Opinion ID: 776830
Heading Depth: 2
Heading Rank: 2

Heading: Reasonableness of the Settlement Amount

Text: 10 The district court granted PTI's motion for judgment on the pleadings finding Federal breached its duty to defend, and under Illinois law Federal is thereby estopped from relying on certain policy defenses. Ins. Co. of the State of Pa. v. Protective Ins. Co., 227 Ill.App.3d 360, 169 Ill.Dec. 630, 592 N.E.2d 117, 121 (1992). Several of Federal's arguments, including the known loss doctrine barring plaintiff's recovery, are also defenses to the breach of the duty to defend. As Federal did not preserve these issues for review, we need not address them. See Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill.2d 90, 180 Ill.Dec. 691, 607 N.E.2d 1204, 1209-11 (1992) (outlining the known loss doctrine). 11 Federal argues that the settlement amount was not reasonable because PTI purchased the Platinum trademark, an asset, thus the settlement was more than merely a release of legal liability. PTI's counters, stating that Federal's argument constitutes a policy defense and is barred. Though policy defenses are barred at this stage, other considerations and defenses arise where a settlement is involved because there is the additional concern that the settlement was entered into in order to obtain insurance coverage for an otherwise uninsurable claim. United States Gypsum Co. v. Admiral Ins. Co., 268 Ill.App.3d 598, 205 Ill.Dec. 619, 643 N.E.2d 1226, 1241-46 (1994). In order to alleviate this concern, the insured is required to show that, among other things, the amount of the settlement was reasonable. Id. 205 Ill.Dec. 619, 643 N.E.2d at 1249-51; Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955, 966-67 (7th Cir.1995); Illinois Tool Works Inc. v. The Home Indem. Co., 24 F.Supp.2d 851, 854 (N.D.Ill.1998); WestAm. Mortgage Co. v. Tri-County Reports, Inc., 670 F.Supp. 819, 821 (N.D.Ill.1987); see also Fid. & Cas. Co. of New York v. Mobay Chem. Corp., 252 Ill.App.3d 992, 192 Ill.Dec. 191, 625 N.E.2d 151, 159 (1992); St. Michael's Orthodox Catholic Church v. Preferred Risk Mut. Ins. Co., 146 Ill.App.3d 107, 100 Ill. Dec. 111, 496 N.E.2d 1176, 1178-79 (1986). For instance, a defendant may raise the defense that the policy was not in effect when the injury occurred or that the policy does not cover the type of damages sustained, as when compensatory but not punitive damages are covered. See generally United States Gypsum, 205 Ill.Dec. 619, 643 N.E.2d at 1230-52. Federal may raise the argument that a portion or all of the settlement was for the purchase of PSC's trademark assets, and not to release PTI from liability for trademark infringement. Cf. Zurich Ins. Co. v. Killer Music, Inc., 998 F.2d 674, 679-80 (9th Cir.1992) (When the issue of the amount of a reasonable settlement in good faith is addressed on remand, Zurich will have the opportunity to demonstrate that some portion, if not all, of the settlement amount is allocable to the value of the songs which Killer received in the settlement agreement.).
12 The facts show that prior to instituting the trademark infringement suit against PTI, PSC attempted to sell its trademark to PTI with a price based on the cost of re-branding the company. Only after a sale price could not be agreed upon did PSC sue PTI for infringement. PSC's subsequent settlement demands were based on the re-branding costs. PTI's settlement offer, in turn, was similarly based on its calculations of PSC's rebranding costs. The settlement agreement, in addition to a release of liability, provided for the assignment of the Platinum trademark to PTI. The Settlement Agreement was also called a Trademark Assignment Agreement by the parties. Then, after the settlement, PTI labeled the trademark an asset and began depreciating it. 13 Using a form of factual cognitive dissonance, PTI argues that the trademarks were of no value to it. However, the fact that PTI previously offered to pay PSC $250,000 for the trademark shows the trademark had some value to PTI. Moreover, PTI's no-value argument is wholly inconsistent with PTI's prior assertion that it was facing enormous liability for invading PSC's markets. PTI's stated objective was to expand its business into new markets, including markets reserved to PSC in the 1993 settlement. Part of the reason PTI agreed to the $10 million settlement was to relieve it from any future liability, thereby allowing PTI to pursue a market expansion that previously would have resulted in infringement. 14 The self-serving valuation of PTI's potential liability, in the hundreds of millions of dollars, by PTI's counsel was wholly speculative, as the district court recognized when ruling on the motions for summary judgment. Platinum Tech., Inc. v. Federal Ins. Co., 2001 WL 109814 at  (N.D.Ill. Feb.2, 2001). And the initial settlement offer amounts are of little evidentiary value considering the fact that they were based not on potential liability, but on re-branding costs. 15 According to the parties' own agreement, PSC's Platinum trademark was worth $4 million, and PTI purchased it in the settlement/assignment agreement. The $4 million cash payment to PSC was not made as part of a reasonable settlement agreement to relieve PTI of its liability to PSC for trademark infringement. United States Gypsum Co., 205 Ill.Dec. 619, 643 N.E.2d at 1249-51. Based on our review of the entire record, we conclude the district court clearly erred in finding that none of the settlement amount was for the purchase of trademarks.
16 Generally, the purpose of a damage award is to place the nonbreaching party in the position he would have been in had the contract been performed, but not to place him in a better position or provide him with a windfall recovery. Kohlmeier v. Shelter Ins. Co., 170 Ill. App.3d 643, 121 Ill.Dec. 288, 525 N.E.2d 94, 102-03 (1988). The amount of damages in insurance policy cases is sometimes determined by the contract provisions, such as a liquidated damages clause, or by proof of actual damages. See United States Fid. and Guar. Co. v. Klein Corp., 190 Ill.App.3d 250, 146 Ill.Dec. 848, 558 N.E.2d 1047, 1052 (1990); Kohlmeier, 121 Ill.Dec. 288, 525 N.E.2d at 102. However, damages cannot be based on potential or future loss, unless it is reasonably certain to occur, nor can damages be based on speculation and conjecture. See Schoeneweis v. Herrin, 110 Ill.App.3d 800, 66 Ill.Dec. 513, 443 N.E.2d 36, 42 (1982); Harp v. Illinois Cent. Gulf R.R. Co., 55 Ill.App.3d 822, 12 Ill.Dec. 915, 370 N.E.2d 826, 829 (1977). Federal cannot escape its obligation to repay PTI for its loss if the damages award is based on a past or current loss and the amount is ascertainable. Cf. UNR Indus., Inc. v. Cont. Cas. Co., 942 F.2d 1101, 1103-06 (7th Cir.1991). 17 The settlement in this case made liability and the OEM credit figure clear; however, the cash valuation of the OEM credit was based on speculation. The facts show that the OEM credits do not have an actual value of $6 million, or even $4.6 million (the cash value the district court appears to have assigned to the credits). PSC/Epicor had already offered to take far less than $4.6 million in the form of an one-time cash payment of between $2.5 and $3 million, and, to date, PSC/Epicor has not used any of the OEM credits. In light of this objective valuation by PSC/Epicor, and additional points advanced by Federal, the calculation by PTI's expert clearly had no proper basis and was speculative. See Schoeneweis, 66 Ill.Dec. 513, 443 N.E.2d at 42 (holding that the party seeking to recover need not only to establish that he sustained damages but also to establish a reasonable basis for computation of those damages). Given that the exact value of the OEM credits is speculative, requiring Federal to reimburse PTI in the amount of $6 million or $4.6 million for an expense PTI may never incur would allow PTI to reap a significant windfall. See Kohlmeier, 121 Ill.Dec. 288, 525 N.E.2d at 102-03. Therefore, we vacate the district court's valuation and remand this issue for reconsideration to determine the current monetary value of the OEM credits. 18 The evidence relied on by the district court to value the OEM credits was clearly not credible in light of the objective valuation of the credits by PSC/Epicor. Thus, in considering this issue, the district court should not only look to expert valuations, but also seek to determine if there are additional objective indicators of the value of the OEM credits beyond those mentioned in this opinion.