the patent action and indemnify any losses. The St. Paul adjuster assigned to determine whether there was coverage inexplicably (even according to St. Paul itself) limited his review to Mor-Flo’s Director’s and Officer’s Liability plan. Based on its review of only the Director’s and Officer’s Liability plan, St. Paul denied coverage.

Walter Abt was the chairman of the board, chief executive officer and majority shareholder of Mor-Flo. In February, 1991, Abt read an article in the Wall Street Journal that suggested that advertising injury provisions in comprehensive insurance plans such as Mor-Flo’s covered patent infringement litigation. Armed with this information, Abt submitted a claim to St. Paul. On April 25, 1991, St. Paul began its investigation into possible coverage for legal fees expended by Mor-Flo in the patent litigation. In July, Jacqueline McCroskey, the St. Paul claim representative at the Cleveland office assigned to Mor-Flo’s claim, established an expense reserve of $1 million based on her belief that there was a fifty percent likelihood that St. Paul could be found liable for the approximately $2 million in legal fees accrued by Mor-Flo in defending the patent litigation. On September 27, 1991, St. Paul received an opinion from outside counsel that St. Paul had no duty to defend, and on October 2, 1991, McCroskey recommended that St. Paul issue a letter to Mor-Flo denying any duty to defend. On November 7, 1991, McCroskey sent a denial letter to Mor-Flo. Throughout this period, St. Paul’s counsel and counsel for Mor-Flo corresponded by letter and telephone with regard to whether the St. Paul policies provided coverage for the patent infringement claim or required St. Paul to defend the patent litigation.

Mor-Flo was sold to SABH (US), Inc., during the spring of 1992, and Abt purchased the rights to Mor-Flo’s duty-to-defend claim against St. Paul for $1000. Abt filed this declaratory judgment action on August 25, 1992. By August 27, 1992, St. Paul had received the complaint through certified mail. On September 2, 1992, St. Paul sent the complaint to Weston (St. Paul’s counsel) which received the complaint in its docket department the following day. Dennis Kolibab, a docket clerk, testified that pursuant to Weston’s policy he called the district court clerk asking whether the return of service had been filed. After finding that the return had not yet been filed, he docketed an answer date for September 14, twenty days from the date the complaint was filed. The return of service was filed on September 9,1992.

James Barone, another docket clerk at Weston, stated in his affidavit that on September 12 or 13, 1992, he called the district court clerk to ascertain whether the return was filed, and again was informed that the return had not yet been filed. Following Weston policy, Barone moved the answer date forward to September 24, 1992. This date was thirty days after the complaint was filed.

No answer to the complaint was filed by the answer date of September 16. Two days later a default was entered on the court’s docket. On September 22, 1992, Abt filed an affidavit in support of a default judgment in which he alleged damages due to him of approximately fifteen million dollars. Around that date, Barone again telephoned the district court clerk and inquired about the status of the return of service and was again told that no return had yet been filed. (Apparently the court clerk did not mention that a default had been entered in the case.) Barone then noted a new, later, answer date of October 4, 1992. This date was forty days after the filing of the complaint.

The court entered a default judgment on September 28, 1992. Weston’s internal docket sheet indicated that on October 4, someone — Weston has not been able to determine who — postponed the answer date to October 18, 1992. Finally, on October 7, 1992, Weston learned of the default. The following day St. Paul filed a motion to vacate the default judgment pursuant to Federal Rule of Civil Procedure 60(b)(1) and (3).

The district court granted the motion finding that Abt was not prejudiced by the vacating of the judgment, St. Paul had a meritorious defense, there was no culpable conduct on St. Paul’s behalf, and Abt’s counsel knew of, but did not notify, St. Paul’s counsel before obtaining the judgment. Each party then moved for summary judgment. The district court held that at the time the patent suit was filed in 1984 it was arguable whether Mor-Flo’s policies covered its claim, and therefore, under Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio St.3d 177, 459 N.E.2d 555 (1984), St. Paul had a duty to defend.

Next, relying on Herman Miller, Inc. v. Travelers Indem. Co., 162 F.3d 454 (6th Cir.1998), the court ruled that St. Paul did not have a duty to indemnify Mor-Flo because the plain meaning of “piracy” and “unfair competition” did not include a claim of patent infringement. On the issue of damages the district court found that, based on its breach of the duty to defend, St. Paul was liable to Mor-Flo for reasonable attorney’s fees and costs incurred in the underlying patent infringement action and in this declaratory judgment action and for pre-judgment interest at Ohio’s statutory rate from November 14, 1991, the date the parties stipulated as the conclusion of the underlying patent litigation.

III. Analysis

A. The Default Judgment

We review for abuse of discretion the district court;s granting of a motion to vacate a default judgment. Manufacturers’ Indus. Relations Ass’n v. East Akron Casting Co., 58 F.3d 204, 207 (6th Cir.1995). We review a motion to vacate a default judgment under the stricter standards of Rule 60(b) rather than under the more lax standards governing a motion to vacate the entry of default under Rule 55(c). Waifersong, Ltd. Inc. v. Classic Music Vending, 976 F.2d 290, 292 (6th Cir.1992) (“But once the court has determined damages and a judgment has been entered, the district court’s discretion to vacate the judgment is circumscribed by public policy favoring finality of judgments and termination of litigation. Rule 60(b) reflects this public policy by requiring greater specificity from a moving party before a court will set aside a default judgment.”).

The Federal Rules of Civil Procedure require a defendant to serve an answer within twenty days of being served with a summons and complaint. Fed.R.Civ.P. 12(a)(1)(A). Rule 55 permits the clerk to enter a default when a party fails to defend an action as required. The court may then enter a default judgment. Fed. R.Civ.P. 55(b)(1). A party against whom a default judgment has been entered may petition the court to set aside the default judgment under Rules 55(c) and 60(b) for good cause, and upon a showing of mistake, or any other just reason.

The seminal case in this circuit on Rule 60(b) motions to vacate default judgments is United Coin Meter Co., Inc. v. Seaboard Coastline R.R., 705 F.2d 839 (6th Cir.1983). In United Coin Meter we noted that Rule 60(b) is to be applied “equitably and liberally” in considering motions to vacate defaults and default judgments, id. at 845, and that the same factors that control a motion to vacate an entry of default under Rule 55(c) are also applicable in determining whether to vacate a default judgment: (1) whether the opposing party would be prejudiced; (2) whether the proponent had a meritorious claim or defense; and (3) whether the proponent’s culpable conduct led to the default. Id.

In Waifersong, we made it clear that a party seeking to vacate a default judgment under Rule 60(b)(1) must demonstrate first and foremost that the default did not result from his culpable conduct. That burden may be carried, we said, only by meeting the requirements of Rule 60(b)(1), that is, by “demonstrat[ing] that his default was the product of mistake, inadvertence, surprise, or excusable neglect.” Waifersong, 976 F.2d at 292. Only if the moving party makes this showing may the district court proceed to consider the other United Coin Meter factors. Id. Other cases have affirmed the more stringent inquiry courts must pursue when vacating a default judgment as opposed to an entry of default. See, e.g., Manufacturers’ Indus. Relations Ass’n, 58 F.3d at 208.

We recognize that the district court did not consider the United Coin Meter factors in the order that Waifersong requires. Nonetheless, although the court did not consider first whether St. Paul had demonstrated that the default was not due to its culpable conduct, the court’s finding on that issue is clearly sufficient to support its considering the other two factors. First, St. Paul demonstrated that its default was not the result of culpable conduct, but of mistake or, at worst, excusable neglect. St. Paul’s counsel did not simply ignore the pleading deadlines, but repeatedly checked with the office of the district court clerk to determine whether service had been effected upon St. Paul and mistakenly relied upon the information obtained from the clerk. Neither St. Paul nor its counsel was willful in failing to respond timely, and the failure to file an answer timely resulted from an honest mistake. See United Coin Meter Co., Inc., 705 F.2d at 845 (internal quotations omitted) (