Platinum Technology, Inc. v. Federal Insurance Co.

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-2503
Platinum Technology, Inc.,
Plaintiff-Appellee,
v.
Federal Insurance Co.,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99-C-7378--James F. Holderman, Judge.
Argued January 23, 2002--Decided March 7, 2002
Before Bauer, Coffey and Evans, Circuit
Judges.
Bauer, Circuit Judge. Federal Insurance
Company appeals from a judgment in favor
of Platinum Technology Incorporated on an
Illinois law claim for breach of an
insurer’s duty to defend. For the reasons
that follow, we reverse the judgment and
remand the matter to the district court
for further proceedings not inconsistent
with this opinion.
BACKGROUND
Platinum Technology Incorporated (PTI)
sued Federal Insurance Company for
failure to defend PTI in a trademarking
infringement suit against Platinum
Software Corporation (PSC). PTI settled
with PSC and then sought to recover the
settlement amount from Federal. Count I
sought a declaration that Federal
breached its duty to defend and
indemnify. Count II sought money damages
for Federal’s breach of the duty to
defend, and Count III sought money
damages for Federal’s breach of the duty
to indemnify. Count IV sought additional
penalties because the breach was
"vexatious and unreasonable" under
Section 155 of the Illinois Insurance
Code.
In a June 27, 2000 ruling, the district

-- 1 of 11 --

court granted judgment on the pleadings
in favor of PTI on Count I. Both parties
then filed cross-motions for summary
judgment on the remaining counts. Federal
claimed that the settlement was neither
in anticipation of litigation nor
reasonable, thus the settlement was not
covered by the policy. Rather, Federal
contended, PTI paid the settlement to
purchase the "Platinum" trademarks from
PSC. The district court granted Federal’s
motion in part and denied it in part as
to Counts II and III, finding that issues
of material fact existed as to the
valuation of the settlement amount. The
district court held that PTI must
establish the settlement was made in
"anticipation of litigation" and that the
amount of the settlement was
"reasonable," including whether the
claims settled were insurable. The
district court also granted PTI’s motion
in part, finding that the settlement was
made "in anticipation of litigation."
Finally, the district court granted
Federal’s motion on Count IV, the section
155 claim, finding Federal’s conduct was
not vexatious or unreasonable.
A bench trial was held on the issues
that remained. The district court found
for PTI and judgment was entered on April
9, 2001, in the amount of $9,422,356.00
(which included prejudgment interest,
attorney’s fees, and the settlement
amount of approximately $4 million in
cash paid to PSC and the $6 million in
Original Equipment Manufacturer (OEM)
product credits available for future use,
valued at $4.6 million in cash).
The issues in this case actually stem
from earlier events involving PTI and PSC
and the "Platinum" trademark. PSC
registered the trademark in 1988, and
prior to that used it in connection with
its software business. It turned out that
PTI was also using a similar, if not the
exact same, trademark. After PSC became
aware of this fact in 1989, it sought to
have PTI stop using the trademark. PTI
responded, stating that market confusion
between the two companies was unlikely
because they were in unrelated sectors of
the software business. PTI sold mainframe
computer software, while PSC sold
software for personal computers. Despite
this assertion, PTI began negotiating
with PSC over the trademark usage and
reached a settlement agreement in 1993.

-- 2 of 11 --

The settlement agreement provided that
neither company would use the "Platinum"
trademark in areas of the market in which
the other’s goods and services competed.
PTI later expanded its business into new
markets, some of which may or may not
have been reserved to PSC. According to
PTI, changes in its own business, PSC’s
business, and the computer software
market caused some product overlap
between the two companies.
In 1996, PSC sought to change its image
and corporate name, to "re-brand" itself.
PSC approached PTI to see if PTI was
interested in buying the "Platinum"
trademark. PSC planned to use the sale to
defray the costs of re-branding. PTI
offered $100,000, and PSC countered with
$1 million demand. PTI’s offer went up
another $150,000, but PSC held firm at $1
million and discussions broke down.
Then in July 1997, PSC sued PTI for,
among other things, trademark
infringement. PSC once again claimed that
its "Platinum" trademark was being
infringed upon by PTI, and that PTI’s use
of the "Platinum" mark was causing
confusion in the marketplace. PSC sought
compensatory damages, treble damages, and
injunctive relief. PTI informed Federal
of the suit and tendered its defense
pursuant to the insurance policy. Federal
refused to defend or indemnify PTI. As a
result, PTI, without Federal, opened
settlement negotiations with PSC. PSC’s
settlement demands were based on its own
calculations of what it would cost to-re-
brand the company, and were in excess of
$20 million. PTI’s offers were initially
less than ten percent of that figure, and
later roughly doubled, based on PTI’s own
estimate that re-branding would cost no
more than $7 million. PTI and PSC
eventually agreed on a $10 million
package, including $4 million in cash and
$6 million in OEM software credits, which
would allow PSC to acquire PTI software
at no cost and potentially resell it for
a profit. Pursuant to the settlement
agreement, PSC released and dismissed all
of its claims against PTI and assigned
all of its "Platinum" related trademarks
to PTI.
After the settlement was entered into,
a PTI employee recorded the "Platinum"
trademark as a new "asset" with a value
of $4 million and PTI began depreciating

-- 3 of 11 --

this asset. After the settlement in 1999,
PSC changed its name to Epicor Software
Corporation. Epicor has not used any of
the OEM credits and offered to take a
one-time cash payment of between $2.5 and
$3 million in lieu of the OEM credits.
ANALYSIS
A. Standard of Review
The parties dispute the proper standard
of review in this case. We review a
district court’s factual conclusions
under the familiar clear error standard.
See, e.g., Brunswick Leasing Corp. v.
Wisconsin Central, Ltd., 136 F.3d 521,
526 (7th Cir. 1998). "A finding is
’clearly erroneous’ when although there
is evidence to support it, the reviewing
court on the entire evidence is left with
the definite and firm conviction that a
mistake has been committed." United
States v. United States Gypsum Co., 333
U.S. 364, 395 (1948). In contract
interpretation cases, we review a
district court’s interpretation of an
unambiguous contract de novo. Central
States, Southeast and Southwest Areas
Pension Fund v. Kroger Co., 226 F.3d 903,
910 (7th Cir. 2000), as corrected by, 241
F.3d 842 (7th Cir. 2001). If the contract
is ambiguous, a more deferential standard
of review is applied to the
interpretation of the terms and factual
findings. Id. In cases of mixed questions
of law and fact the standard is
oftentimes clear error (or abuse of
discretion), though plenary review may be
used when certain factors indicate it is
warranted or needed. See Cook v. City of
Chicago, 192 F.3d 693, 696-97 (7th Cir.
1999). This case turns on the factual
issue of whether the settlement was a
purchase of trademark assets or a release
of legal liability, therefore we review
for clear error. Even though this is a
deferential review, it is by no means a
rubber stamp.
B. Reasonableness of the Settlement
Amount
The district court granted PTI’s motion
for judgment on the pleadings finding
Federal breached its duty to defend, and
under Illinois law Federal is thereby
estopped from relying on certain "policy
defenses." Ins. Co. of the State of Pa.
v. Protective Ins. Co., 592 N.E.2d 117,

-- 4 of 11 --

121 (Ill. App. 1st Dist. 1992). Several
of Federal’s arguments, including the
"known loss doctrine" barring plaintiff’s
recovery, are also defenses to the breach
of the duty to defend. As Federal did not
preserve these issues for review, we need
not address them. See Outboard Marine
Corp. v. Liberty Mut. Ins. Co., 607
N.E.2d 1204, 1209-11 (Ill. 1992)
(outlining the "known loss doctrine").
Federal argues that the settlement
amount was not reasonable because PTI
purchased the "Platinum" trademark, an
asset, thus the settlement was more than
merely a release of legal liability.
PTI’s counters, stating that Federal’s
argument constitutes a "policy defense"
and is barred. Though policy defenses are
barred at this stage, other
considerations and defenses arise where a
settlement is involved because there is
"the additional concern that the
settlement was entered into in order to
obtain insurance coverage for an
otherwise uninsurable claim." United
States Gypsum Co. v. Admiral Ins. Co.,
643 N.E.2d 1226, 1241-46 (Ill. App. 1st
Dist. 1994). In order to alleviate this
concern, the insured is required to show
that, among other things, the "amount of
the settlement was reasonable." Id. at
1249-51; Caterpillar, Inc. v. Great Am.
Ins. Co., 62 F.3d 955, 966-67 (7th Cir.
1995); Illinois Tool Works Inc. v. The
Home Indem. Co., 24 F. Supp. 2d 851, 854
(N.D. Ill. 1998); West Am. Mortgage Co.
v. Tri-County Reports, Inc., 670 F. Supp.
819, 821 (N.D. Ill. 1987); see also Fid.
& Cas. Co. of New York v. Mobay Chem.
Corp., 625 N.E.2d 151, 159 (Ill. App. 1st
Dist. 1992); St. Michael’s Orthodox
Catholic Church v. Preferred Risk Mut.
Ins. Co., 496 N.E.2d 1176, 1178-79 (Ill.
App. 1st Dist. 1986). For instance, a
defendant may raise the defense that the
policy was not in effect when the injury
occurred or that the policy does not
cover the type of damages sustained, as
when compensatory but not punitive
damages are covered. See generally United
States Gypsum, 643 N.E.2d at 1230-52.
Federal may raise the argument that a
portion or all of the settlement was for
the purchase of PSC’s trademark assets,
and not to release PTI from liability for
trademark infringement. Cf. Zurich Ins.
Co. v. Killer Music, Inc., 998 F.2d 674,
679-80 (9th Cir. 1992) ("When the issue
of the amount of a reasonable settlement

-- 5 of 11 --

in good faith is addressed on remand,
Zurich will have the opportunity to
demonstrate that some portion, if not
all, of the settlement amount is
allocable to the value of the songs which
Killer received in the settlement
agreement.").
1. the cash payment
The facts show that prior to instituting
the trademark infringement suit against
PTI, PSC attempted to sell its trademark
to PTI with a price based on the cost of
re-branding the company. Only after a
sale price could not be agreed upon did
PSC sue PTI for infringement. PSC’s
subsequent settlement demands were based
on the re-branding costs. PTI’s
settlement offer, in turn, was similarly
based on its calculations of PSC’s re-
branding costs. The settlement agreement,
in addition to a release of liability,
provided for the assignment of the
"Platinum" trademark to PTI. The
"Settlement Agreement" was also called a
"Trademark Assignment Agreement" by the
parties. Then, after the settlement, PTI
labeled the trademark an "asset" and
began depreciating it.
Using a form of factual cognitive
dissonance, PTI argues that the
trademarks were of no value to it.
However, the fact that PTI previously
offered to pay PSC $250,000 for the
trademark shows the trademark had some
value to PTI. Moreover, PTI’s no-value
argument is wholly inconsistent with
PTI’s prior assertion that it was facing
enormous liability for invading PSC’s
markets. PTI’s stated objective was to
expand its business into new markets,
including markets reserved to PSC in the
1993 settlement. Part of the reason PTI
agreed to the $10 million settlement was
to relieve it from any future liability,
thereby allowing PTI to pursue a market
expansion that previously would have
resulted in infringement.
The self-serving valuation of PTI’s
potential liability, in the hundreds of
millions of dollars, by PTI’s counsel was
wholly speculative, as the district court
recognized when ruling on the motions for
summary judgment. Platinum Tech., Inc. v.
Federal Ins. Co., 2001 WL 109814 at *5
(N.D. Ill. Feb. 2, 2001). And the initial

-- 6 of 11 --

settlement offer amounts are of little
evidentiary value considering the fact
that they were based not on potential
liability, but on re-branding costs.
According to the parties’ own agreement,
PSC’s "Platinum" trademark was worth $4
million, and PTI purchased it in the
settlement/assignment agreement. The $4
million cash payment to PSC was not made
as part of a "reasonable settlement
agreement" to relieve PTI of its
liability to PSC for trademark
infringement. United States Gypsum Co.,
643 N.E.2d at 1249-51. Based on our
review of the entire record, we conclude
the district court clearly erred in
finding that none of the settlement
amount was for the purchase of
trademarks.
2. the OEM credits
Generally, the purpose of a damage award
"is to place the nonbreaching party in
the position he would have been in had
the contract been performed, but not to
place him in a better position or provide
him with a windfall recovery." Kohlmeier
v. Shelter Ins. Co., 525 N.E.2d 94, 102-
03 (Ill. App. 5th Dist. 1988). The amount
of damages in insurance policy cases is
sometimes determined by the contract pro
visions, such as a liquidated damages
clause, or by proof of actual damages.
See United States Fid. and Guar. Co. v.
Klein Corp., 558 N.E.2d 1047, 1052 (Ill.
App. 1st Dist. 1990); Kohlmeier, 525
N.E.2d at 102. However, damages cannot be
based on potential or future loss, unless
it is reasonably certain to occur, nor
can damages be based on speculation and
conjecture. See Schoeneweis v. Herrin,
443 N.E.2d 36, 42 (Ill. App. 5th Dist.
1982); Harp v. Illinois Cent. Gulf R.R.
Co., 370 N.E.2d 826, 829 (Ill. App. 5th
Dist. 1977). Federal cannot escape its
obligation to repay PTI for its loss if
the damages award is based on a past or
current loss and the amount is
ascertainable. Cf. UNR Indus., Inc. v.
Cont. Cas. Co., 942 F.2d 1101, 1103-06
(7th Cir. 1991).
The settlement in this case made
liability and the OEM credit figure
clear; however, the cash valuation of the
OEM credit was based on speculation. The
facts show that the OEM credits do not

-- 7 of 11 --

have an actual value of $6 million, or
even $4.6 million (the cash value the
district court appears to have assigned
to the credits). PSC/Epicor had already
offered to take far less than $4.6
million in the form of an one-time cash
payment of between $2.5 and $3 million,
and, to date, PSC/Epicor has not used any
of the OEM credits. In light of this
objective valuation by PSC/Epicor, and
additional points advanced by Federal,
the calculation by PTI’s expert clearly
had no proper basis and was speculative.
See Schoeneweis, 443 N.E.2d at 42
(holding that "the party seeking to
recover" need "not only to establish that
he sustained damages but also to
establish a reasonable basis for
computation of those damages"). Given
that the exact value of the OEM credits
is speculative, requiring Federal to
reimburse PTI in the amount of $6 million
or $4.6 million for an expense PTI may
never incur would allow PTI to reap a
significant windfall. See Kohlmeier, 525
N.E.2d at 102-03. Therefore, we vacate
the district court’s valuation and remand
this issue for reconsideration to
determine the current monetary value of
the OEM credits.
The evidence relied on by the district
court to value the OEM credits was
clearly not credible in light of the
objective valuation of the credits by
PSC/Epicor. Thus, in considering this
issue, the district court should not only
look to expert valuations, but also seek
to determine if there are additional
objective indicators of the value of the
OEM credits beyond those mentioned in
this opinion.
C. Prejudgment Interest
Federal argues that prejudgment interest
only accrued from the time the district
court entered judgment against Federal
because the amount of damages was, until
then, undetermined. In the alternative,
Federal argues that prejudgment interest
should have been awarded at the statutory
rate and not the equitable rate. The
issue of prejudgment interest has been
largely rendered moot by our decision
today. Because PTI is not entitled to
part of the original damages award, it is
logically not entitled to prejudgment
interest for that portion. Prejudgment
interest for the OEM credits is another

-- 8 of 11 --

matter.
In Illinois, prejudgment interest,
whether grounded in a statute or equity,
is based on the concept of fairness and
is awarded to make the plaintiff whole
for the loss of use of money wrongfully
withheld. In re Estate of Wernick, 535
N.E.2d 876, 888 (Ill. 1989). "Generally,
prejudgment interest ’is not recoverable
absent a statute or agreement providing
for it.’" New Hampshire Ins. Co. v.
Hanover Ins. Co., 696 N.E.2d 22, 26 (Ill.
App. 1st Dist. 1998) (quoting City of
Springfield v. Allphin, 413 N.E.2d 394,
395 (Ill. 1980)). The Illinois Interest
Act, 815 ILCS sec. 205/2 (West 2001),
provides a statutory rate of 5%, or when
circumstances allow, a court may award
interest at an equitable rate (using the
Act as a benchmark). 815 ILCS sec. 205/2
("Creditors shall be allowed to receive
at the rate of five (5) per centum per
annum for all moneys after they become
due on any bond, bill, promissory note,
or other instrument of writing . . .").
And under Illinois law, insurance polices
are written instruments. See, e.g., J.R.
Couch v. State Farm Ins. Co., 666 N.E.2d
24, 27-28 (Ill. App. 3d Dist. 1996).
In an action in equity, prejudgment
interest may be awarded at a rate
determined by the court. Wernick, 535
N.E.2d at 888-89. An Illinois appellate
court has thus concluded that for actions
at law, including breach of contract,
prejudgment interest cannot be awarded at
an equitable rate. Cont’l Cas. Co. v.
Commonwealth Edison Co., 676 N.E.2d 328,
331-34 (Ill. App. 1st Dist. 1997). On the
other hand, some of the broad language in
Wernick indicates that the statutory rate
is merely a benchmark used "to establish
a rate sufficient to compensate" because
the statute has not kept pace with the
times. Wernick, 535 N.E.2d at 888-89 ("We
conclude that the interest statute is a
remedy separate from the equitable powers
of the court to make an injured party
whole."); see also Cummings v. Beaton &
Associates, Inc., 618 N.E.2d 292, 310-12
(Ill. App. 1st Dist. 1992) ("Wernick does
open the way for courts to apply the
prime rate as a means of better
compensating injured parties . . .").
Continental rejected this broad reading
of Wernick, reasoning the plaintiff’s
theory that "every circuit court judge
has equitable powers" merely described

-- 9 of 11 --

the judge’s power based on the "relief
available to a plaintiff [ ] derived from
the substance of the claim before it."
Cont’l Cas. Co., 676 N.E.2d at 331-34
(citations omitted). PTI cites Wernick as
support for the equitable award in this
case, though PTI does not argue that this
was an action in equity.
Federal argues that absent a finding of
bad conduct, prejudgment interest can
only be awarded at the statutory rate.
The broader rule that equitable interest
awards are unavailable absent bad,
vexatious, or unreasonable conduct is
dispositive, and we need not reach the
issue of whether the increased equitable
interest award was proper under the
circumstances. There is extensive support
for this proposition in Wernick,
Continental Casualty, and Cummings.
Wernick, 535 N.E.2d at 888-89 ("The
equitable award of interest is based on
the circumstances surrounding Macks’
breach of fiduciary duty . . ."); Cont’l
Cas. Co., 676 N.E.2d at 331-34 ("We also
observed that the element of bad conduct
necessary for either a statutory or
equitable award of interest was not
present."); Cummings, 618 N.E.2d at 310-
12 (commenting, while affirming the award
of prejudgment interest at the statutory
rate that: "[u]nlike the situation in
Wernick, McDonald’s is not in a fiduciary
relationship with the Cummingses and the
award of prejudgment interest . . . was
based on the provision that permits
interest to accrue on written instruments
after the money is due."). Absent some
type of bad, vexatious, or unreasonable
conduct prejudgment interest should be
awarded at the statutory rate of 5% on
written instruments. cf. Krantz v.
Chessick, 668 N.E.2d 77, 80-81 (Ill. App.
1st Dist. 1996).
In addressing the section 155 claim, the
district court specifically found that
Federal did not engage in vexatious
conduct. Instead, the court found that
Federal was involved in "an honest
dispute as to whether it had a legal duty
to defend PTI in its lawsuit with PSC."
Platinum Tech., Inc., 2001 WL 109814 at
*10. Nothing that happened during trial
or after indicates that Federal later
engaged in any bad conduct to warrant
imposition of a rate higher than the
statutory rate. The district court twice
characterized Federal’s conduct as merely

-- 10 of 11 --

"wrongful" in its oral ruling of judgment
and in its denial of Federal’s post trial
motions. Rather, the district court made
the equitable determination that a higher
interest rate was required to make PTI
whole. However, as we noted, the interest
rate provided for under Illinois law for
instruments of writing is 5%, and because
the district court did not find any bad
or vexatious conduct, we need not
consider whether the increase based on
equitable considerations was warranted.
We conclude that the district court
abused its discretion in awarding
prejudgment interest at an equitable rate
and vacate that award.
Prejudgment interest may be recovered on
written instruments, including insurance
policies, calculated from the time the
money was due under the policy. 815 ILCS
sec. 205/2; J.R. Couch, 666 N.E.2d at 27-
28. And even though the exact monetary
value of the OEM credits remains
undetermined, prejudgment interest can be
awarded for that portion of the damages
award. Once the settlement was entered
into, the amount of the OEM credits was
known to Federal ($6 million). Though the
exact cash value of the credits was not
certain, it was by no means unprovable.
Cummings, 618 N.E.2d at 310-11. More
importantly, the amount due is
susceptible to judicial determination,
therefore prejudgment interest can be
awarded. See New Hampshire Ins. Co., 696
N.E.2d at 27-28; J.R. Couch, 696 N.E.2d
22, 27-28; Bank of Chicago v. Park Nat’l
Bank, 640 N.E.2d 1288, 1296 (Ill. App.
1st Dist. 1994); Martin v. Orvis Brothers
& Co., 323 N.E.2d 73, 82-85 (Ill. App.
1st Dist. 1974); L.W. Foster Sportswear
Co. v. Goldblatt Bros., Inc., 356 F.2d
906, 910-11 (7th Cir. 1966).
CONCLUSION
We Reverse the judgment of the district
court because the $4 million cash payment
by PTI to PSC was for the purchase of a
trademark asset and not part of a
reasonable settlement of PSC’s claims
against PTI, and Remand with directions to
the district court to determine the
current monetary value of the OEM credits
and recalculate the prejudgment interest
at the statutory rate once the precise
value of the credits is ascertained. Rule
36 to apply on the remand.

-- 11 of 11 --