## Facts

- King Sports, Inc., an online golf-club seller owned by Jui-Chen Chang, purchased a commercial general liability policy from State Farm providing “personal and advertising injury” coverage, subject to intellectual-property and knowing-violation exclusions and conditions requiring cooperation and prohibiting voluntary payments or settlements without consent.
- In 2007, King Sports faced trademark-infringement suits by two other brand owners; State Farm defended and settled those matters.
- In 2008, Roger Cleveland Golf Company, Inc. sent a cease-and-desist letter alleging infringement; State Farm reserved rights and asked Chang to contact it, but King Sports did not do so and continued selling the accused products.
- Cleveland Golf sued King Sports and Chang for trademark and related intellectual-property violations.
- State Farm, under a reservation of rights, retained defense counsel Bruce Hedrick, who attempted for months to obtain cooperation from Chang and King Sports through letters, texts, emails, and calls; only an employee, Andy Lee, responded and said he lacked authority, then stopped responding.
- State Farm also attempted to locate Chang through investigative and agency efforts; after about four months without meaningful cooperation, the underlying court granted Hedrick’s motion to withdraw.
- After counsel withdrew and without State Farm’s consent, Lee purported to settle Cleveland Golf’s claims on King Sports’s behalf.
- State Farm filed a federal declaratory-judgment action against King Sports, Chang, and Cleveland Golf seeking a declaration of no duty to defend or indemnify and no obligation to honor the settlement; Cleveland Golf counterclaimed alleging bad faith.

## Issues

1. Whether the policy’s “personal and advertising injury” coverage required State Farm to defend or indemnify King Sports and Chang against Cleveland Golf’s trademark and related intellectual-property claims.
2. Whether King Sports’s and Chang’s failure to cooperate materially breached the policy and discharged State Farm’s defense and indemnity obligations.
3. Whether an employee-negotiated settlement made without State Farm’s consent triggered coverage or bound State Farm despite the policy’s no-voluntary-payments/consent-to-settle condition.
4. Whether Cleveland Golf could recover from State Farm on bad-faith theories based on State Farm’s refusal to continue the defense and refusal to honor the settlement.

## Decision

- The court granted State Farm’s motion for summary judgment.
- The court declared State Farm owed no duty to defend and no duty to indemnify King Sports or Chang in the Cleveland Golf action.
- The court held State Farm had no obligation to fund or honor the settlement purportedly reached by King Sports’s employee without State Farm’s knowledge or consent.
- The court entered judgment against Cleveland Golf on its bad-faith counterclaims.

## Legal Principles

- Under Georgia insurance-contract law, an insurer’s duty to defend depends on the policy terms applied to the allegations in the underlying complaint; trademark and related intellectual-property allegations may fall outside “advertising injury” coverage and/or within express exclusions, including knowing-violation exclusions.
- An insured’s material failure to cooperate may discharge an insurer’s duties to defend and indemnify where the lack of cooperation prejudices the insurer’s ability to defend.
- A no-voluntary-payments/consent-to-settle condition bars the insured from unilaterally assuming obligations or settling claims without the insurer’s prior consent; such a settlement does not bind the insurer or create an indemnity obligation.
- Bad-faith liability cannot be imposed where there is no coverage and where the insurer’s obligations have been discharged by policy terms and the insured’s breach of conditions; a third-party claimant’s ability to assert bad-faith theories is limited absent a recognized basis to proceed against the insurer.

## Conclusion

The court held that State Farm had no duty to defend or indemnify King Sports or its owner for Cleveland Golf’s trademark-based claims and was not bound by an unauthorized settlement, because the allegations implicated intellectual-property/intentional-conduct limitations and the insured materially breached cooperation and consent-to-settle conditions; Cleveland Golf’s bad-faith counterclaims therefore failed as a matter of law.


State Farm Fire & Cas. Co. v. King Sports, Inc., 827 F. Supp. 2d 1364 (N.D. Ga. 2011)