Lonstein Law Office, P.C. v. Starstone Specialty Insurance Company

Background

Lonstein Law Office, a law firm, had been retained by DIRECTV to find and investigate people allegedly violating DIRECTV’s terms of service. Lonstein was later sued several times for allegedly using aggressive and harassing tactics. Its professional insurance policy with Evanston Insurance was exhausted by those suits in July 2021.

Lonstein then sued Evanston and DIRECTV for indemnification, meaning payment for losses or expenses. DIRECTV compelled arbitration, and in that arbitration it asserted a counterclaim accusing Lonstein of misappropriating DIRECTV’s trade secrets. The alleged misappropriation involved a declaration from a former DIRECTV employee that Lonstein filed in the indemnification suit.

Lonstein sought coverage for the trade-secrets claim under a 2021–2022 policy issued by StarStone. StarStone denied coverage. The policy covered claims against Lonstein but excluded claims based upon, arising out of, directly or indirectly resulting from, or in any way involving a wrongful act or related wrongful act that had been the subject of a notice or claim reported under another insurance policy.

Parties’ Arguments

StarStone argued that the trade-secrets claim was connected to the same wrongful acts—Lonstein’s allegedly extortive or aggressive investigative tactics—that had been the subject of claims under the Evanston policy. StarStone also argued that, even if the trade-secrets claim itself was not based on those acts, DIRECTV’s counterclaim had to be considered as a whole and its other causes of action were based on the same acts.

Lonstein argued that the policy terms were ambiguous and should therefore be interpreted in its favor. It also relied on cases involving different or undefined policy language and argued that the relationship between the earlier claims and the trade-secrets claim could not be decided on a motion to dismiss.

Court’s Analysis

On a motion to dismiss, the court determines whether the complaint contains enough factual material to state a plausible claim. The court generally accepts the complaint’s factual allegations as true and draws reasonable inferences for the plaintiff. The court said it could consider the insurance policy attached to the complaint and publicly filed documents from other cases.

Applying New York law, the court began with the policy’s language. It found the exclusion’s wording “clearly and unmistakably broad.” The exclusion applied not only to claims directly based on a previously reported wrongful act, but also to claims that indirectly resulted from or were in any way connected to that act.

The court concluded that Lonstein’s investigative tactics had the required connection to the trade-secrets claim. Those tactics led to the lawsuits against Lonstein. After the Evanston policy was exhausted, Lonstein sought indemnification from DIRECTV, and that dispute led to the filing of the declaration that allegedly exposed DIRECTV’s trade secrets. The court therefore found that Lonstein’s alleged tactics were a but-for cause of the alleged trade-secrets violation, even though other causes or intervening events might also have been involved.

The court rejected Lonstein’s comparison to cases requiring more specific overlapping facts or involving undefined terms. It also concluded that the complaint itself documented the relationship among the earlier collection-related claims, the indemnification dispute, the declaration, and the trade-secrets counterclaim. Because the first coverage-exclusion argument was sufficient, the court did not reach StarStone’s second argument concerning the counterclaim as a whole.

Disposition

The court granted the motion to dismiss. It dismissed the plaintiffs’ claims with prejudice, directed the Clerk of Court to enter judgment for StarStone, and closed the case.