Confidential
Settlement – $1,725,000Court
Sacramento Superior
Attorneys
Plaintiff
Steven J. Shapero
(Shapero & Shapero)
Defendant
Experts
Plaintiff
Barbara C. Luna
(technical)
Stephen A. Spataro
(technical)
James T. Hudson
(technical)
Thomas J. Corridan
(technical)
Defendant
James Schratz
(technical)
Boyd A. Veenstra
(technical)
John Moyle
(technical)
Facts
Tapeworm, of Santa Clarita, is in the business of distributing videos in the straight-to-video market. It innocently purchased a video that violated the copyright of a third party. Tapeworm resold the movie to, among others, Blockbuster, for retail rental and sale purposes. The third party copyright owner sued both Tapeworm and Blockbuster, among others and alleged copyright violation. Tapeworm tendered the suit to CalFarm, its business liability insurance carrier, under the coverage afforded for advertising injury arising out of a copyright violation. Blockbuster, which had indemnity rights against Tapeworm as a purchaser of the infringing tape from tapeworm, also tendered the claim to CalFarm on the theory that if Blockbuster sued Tapeworm for indemnity, CalFarm would be obligated to defend that suit as well as the underlying claim. CalFarm denied coverage and a duty to defend, on the ground that there was no advertising injury arising out of a copyright violation, i.e. that no infringing material was used to promote or market the video. Tapeworm resubmitted the tender on several occasions, and advised CalFarm that the video had been marketed and advertised using the video itself and flyers. The flyers and video sleeve (box) contained infringing material and was used to market and sell the video. CalFarm refused to defend and sued Tapeworm for declaratory relief in Sacramento Superior Court. Meanwhile, Tapeworm and Blockbuster settled with the plaintiff in the underlying case for $550,000, with $505,000 advanced by Blockbuster and $45,000 by Tapeworm. Tapeworm paid $85,000 to Blockbuster towards attorneys fees incurred and Tapeworm repurchased the offending tapes from Blockbuster. Tapeworm also agreed to pursue a bad faith action against CalFarm on behalf of itself and Blockbuster in order to obtain back the costs and expenses of the underlying litigation. Tapeworm sued CalFarm in Los Angeles for bad faith and the case was then transferred to Sacramento.
Settlement Discussions
CalFarm settled with Blockbuster for $725,000 and then settled with Tapeworm for an additional $1 million. The mediator was retired Justice Edward Panelli.
Damages
Tapeworm claimed damages consisting of amounts paid to the underlying plaintiff in the copyright infringement case, amounts paid to Blockbuster in connection with the settlement of the underlying copyright infringement case; attorneys fees in the underlying case and attorneys fees incurred in the bad faith action, and lost profits resulting from the loss of the business relationship with Blockbuster, Tapeworm's largest client, from the failure to defend and Blockbuster's expenditure of large sums in connection with the underlying case. Total claimed damages were approximately $700,000 in fees and costs and $6 million in lost profits. CalFarm's economist significantly reduced the amount of claimed damages after an adverse ruling on a summary adjudication motion.
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