Although Insurer Provides Coverage for Malicious Prosecution, It Has No Obligation to Defend or Indemnify Alleged "Sham" Litigation
September, 2005
Courts often cite the maxim that the duty to defend is broader than the duty to indemnify. However, it is also a well-established principle that in defining the duty to defend, courts disregard outside facts and circumstances and look only to the allegations of the complaint issued against the insured. This latter principle was upheld in the recent New York Supreme Court case Purdue v. Steadfast Ins. Co., et al., 2005 WL 1662028 (N.Y. Sup. Ct. 2005).
In Purdue, the court was deciding whether Steadfast and other insurers were obligated to defend Purdue Pharma from a suit where the plaintiffs alleged Purdue had engaged in “sham litigation.” Even though the policy required the insurers to defend its insured if a suit alleged “malicious prosecution,” this so-called “sham litigation” was not “malicious prosecution,” and therefore no duty to defend existed.
The course of events leading to this case started when Purdue sued another drug company, Endo Pharmaceuticals, for patent infringement because Endo was trying to obtain FDA approval to market a generic version of the drug OxyContin. Although Endo infringed on Purdue’s patents, the court ruled against Purdue, because Purdue engaged in unfair conduct in obtaining the patents, making them unenforceable. Id. at 2.
After the ruling in Purdue’s action against Endo, more than sixty suits were brought against Purdue claiming that its frivolous lawsuit delayed release of a generic version of OxyContin, costing these individuals and “end-payors.” These various suits included claims, among others, of antitrust violations, unfair trade practices, and unjust enrichment. Most importantly, these actions characterized Purdue’s suit against Endo as a “sham litigation.” Id.
The underlying plaintiffs’ use of the word “sham” to describe the Endo action was far from arbitrary. The court reasoned that the plaintiffs called it a “sham litigation” because they wanted to invoke the “sham litigation” exception to the Noerr-Pennington rule. Pursuant to this rule one cannot normally bring an antitrust suit against a competitor. However, if the competitor engaged in “sham litigation,” then the suit is permissible. Id.
Regardless of the underlying plaintiffs’ choice of words, the court still had to resolve the dispute of whether the underlying plaintiffs’ asserted malicious prosecution. In reaching its conclusion, the court considered and then disregarded a choice-of-law analysis. Even though both New York and Connecticut had significant contacts with the suit, there was no real difference between the laws of the two states, so New York law applied. Id. at 3. Although New York law applied, the court based much of its analysis on a factually-comparable Connecticut Supreme Court case.
The court then recognized that an insurer’s duty to defend was rather broad. “An insurer’s duty to defend its insured arises whenever the allegations in a complaint state a cause of action that gives rise to the reasonable possibility of recovery under the policy.” Town of Massena v. Healthcare Underwriters, 98 N.Y.2d 435, 443 (1991). In Purdue, the insurers argued that the underlying actions did not allege facts that would support a cause of action for malicious prosecution under New York law. Therefore, the insured had no possibility of recovery under the policy, and, in turn, there was no duty to defend. Purdue at 2.
In the factually-comparable Connecticut case, the court found that the insured, suing for coverage, had no possibility of recovery under the policy. QSP, Inc. v. Aetna Casualty & Surety Co., 256 Conn. 343 (2001). In QSP, the insured, QSP, was seeking a defense for various antitrust actions brought against it based on QSP’s allegedly illegal monopolization activities, including defamation and the institution of bad-faith litigation against its competitors. Although the insurers would have been obligated to defend QSP in any defamation or malicious prosecution actions brought against it, the plaintiffs in the underlying actions did not and could not have sued QSP for defamation or malicious prosecution. The underlying plaintiffs did not have a cause of action for defamation or malicious prosecution, because these acts were committed against other parties, who were not involved in the antitrust actions. Therefore, even though the antitrust actions were based on facts which constituted defamation and malicious prosecution, the case against QSP sounded only in antitrust, and it was not entitled to coverage. Id.
Similarly, in Purdue, although the actions against Purdue alleged facts which constituted “sham litigation,” the plaintiffs were not suing Purdue for malicious prosecution. A malicious prosecution action requires that the plaintiff show the initiation of an action that ended in favor of the plaintiff, lack of probable cause, malice, and special injury. Fink v. Shawangunk Conservancy, Inc., 15 A.D.3d 754 (3d Dep’t 2005). More importantly, the plaintiff must have been a party to the underlying action. Jackson v. Kessner, 206 A.D.2d 123, 126 (1st Dep’t 1994). Because none of the underlying plaintiffs in Purdue were a party to the “sham litigation” actions, they could not allege a cause of action for malicious prosecution. Since this was not a malicious prosecution case, Steadfast and the other insurers had no duty to defend. Purdue at 6.
Learning Point:
The duty to defend is triggered if, and only if, the facts in the underlying complaint allege a cause of action that is within the policy. However, it is important to note that the court will liberally construe the policy when making its determination.•
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