Cadwalader Wins Reversal—and a Censure—in Mead Johnson Insurance Row

, The Litigation Daily

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Lawyers at Cadwalader, Wickersham & Taft probably have mixed feeling about a ruling on Tuesday from Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit.

On the one hand, Cadwalader won a reversal that will allow client Mead Johnson & Co. to seek $13.5 million from two insurers for a verdict it suffered in a product disparagement case. On the other hand, Posner held that insurer National Union does not have to cover Mead Johnson's $15 million settlement in a related consumer class action. And, in a pointed slap at Cadwalader, Posner blasted the firm for resorting to "shenanigans" in arguing the appeal.

The insurance dispute arose from a lawsuit filed against Mead Johnson by Perrigo Company unit PBM Products over claims made about baby formula. Mead Johnson had suggested in ads for its Enfamil formula that cheaper generic formulas, like PBM's product, could harm a baby's brain and eye development. PBM sued for $500 million in 2009; a jury awarded $13.5 million later that year, and the verdict was upheld on appeal.

Mead Johnson asked its insurers, National Union and Lexington (both American International Group Inc. subsidiaries), to cover the award. But they balked because Mead Johnson hadn't notified them about the case until after the verdict. Mead Johnson conceded the delay but maintained that the insurers were still on the hook. The trial court agreed with the insurers that Mead Johnson's late notice voided the coverage and granted them summary judgment.

In reviewing the case, Posner held that U.S. District Judge Richard Young of the Southern District of Indiana had applied the wrong legal standard. Young held that when an insured fails to give timely notice of an insurable event, there is an irrefutable presumption that the insurer has suffered harm. But under Indiana law, Posner held, the presumption is rebuttable. For this reason he remanded the case for the lower court to determine if Mead Johnson's delay caused the insurers any harm.

The Cadwalader argument that so angered Posner, meanwhile, turned on a technical point of contractual interpretation. National Union and Mead Johnson had amended their policy so that Mead Johnson would not be deemed to have notice of an insurable "occurrence" (defined as an accident) unless its director of risk management was notified. Cadwalader maintained that the amendment also applied to lawsuits, and since Mead Johnson's risk management director wasn't notified of the PBM case until after the verdict, the firm argued that Mead Johnson didn't have a duty to notify the insurance companies until that time. Posner called that interpretation of the amendment "frivolous," and he charged Cadwalader with intentionally mischaracterizing the amendment to support its position.

"That a major law firm would engage in such shenanigans distresses us," Posner wrote for the unanimous panel. "The firm's argument regarding the amendment to the National Union insurance policy is censurable, and we hereby censure it."

Posner also expressed skepticism that Mead Johnson's director of risk management wasn't notified of the PBM case until after the verdict. He observed that the panel asked the company's counsel at oral argument why the insurers were notified so late, and he said he didn't know. "We find this hard to believe," wrote Posner, "but are left in the dark."

The insurers did prevail on their argument that their policies covering claims arising out of product disparagement did not cover consumer false advertising lawsuits.

Barbara Michaelides of Chicago's Bates Carey Nicolaides, who represented the insurance companies, didn't respond to a request for comment.

Hal Shaftel of Cadwalader argued the appeal for Mead Johnson in September. In a statement, a Cadwalader spokesman called Tuesday's ruling "a key victory for our client Mead Johnson and for policyholders generally." The firm added: "We have great respect for the court and regret that, while ruling in our client's favor, the court objected to one of our arguments. We respectfully disagree with the court's observation, which has no bearing on our client's victory."

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