Michael Daugherty, CEO of LabMD. (Courtesy photo)

Attorneys for an insurance company that arranged to settle a defamation case despite a client's objections told a federal judge in Atlanta Friday that no other Georgia judge has stopped an insurance company from settling a claim. 

Seth Friedman, a partner at Lewis Brisbois Bisgaard & Smith in Atlanta, told U.S. District Judge J.P. Boulee that a temporary restraining order barring Sentinel Insurance Co. from paying $750,000 to end the litigation would be "an extraordinary remedy" that would be a first in the state. He said it could also set a precedent that would strip insurance companies of any ability to resolve claims without going to trial.

Friedman said Sentinel has already spent more than $2.9 million defending Atlanta entrepreneur Michael Daugherty and his defunct medical lab, LabMD, against a 2013 defamation lawsuit brought by the owner of a defunct data security firm whose efforts to gin up business were at the heart of what became Daugherty's eight-year battle with the Federal Trade Commission over data security at LabMD.

Daugherty is seeking a temporary restraining order to stop SentineI from paying $750,000 to Tiversa owner Robert Boback. Boback filed the defamation claim in Pennsylvania after he failed to halt publication of Daugherty's 2013 book, "The Devil Inside the Beltway." The self-published book is Daugherty's personal account of his battle with the FTC stemming from a 2008 data breach at LabMD and Boback's role in the ensuing federal investigation. Daugherty eventually prevailed, but his business was destroyed. At issue in the defamation case are passages in the book and statements Daugherty publicly made about the book's contents.

Boulee took the matter under advisement after a three-hour hearing Friday. Sentinel attorneys have agreed not to pay Boback until after the judge issues a ruling.

Friedman acknowledged during the hearing that Sentinel arranged to settle the case, which was first filed in 2013, because it has already cost the insurance company "millions of dollars."

He said the terms of LabMD's insurance policy gives Sentinel the discretion to unilaterally settle claims without Daugherty's approval. Friedman dismissed arguments by Daugherty counsel Holly Pierson that Sentinel was operating in bad faith because it refused to investigate the validity of Boback's claims before agreeing to a six-figure payout. And he scoffed at any suggestion that there was any chilling effect on Daugherty's free speech or that it would created an irreparable harm.

Friedman said if Daugherty believes Sentinel has acted in bad faith, "They can sue us later. … The fight over whether it's in bad faith is for another day."

That assertion prompted Boulee to ask Sentinel's lawyers whether they would concede that any settlement must be made in good faith or whether they believed they could settle even if they did so in bad faith—effectively gambling as to whether Daugherty would sue them later.

"Certainly, we can injure the insured when we settle," Friedman replied. "But not in this case."

Pierson disagreed. She argued that a high-dollar settlement with Boback, with no admission of liability, would give Boback's meritless defamation claims against Daugherty the imprimatur of legitimacy. She noted that Daugherty's book is undergirded by the published findings of an FTC administrative law judge, an investigative report by the U.S. House of Representatives and an opinion from the U.S. Court of Appeals for the 11th Circuit—all detailing how Boback was involved in "a shakedown scheme."

Settling with Boback not only rewarded him handsomely, but Sentinel's settlement would irreparably harm Daugherty by foreclosing malicious prosecution claims he could otherwise bring, Pierson said. That would effectively chill Daugherty's First Amendment rights and undermine any ability to reclaim his own damaged reputation through a public jury trial.

Pierson also argued that, even though Sentinel may have the right under Georgia law to settle a claim without the approval of the insured, it cannot do so without first making a good faith effort to thoroughly investigate the validity of the claims.

"They have to act in good faith," she said. "They can't just injure us. That's the whole point of a TRO. There won't be a way to hold them [Sentinel and parent company The Hartford] accountable later."

Calling Sentinel's attorneys "tone deaf" for insisting that Daugherty would be "better off" once the case is settled, Pierson contended, "We would permanently have our First Amendment rights chilled, and the man who caused it would be $750,000 richer."