SPL also received crude heparin directly from consolidators and manufactured Heparin Sodium, USP, at a facility in Wisconsin, which it then sold to Baxter. Baxter finished the heparin and supplied it to hospitals, where the drug was administered to patients.

Following reports of severe patient reactions to heparin, including patient deaths, Baxter and SPL recalled all of their U.S. heparin products between January and March 2008. Investigations concluded that the heparin had been contaminated by oversulfated chondroitin sulfate. The parties agreed that the contaminated heparin that had been administered to patients had been sourced through CZSPL.

SPL sourced heparin from multiple suppliers, however, and supplied heparin to Baxter that had not been purchased from CZSPL. Some of the non-CZSPL heparin sold by SPL to Baxter also tested positive for contamination, but had not been administered to patients. The source of the contamination in the heparin SPL purchased from CZSPL was traced to the raw materials, which had been contaminated before they had been obtained by CZSPL.

The first heparin lawsuits were filed in March 2008. In total, 574 federal lawsuits and 490 state lawsuits were filed against SPL, Baxter, or American Capital, Ltd., which, in 2006, had formed and acquired an interest in SPL Acquisition Corp., which acquired SPL Holdings, LLC, which wholly owned SPL.

Of the 1,064 suits referred to as the “heparin litigation,” insurers calculated that American Capital was sued in approximately 68 percent and that only three percent of the heparin litigation suits were brought against Baxter without naming American Capital or SPL. Some of the suits named CZSPL as a defendant or alleged that the contaminated heparin a patient had received had been sourced through the Changzhou joint venture, but many of the complaints did not mention Changzhou or reference a joint venture.

American Capital provided notice of the heparin litigation to Charter Oak Fire Insurance Company and Travelers Property Casualty Company of America, its commercial general liability and excess insurance carriers. Charter Oak and Travelers are subsidiaries of The Travelers Companies, Inc.

Shortly thereafter, the insurers decided that the heparin lawsuits fell outside the coverage of the policies, and filed a declaratory judgment action seeking rescission or reformation of the policies. American Capital and SPL filed a variety of counterclaims.

The parties moved for summary judgment.

The District Court's Decision

The district court ruled that Charter Oak had breached its duty to defend American Capital in the heparin litigation under three CGL policies; Travelers had breached its duty to defend SPL in the heparin litigation under an excess policy; and Charter Oak had breached its duty to defend SPL in the heparin litigation under two CGL policies.

The district court then examined the claim for $62,717,069.00 in damages sought by American Capital and SPL.

The district court pointed out that American Capital and SPL had provided an exhibit tallying 894 invoices reflecting time recorded by attorneys in the law firms' recording mechanism from which the invoices were compiled and vendor invoices received from vendors and prepared in the ordinary course of business. These invoices, the district court decided, were “normal, routine billing records.”

The district court noted that some of the underlying invoices had been redacted, but that the amount sought by American Capital and SPL had been reduced from the total of the invoices to account for those redactions.

The 894 invoices, the district court said, included “detailed descriptions of the services performed on the heparin cases by each attorney to the tenth of an hour over seven-and-a-half years of litigation.”

In the district court's opinion, these invoices provided “far more than a compilation of hours multiplied by hourly rates” and they enabled the insurers and the court to scrutinize the legal services provided in the defense of the heparin litigation to American Capital, SPL, and Baxter.

The district court noted that Daniel William Groskreutz, who primarily served as the chief financial officer of SPL during his tenure at the company from June 2004 until March 2015, had testified that:

- The heparin litigation presented “a bet-the-company type of exposure” and that SPL had determined it “needed to have the best law firm that we could find [to] handle this.”

- When the first claims were filed, he estimated that the claims could “escalate” into the “tens of millions of dollars.”

- SPL chose Arnold & Porter LLP as its counsel in the summer of 2008 because the firm was “a nationally recognized firm that had handled large litigation like this before, particularly in products liability” and the heparin litigation involved many “very complex cases . . . spread across the country.”

- He understood that Arnold & Porter's hourly rates for partners for this type of work were “[u]p to $800 an hour” and considered an upper limit of “$225 an hour for a senior partner” proposed by a different insurer “really pretty shocking” given the exposure the heparin litigation presented.

As the district court explained, after a joint defense agreement was reached with Baxter and American Capital, Kirkland & Ellis LLP assumed the heparin litigation joint defense, although Arnold & Porter continued to represent SPL as well. The district court added that Mr. Groskreutz also testified that:

- Beginning in 2009, “[w]hat seemed like a significant number of [heparin] cases, in the tens and maybe hundreds, kept growing and growing very, very rapidly. Before long, we were at 400, 500 cases. I believe the ultimate number was over 1,000 cases. So, the exposure grew just because the number of plaintiffs grew.”

- A bellwether trial took place, resulting in a $625,000 verdict for a single plaintiff, without a finding of negligence or punitive damages.

- SPL, therefore, was concerned that its exposure “was getting into the hundreds of millions of dollars potentially,” particularly after a ruling allowed state court heparin complaints to be amended to add a count for punitive damages against SPL.

The district court then ruled that, in light of the “complexity of the heparin litigation, the amount of time and labor involved over more than seven years, and the potential exposure the heparin defendants faced,” the heparin litigation defense costs represented in the American Capital and SPL exhibit were “reasonable and necessary.”

The district court concluded that American Capital and SPL had incurred the heparin litigation expenses they sought to recover, that the claims against Baxter, SPL, and American Capital were “not only reasonably related but inextricably intertwined,” and that American Capital and SPL were entitled to prejudgment interest under Maryland law of six percent per annum, accruing from the date of each invoice until the date of judgment. The district court then awarded breach of contract damages to American Capital and SPL in the amount of $62,717,069.00, plus prejudgment interest at six percent per annum from the date of each invoice until the entry of judgment, for the attorneys' fees and litigation expenses they had incurred to defend against the heparin litigation between January 18, 2009, and June 14, 2016.

The case is Charter Oak Fire Co. v. American Capital Ltd., No. DKC 09-0100 (D. Md. Aug. 3, 2017). Attorneys involved include: For The Charter Oak Fire Insurance Company, Travelers Property Casualty Company of America, Plaintiffs: Andrew Jay Graham, LEAD ATTORNEY, Steven Michael Klepper, Kramon and Graham PA, Baltimore, MD; Elizabeth C Sackett, Kevin J OConnor, Matthew E Bown, Peter G Hermes, PRO HAC VICE, Hermes Netburn O'Connor and Spearing PC, Boston, MA. For American Capital, Ltd., Scientific Protein Laboratories LLC, SMG, Defendants: John William Schryber, LEAD ATTORNEY, Andrew M Weiner, Reed Smith LLP, Washington, DC. For Baxter International, Inc., Baxter Healthcare Corporation, Interested Parties: Joseph Dowell Edmondson, Jr, LEAD ATTORNEY, Foley and Lardner LLP, Washington, DC; Carl W Shapiro, Cindy F Forman, PRO HAC VICE, Shapiro Rodarte and Forman LLP, Santa Monica, CA. For American Capital, Ltd., Counter Claimant: Andrew M Weiner, John William Schryber, Reed Smith LLP, Washington, DC. For Scientific Protein Laboratories LLC, SMG, Counter Claimants, Counter Defendants: Andrew M Weiner, John William Schryber, Reed Smith LLP, Washington, DC. For American Capital, Ltd., Counter Defendant: Andrew M Weiner, John William Schryber, Reed Smith LLP, Washington, DC; Elizabeth C Sackett, Hermes Netburn O'Connor and Spearing PC, Boston, MA. For The Charter Oak Fire Insurance Company, Travelers Property Casualty Company of America, Counter Defendants: Andrew Jay Graham, LEAD ATTORNEY, Kramon and Graham PA, Baltimore, MD; Elizabeth C Sackett, Kevin J OConnor, Matthew E Bown, Peter G Hermes, PRO HAC VICE, Hermes Netburn O'Connor and Spearing PC, Boston, MA.