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Minnesota Lawyers Mutual Insurance Co. v. Protostorm, LLC

United States District Court, E.D. Virginia, Alexandria Division

June 22, 2016

MINNESOTA LAWYERS MUTUAL, INSURANCE CO., Plaintiff/ Counter-Defendant,
v.
PROTOSTORM, LLC, ET AL., Defendants/Counterclaimants.

          MEMORANDUM OPINION

          JAMES C. CACHERIS, UNITED STATES DISTRICT COURT JUDGE

         This matter is before the Court on cross-motions for summary judgment for a declaration regarding Minnesota Lawyers Mutual Insurance Company’s (“MLM”) obligation to indemnify a Virginia law firm for a malpractice judgment. The insurance policy (the “Policy”) at issue provides $10 million in coverage for any claim arising out of any act, error, or omission that occurred after October 25, 2006. But the Policy provides only $5 million in coverage for any claim arising out of any act, error, or omission that occurred on or before that date. The controversy in this case is whether MLM is obligated to indemnify $10 million or $5 million. For the foregoing reasons, the Court concludes that the $5 million liability limit applies and the Court will grant summary judgment for MLM.

         I. Background

         Because this case involves an insurer’s duty to indemnify, the Court constrains its review to the proceedings in the underlying malpractice lawsuit, the facts litigated therein, and the insurance policy at issue. See CACI Int’l, Inc. v. St. Paul Fire & Marine Ins. Co., 566 F.3d 150, 155 (4th Cir. 2009); Capital Envtl. Servs., Inc. v. N. River Ins. Co., 536 F.Supp. 2d. 633, 645 (E.D. Va. 2008).

         In 2000, Protostorm, LLC (“Protostorm”) retained the Virginia law firm of Antonelli, Terry, Stout & Kraus, LLP (“the Firm”) to prepare and prosecute patent applications for Protostorm’s advertising-based internet game. (SOF ¶ 7.)[1] To that end, the Firm filed a provisional patent application with the U.S. Patent and Trademark Office (“PTO”) in June 2000. (SOF ¶ 8.) The final application was due one year later, on June 27, 2001. (SOF ¶ 8.) Instead of filing a final application in only the United States, the Firm timely submitted a Patent Cooperation Treaty filling (“PCT Application”) on June 25, 2001. (SOF ¶ 9.) A PCT Application allows a filer seeking international patent protection to simultaneously establish a priority date among all the countries that the filer designates in the application. (Nixon[2] Tr. at 1840-1842; Brundidge Tr. at 649.) To actually obtain a patent from a designated country, however, the applicant still must make the appropriate country-specific filings during the “national phase” of the application process. (Nixon Tr. at 1840-1842; Brundidge Tr. at 649.) The Firm designated an interest in patent protection in 86 countries on the PCT Application, but failed to check the box for the United States. (SOF ¶¶ 10, 19; PCT App. [Dkt. 73-14] at 3.)

         The Firm’s negligent PCT Application jeopardized Protostorm’s ability to receive patent protection in the United States. The initial country designations, however, were preliminary and could have been corrected as a matter of course as late as September 2001. (Rappaport[3] Tr. at 823; Nixon Tr. at 1852-1853.) Instead of filing a correction, the Firm abandoned Protostorm’s patent application on September 20, 2001, without informing Protostorm. (See SOF ¶ 16; Brundidge Tr. at 698; Nov. 20, 2007 email [Dkt. 73-10] at 3.) Even after missing the September 2001 deadline, the Firm could have preserved Protostorm’s ability to seek a U.S. patent by filing a new application by February 2003, at the absolute latest. (Rappaport Tr. at 817, 823. But see Nixon Tr. at 1854 (testifying that the deadline to refile was January 2003).) Because the Firm had completely ceased working on Protostorm’s application, it missed the last-chance February 2003 U.S. deadline and also missed the early 2003 national-phase deadlines to pursue patents in any of the 86 countries actually designated in the PCT Application. (See Nixon Tr. at 1841, 2057; Brundidge Tr. at 666, 716; Rappaport Tr. at 890, 905.)

         As those deadlines slipped away, Protostorm was unaware the Firm had abandoned the application. The Firm had not withdrawn as counsel of record at the PTO or the World Intellectual Property Organization. (SOF ¶ 22.) Furthermore, the Firm told Protostorm in December 2001 that the PCT Application had been submitted and was proceeding accordingly. (SOF ¶ 11.)

         A. The Firm’s Conduct in 2006 and Later

         Protostorm and the Firm had no communication for five years after that December 2001 phone call. (SOF ¶ 12.) Protostorm’s Peter Faulisi reached out to the Firm in early 2006, leaving unanswered messages in February, April, July, and November of 2006. (SOF ¶ 12.) Finally in June 2007, Faulisi was able to reach Alan Schiavelli (“Schiavelli”), the managing partner at the Firm. (SOF ¶ 13.) Schiavelli told Faulisi that the Firm had filed Protostorm’s international patent application, but that there were problems with the application. (SOF ¶ 13.) Faulisi was surprised by this concerning news and hired attorney Jonathan Moskin (“Moskin”) to investigate. (SOF ¶¶ 13-14.) Through an exchange of several emails and letters, Moskin was finally able to pry an admission from Schiavelli that the Firm had unilaterally abandoned Protostorm’s application in September 2001. (SOF ¶ 16.) Two letters later, on January 25, 2008, Schiavelli revealed for the first time that the Firm had failed to designate the United States in the application. (SOF ¶ 20.) At the time of those communications, the Firm was still listed as Protostorm’s counsel of record at the PTO and with the World Intellectual Property Organization. (SOF ¶ 22.)

         B. The Underlying Malpractice Lawsuit

         In March 2008, Protostorm filed a legal malpractice lawsuit in New York against the Firm, Schiavelli, and two attorneys that worked on the patent application but left the Firm in 2004-Frederick D. Bailey (“Bailey”) and Carl I. Brundidge (“Brundidge”) (collectively “Insured”).[4] (SOF ¶ 23.) Protostorm filed a second amended complaint on August 24, 2009, in which it summarized the Insured’s various acts of negligence to include the following failures:

(1) to designate the United States on the PCT Application; (2) to take appropriate steps to correct their errors in failing to designate the United States; (3) to the extent they deemed it necessary to have a power of attorney, to prepare and have executed a power of attorney to be filed simultaneously with the PCT Application or obtain extensions of time thereafter to file the power of attorney; (4) to keep plaintiffs advised of the status of the PCT application; (5) to prosecute the patent application in any of the countries defendants did designate; (6) ever to disclose to plaintiffs that their United States patent rights had been needlessly abandoned; and (7) to file a new United States application, which could have been done as late as January 2003, one year after the publication of the PCT Application.

(Sec. Am. Compl. [Dkt. 73-2] ¶ 50.) As relief, Protostorm sought damages “sufficient to compensate plaintiffs for the needless abandonment of their patent rights, ” punitive damages, and costs and fees. (Id. ¶ 61(a)-(d).)

         Before trial, the parties filed cross-motions for summary judgment. The Insured argued that New York’s three-year statute of limitations barred Protostorm’s legal malpractice claim. (See Firm Mot. for Summary J. [Dkt. 73-16] at 14.) The New York court noted that Protostorm filed the complaint over six years after the Firm negligently submitted the final PCT Application in 2001 and that the statute of limitations begins to run on “the day an actionable injury occurs.” See Protostorm, LLC v. Antonelli, Terry, Stout & Kraus, LLP, 834 F.Supp.2d 141, 155 (E.D.N.Y. 2011). The court could not conclusively decide that the claim was untimely, however, because it was disputed whether the Firm continued to represent Protostorm through 2008, thereby tolling the statute of limitations under New York’s continuous representation doctrine. Id. at 157. Thus, the Court denied the Firm’s motion for summary judgment based on the statute of limitations.

         The court also denied Protostorm’s cross-motion for summary judgment on the merits of its legal malpractice claim. The court noted that, to the extent the Firm was retained to prosecute the patent between 2002 and 2003, the Firm’s “lapses clearly constituted a failure to exercise ordinary skill.” Id. at 158. However, there remained a question of fact as to whether the Firm was retained to “substantively prosecute the patent to completion” or to merely “physically file the PCT application and accomplish other ministerial tasks.” Id. Therefore, the court granted Protostorm summary judgment on the limited question of the Firm’s breach of its duty to prosecute the patent by the beginning of 2003, if such a duty existed.

         C. Jury Instructions and Verdict

         After the jury heard weeks of testimony regarding the facts discussed above, the court instructed the jury on the elements of a legal malpractice cause of action in New York. Regarding the duty ...


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