A $6 million settlement in a Telephone Consumer Protection Act suit was reasonable, an Illinois federal court found, ordering two insurers to indemnify the marketing company that sent five illegal faxes to more than 4,000 recipients.

The president of M&M Rental Center purchased a list of thousands of names and fax numbers from a marketing company in 1997. Between June 2002 and June 2006 M&M sent five fax blasts to the numbers on the list.

Eclipse Manufacturing Company, one of the recipients, filed a putative class action alleging violations of the TCPA. One problem: neither side could locate the copies of faxes #1 through #3 for the litigation.

The federal court judge overseeing the case therefore granted partial summary judgment for both parties. She ruled that the plaintiffs could not recover for faxes #1 through #3 because without the fax itself there was no genuine issue of material fact as to whether the faxes were advertisements within the meaning of the statute. However, she granted summary judgment for the plaintiffs as to faxes #4 and #5, and entered a judgment in the amount of $3,862,500 ($500 per 7,725 faxes total).

Postjudgment motions followed, including a motion by the class seeking reconsideration of the court’s ruling on faxes #1 through #3. The parties also began settlement talks, with M&M revealing that it could not pay the judgment and would have to rely upon insurance assets.

The first round of settlement talks, which included M&M’s two insurance carriers, Maxum Indemnity Company and Security Insurance Company, did not reach a deal. A second conference – which the insurers declined to attend – reached an agreement of $5,817,150. The total included the court’s $3.8 million judgment as well as an additional $1,954,650 for faxes #1 through #3 (discounted to $150 per fax).

The court approved the settlement. M&M transferred its rights to the class, which then sought recovery from the insurers. But both Maxum and Security objected, asserting, in part, that the settlement was a collusive deal aimed at them, and that M&M agreed to it despite having inadequate finances.

Under Illinois law, the insured had to demonstrate that the settlement was entered into in “reasonable anticipation of liability” to rebut an allegation of collusion. The court noted that anticipation of liability was certainly reasonable with regard to the $3.9 million judgment for faxes #4 and #5. But what about for the first three faxes?

Despite summary judgment having been entered in M&M’s favor, a chance still existed that a reversal could occur, the court held.

“Certainly, prevailing on the plaintiffs’ postjudgment motion was unlikely,” U.S. District Court Judge Joan Humphrey Lefkow wrote. “That unlikelihood aside, the court of appeals does from time to time disagree with a district judge’s conclusion that no genuine issue of material fact exists, meriting a trial.”

Even with the unlikelihood of reversal, the “totality of the evidence” pointed “to the conclusion that the settlement as to faxes #1 – #3 was reached in reasonable anticipation of liability for those faxes,” the court held. A “seasoned magistrate judge” oversaw the settlement negotiations, “a strong indication” that potential liability was fully and fairly assessed. The insurers were invited to participate but declined, showing that the negotiations were conducted in good faith, and the deeply discounted value of the first three faxes reflected that the weakness of the claim was considered, Judge Lefkow said.

“Even though the odds of victory were strongly in M&M’s favor as to faxes #1 – #3, there was potential for the district judge to change her mind about summary judgment or for the court of appeals to reverse, causing at least delay, uncertainty, and further litigation expense, factors typically favoring settlement.”

Judge Lefkow also found that the TCPA claims, albeit made by corporate plaintiffs, invaded their privacy within the scope of the policy’s advertising injury provision. The insurers contended that because the plaintiffs were corporate entities, the settlement did not resolve privacy violations but only involved property damage, which was not covered by the policy.

“Since the TCPA makes no distinction among individuals, corporations, and other business entities, it follows that the TCPA created by statute a right of privacy for all three: a right not to be intruded upon by unwanted faxes,” she wrote.

To read the opinion in Maxum Indemnity Company v. Eclipse Manufacturing Co., click here.

Why it matters: As TCPA cases continue to proliferate, advertisers should be cognizant of the extent of their insurance coverage and the scope of the relevant policy. The policyholder managed to score two significant victories in the Maxum case: First, the court recognized that a “reasonable anticipation of liability” existed despite the judge’s granting of summary judgment for three of the faxes on which the TCPA claims were based, and thereby held that the insurers must indemnify the insured for the settlement agreement. Secondly, the claims at issue fell under the advertising injury provisions of the policy, the court determined, even though the plaintiffs were corporate entities and not individuals. The decision also illustrated the result of a May decision from the Illinois Supreme Court, holding that statutory damages under the TCPA are remedial in nature, and are not uninsurable punitive damages.