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MORGAN v. HANOVER INS. CO.

May 6, 1996

MORGAN, LEWIS & BOCKIUS LLP, Plaintiff,
v.
HANOVER INSURANCE COMPANY, Defendant.



The opinion of the court was delivered by: ROSEN

 ROSEN, Magistrate Judge

 I. INTRODUCTION

 Presently before the court are the cross-motions for summary judgment of plaintiff Morgan, Lewis & Bockius and defendant Hanover Insurance Company. Plaintiff Morgan, Lewis & Bockius (hereinafter "ML&B") seeks to recover from Hanover Insurance Company legal fees and expenses allegedly due to Cosmetic Gallery, Inc. incurred in the defense of Cosmetic Gallery in connection with the case Matrix Essentials, Inc. v. Cosmetic Gallery, Inc., 870 F. Supp. 1237 (D.N.J. 1994), aff'd, by Memorandum Opinion filed April 4, 1996 (Doc.No. 92-cv-03400), (hereinafter "the Matrix litigation") (Plaintiff's Brief at 1).

 ML&B, as assignee of Cosmetic Gallery, Inc. (hereinafter "Cosmetic Gallery"), seeks to recover certain disputed costs allegedly owed by Hanover Ins. Co. (hereinafter "Hanover") to Cosmetic Gallery, in relation to the defense of the Matrix litigation pursuant to certain policies of insurance issued by Hanover to Cosmetic Gallery. ML&B acted as counsel to Cosmetic Gallery in the Matrix litigation. In the course of that action, Cosmetic Gallery incurred $ 343,384.81 in attorneys' fees and disbursements from ML&B and $ 10,104.05 in fees and costs from Brown & Connery, Esqs., local New Jersey counsel of Cosmetic Gallery. ML&B requests payment of: (a) the amounts paid by Cosmetic to ML&B, together with interest on those amounts from the date of payment, (b) the amount currently owed by Cosmetic to ML&B together with interest from the date the outstanding ML&B bills were presented and (c) the amount currently owed by Cosmetic to Brown & Connery, together with interest from the date the outstanding Brown & Connery bills were presented. To date, ML&B has received $ 165,263.16 from Hanover and $ 18,135.86 from Cosmetic Gallery (Plaintiff's Brief at 10).

 Throughout the course of the Matrix litigation, ML&B also represented C & L Beauty Supply, Inc., and Charles and Larry Eisenberg in their capacities as officers and major stockholders of Cosmetic Gallery, as well as C & L Beauty Supply. ML&B contends that Hanover is liable for the costs of defending all of the eight claims asserted against Cosmetic Gallery and is therefore responsible for the entire cost of the litigation. Conversely, Hanover accepts responsibility for payment on only four of the eight claims. ML&B also contends that even if Hanover is responsible for only some of the claims, Hanover cannot satisfy its burden of advancing an equitable allocation of the defense costs "due to the fact that the issues of fact and law concerning Matrix's claims against Cosmetic Gallery are so interrelated and intertwined that there can be no reasonable basis for such a proposed allocation." (Plaintiff's Brief at 2).

 ML&B has taken the position that under New Jersey law, 1) if a complaint states various theories of recovery and one theory requires coverage, the insurance carrier must defend the entire action, and 2) even if allocation might be permitted under some circumstances, where the claims, facts and issues are so interrelated and intertwined as not to permit allocation on any reasonable basis, no allocation is permitted. (Plaintiff's Brief at 12). In addition, ML&B asserts that each individual cause of action asserted by Matrix in the underlying action is based on the totality of Cosmetic Gallery's alleged conduct and that "Matrix's claims against Cosmetic Gallery consist of the same set of operative facts with eight separate legal labels." (Plaintiff's Brief at 5).

 In contrast, the defendant posits that even though some of the claims asserted against Cosmetic Gallery are certainly covered by the insurance policies, there should be a proportionate allocation of the costs to defend the Matrix litigation between the covered and non-covered claims.

 Pursuant to the Stipulation and Order of the Honorable Joseph E. Irenas dated October 26, 1995, ML&B and Hanover have agreed to file cross motions for summary judgment as to the issues related to the balance of the counsel fees claimed to be owing. The parties have also agreed that the decision that this court will reach is to be final, binding and unappealable.

 After careful consideration of the parties submissions and the oral argument on the record on March 13, 1996, and for the reasons noted herein, the motion of Morgan, Lewis & Bockius shall be denied and the motion of Hanover Insurance Company shall be granted.

 FACTUAL AND PROCEDURAL HISTORY:

 It is necessary, at this point, to analyze some of the facts concerning the underlying Matrix litigation in order to assess the allegations asserted herein.

 Cosmetic Gallery operated various retail beauty supply outlets in southern New Jersey with the intent to attract customers by selling hair care and beauty supplies at a discount below the price offered by supermarkets, pharmacies and hair salons.

 Matrix Essentials, Inc. (hereinafter "Matrix") manufactured and sold a wide variety of hair care products. In its complaint against Cosmetic Gallery, Matrix alleged that it entered into contractual relationships with beauty salons with the understanding that Matrix products would be sold only to salon clients for their personal use at home. It claimed that Matrix had developed the trade name Matrix and a shield design trademark for use in connection with the sale of its hair care products. Matrix alleged that Cosmetic Gallery and its principals, the Eisenbergs, violated Matrix's rights in that they offered for sale and/or sold Matrix's products in their over-the-counter retail stores. It alleged that the Matrix defendants obliterated batch codes and other identifying information with the intent to conceal their actions from the plaintiff. (Defendant's Brief at 4).

 On August 12, 1992, Matrix Essentials filed a complaint in the United States District Court for the District of New Jersey asserting eight different causes of action against, inter alia, Cosmetic Gallery, C & L Beauty Supply and Charles and Larry Eisenberg, both in their capacities as officers and major stockholder of Cosmetic Gallery and C & L Beauty Supply: 1) violation of the Federal Trademark Act of 1947; 2) trademark infringement and unfair competition under the Lanham Act, 15 U.S.C. § 1051 et seq; 3) trademark infringement and violation of statutory and common law unfair competition under New Jersey laws; 4) malicious interference with contractual relations; 5) malicious interference with prospective economic advantage; 6) violation of the New Jersey Consumer Fraud Act, N.J.S.A. § 56: 8-1 et seq.; 7) violation of the New Jersey Unfair Competition Act; 8) conspiracy to commit acts of trademark infringement, unfair competition and other tortious conduct. The defendants filed an answer and asserted an antitrust counterclaim. On February 26, 1993, the court granted the Matrix defendants' motion to dismiss Matrix Essentials' claim under the New Jersey Consumer Fraud Act, but denied that motion as to all other claims. Matrix Essentials, Inc. v. Cosmetic Gallery, 870 F. Supp. 1237, 1239 (D.N.J. 1994).

 On March 31, 1994, the court granted Matrix's motion for summary judgment on the Matrix defendants' counterclaim, and granted in part and denied in part the Matrix defendants' motion for summary judgment. The court: 1) denied the Matrix defendants' motion on Matrix Essentials' Lanham Act and unfair competition claims to the extent that Matrix Essentials had shown that the Matrix defendants sold defaced Matrix products, but granted the motion to the extent that the defendants had sold unaltered Matrix Essentials products, and 2) granted the Matrix defendants' motion for summary judgment on all other claims. Id. On July 22, 1994, the court partially granted Matrix's motion for reconsideration, and reinstated its tortious interference with contract claim to the extent that it sought injunctive rather than monetary relief. Id.

 In the course of the Matrix litigation, Cosmetic Gallery incurred attorneys' fees and costs from ML&B in the amount of $ 343,384.81. Hanover contends that not all the claims defended by ML&B are covered by Hanover policies. Hanover agreed to pay only fifty percent of the ML&B and the Brown & Connery bills. Hanover based its position upon the case of SL Industries, Inc. v. American Motorists Ins. Co., 128 N.J. 188, 607 A.2d 1266 (1992), which held that in cases where multiple claims are asserted that are both covered and non-covered under a liability insurance policy, the cost of defense should be fairly allocated between the insurer and the insured. Id. at 216, 607 A.2d at 1280. Hanover concedes its policies afforded coverage for unfair competition and infringement of copyright, title or slogan. Out of the eight claims Matrix asserted, Hanover afforded coverage for damages contained in the First, Second, Third, Seventh and part of the Eighth Claim.

 Hanover denies coverage for the plaintiff's Fourth (malicious interference with contractual relations), Fifth (malicious interference with prospective economic advantage), Sixth (New Jersey Consumer Fraud Act) claims, and that part of the Eighth claim relating to conspiracy to commit acts of tortious conduct. Hanover also claims that coverage under its policy was limited solely to claims for damages and that no coverage is afforded for the defense of plaintiff's claims for injunctive relief or punitive damages. Furthermore, Hanover alleges that it was not aware that ML&B represented both Cosmetic Gallery and C & L Beauty Supply, Inc. as well as Charles and Larry Eisenberg in their capacities as officers and stockholders of both Cosmetic Gallery and C & L Beauty Supply, Inc., a fact which came to the attention of Hanover only after Hanover counsel's review of the file in the Matrix litigation. Hanover contends that no coverage is afforded under the insurance policies for C & L Beauty Supply, Inc. or Charles and Larry Eisenberg in their capacities as officers and stockholders of C & L Beauty Supply, Inc. as they are not named insureds under the terms of the policy. Finally, Hanover denies coverage ...


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