Gauntlett on Intellectual Property/Antritrust Insurance : Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

Notably a defense was provided by the insurer under reservation of rights which it agreed could create a right to retention of independent counsel, which was retained and which defended the insured at trial. Judgments were entered against Myer following affirmance by the Supreme Court of damage awards, including $150,000 on the defamation claim, $75,000 for injury to reputation and $75,000 for actual harm as well as $200,000 for high IIED.

Pharmacists’ argument was that despite the special verdict, the policy excluded defamatory statements which the insured knew or had reason to believe . . . were false. It urged that reason to believe incorporated negligence. Myer argued that such a construction would render the exclusionary language meaningless and nullify coverage.

It is axiomatic that constructions of exclusionary clauses to nullify coverage provisions are not reasonable. See, e.g., Safeco Ins. Co. v. Robert S., 28 P.3d 889, 894 (Cal. 2001) (rejecting construction of exclusion “so broad as to render the policy's liability coverage practically meaningless”). Thus, in an analogous context, courts have generally construed policy exclusions for “intentional” misconduct to bar coverage of defamatory statements made with malice or an intent to deceive, while leaving intact coverage of defamatory statements made negligently. See, e.g., Uhrich v. State Farm Fire & Cas. Co., 135 Cal.Rptr.2d 131, 139 (Ct.App.2003) (rejecting claim that coverage of defamation was precluded under intentional-misconduct exclusion since “an insured could be liable for defamation for negligently publishing a defamatory statement”) . . . .

Id. at *4.

The court also found that the “had reason to believe” standard was not limited to negligence because “knew or had reason to believe” was a shorthand for a state of mind equivalent to gross or willful misconduct or even actual malice, the higher standard constitutionally required in certain defamation cases, citing O’Hara v. Bd. of Educ., Nos. 01-4269, 02-3093, 2003 WL 21774013, at *3 (6th Cir. July 30, 2003) (finding no showing of recklessness in the context of defamation where plaintiff did not contend that defendant “knew or had reason to believe the statements he made were false.” Id. at *4.

Although the jury award of $150,000 in defamation was differentiated between covered and uncovered conduct, the court observed that:

It is settled law in Vermont, however, that once an insured has demonstrated coverage under a policy, the burden falls “on the insurer to show that a third party's claim against the insured is entirely excluded from coverage.” State v. CNA Ins. Cos., 172 Vt. 318, 324, 779 A.2d 662, 667 (2001).

Id. at *5.

As Pharmacists monitored the defense conducted through independent counsel, and it did not demand the use of special interrogatories, it was obligated to notify the trial court and the parties of the potential apportionment issue and of the need for special interrogatories allocating damages to seek permission if necessary to attend the charge conference to propose such interrogatories, or even to intervene in the litigation if all else failed. See e.g., Duke v. Hoch, 468 F.2d 973, 979 (5th Cir.1972). Id. at *5.

The court also cited 1 A Windt, Insurance Claims & Disputes § 6:27, at 6-227 to 228 (5th ed. 2007) for support of its analysis on this issue. The court found that the defense fees incurred on appeal were also within the insurer’s obligation, citing 22 E. Holmes, Holmes’ Appleman on Insurance § 136.11, at 86 (2nd ed. 2003) (“Insurer is obligated to bring an appeal ‘when there appear to be reasonable grounds that a substantial interest of the insured may be served or protected by an appeal’”). Id. at *6.

Also of interest was an intellectual property laws and rights exclusion applicable to both policies. The underlying lawsuit in San Francisco Superior Court entitled Align Technology, Inc. v. Ortho Clear, Inc., et al., No. CGC-05-438361 asserted 15 causes of action including unfair competition in violation of CBC § 17200 misappropriation of trade secrets, breach of contract, common law and fair competition, intentional interference with economic advantage, conversion, unjust enrichment and civil conspiracy.

Allegedly, former Align employees attempted to “unlawfully utilize Align’s intellectual property, confidential information and employees to start a competing dental device company.” Litigation was one including five lawsuits in total and one ITC action. The cross-complaint against Align asserted 17 causes of action including unfair competition in violation of Cal. Bus. & Prof. Code § 17200, common law and fair competition, intentional interference with respect to economic advantage, defamation (libel), defamation (slander) and breach of contract.

Align allegedly “embarked on a deliberate strategy to destroy OrthoClear … before its first sale was ever undertaken. This strategy manifested itself in a pattern of misconduct, of which the Align lawsuit itself is but a small part. Align’s misconduct encompasses threatening employees that they would be sued personally and destroyed financially if they joined OrthoClear, holding a press conference in which Align defamed the founding members of OrthoClear, instituting the present lawsuit to preclude competition slow [sic] an emerging company from entering the marketplace, and interfering with potential investors interested in OrthoClear.” Id. at *3.

The libel and slander counts arose from communications to other Align employees and the general public who were the recipient of defamatory statements. A number of communications were referenced. These included a series of questions implying that

“(a) OrthoClear's product was ‘merely a copycat’ that infringed on Align's patents, (b) OrthoClear could not possibly compete lawfully with Align and that its founders had violated noncompetition and nonsolicitation agreements, (c) OrthoClear's sources of funding were suspect, and (d) OrthoClear's stock options granted to its employees would not be valuable.”

Id. at *3.

In addition,

On or around February 5, 2005, Align issued a memorandum to its non-management employees which “grossly misrepresented the value of the stock options OrthoClear had promised .... [and] implied that OrthoClear would never go public, would not survive litigation with Align, and would never become profitable.” Id. ¶ 53. The memorandum “specifically maligned Chishti's track record during his tenure at Align.”

Id. at *4.

Settlement of the matter thereafter arose including a one-time payment of $20 million from Align to OrthoClear. Following a February 17, 2005 tender a March 10, 2005 denial was issued.

The court relied on the intellectual property laws or rights exclusion to bar a defense. Bad faith allegations were asserted because Federal was fully aware that none of the exclusions decided came even remotely close to eliminating potential for coverage which is clearly evident on the face of OrthoClear’s cross-complaint.

Align asked the court to follow KLA-Tencor Corp. v. Travelers Indemnity Company of Illinois, 2003 WL 21655097 (N.D. Cal. Apr. 11, 2003) rather than Molecular Bioproducts, Inc. v. St. Paul Mercury Ins. Co., 2003 WL 23198852 (S.D. Cal. July 9, 2003). Id. at *9.

The court found neither Molecular Bioproducts or KLA-Tencor controlling. It noted that the present IP exclusion was neither as narrow as that in KLA-Tencor nor as broad as that in Molecular Bioproducts. It noted that unlike the facts in Molecular Bioproducts a singular intellectual property claim does not automatically disqualify the entire suit for coverage.

Following applicable rules of California Insurance Coverage Law, which required them to be interpreted based on the ordinary understanding of a lay person and exclusionary clauses be interpreted narrowly and requirement that they be “conspicuous, plain and clear,” Federal’s language did not put an insured reasonably on notice that Federal will not cover claims in a lawsuit whenever that lawsuit also includes a claim for intellectual property. Id. at *9.

Looking at the history of California’s interpretation of the term “unfair competition” the court concluded:

The only reasonable interpretation of the phrase in context is that it refers to statutory law to the extent it concerns piracy, common law unfair competition, and similar practices. Thus, some claims under § 17200 may trigger the exclusions, but the determination must be made based on the factual allegations. See CNA Cas., 176 Cal.App.3d at 606 07.

Id. at *11.

The court rejected Federal’s argument that regardless of whether the alleged defamatory statements referred specifically to intellectual property rights all arose out of the Align’s dispute with OrthoClear since it was, at heart, a dispute over intellectual property and all of Align’s statements were made in an attempt to protect its intellectual property from OrthoClear.

Accepting Federal's argument would allow it to cobble together the most favorable allegations from both parties and disregard the rest. Such an approach defies the public policy of strictly construing exclusionary clauses. At best, the conflicting allegations might create a factual issue as to whether injury from each statement was related to an alleged intellectual property dispute. Since a factual dispute does not completely eliminate the possibility of coverage, it does not relieve Federal of its duty to defend. Mirpad, LLC v. California Ins. Guar. Ass'n, 132 Cal.App. 4th 1058, 1068 (2005) (“If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend.”).

Id. at *12.

The court concluded:

The Cross-Complaint alleged that, in addition to accusing it of violating intellectual property laws, Align was liable for defamation because, among other things, it accused OrthoClear of making false promises to prospective employees, insinuated that former Align executives breached non-competition agreements, maligned Chishti's management of Align, and accused OrthoClear of recruiting its entire sales force and unlawfully soliciting its employees. On their face, such alleged statements bear no relation to the assertion of intellectual property rights. Nor did OrthoClear allege that these were part of any intellectual property dispute. Rather, OrthoClear alleged that Align was engaged in “a deliberate strategy to destroy OrthoClear ... of which the Align lawsuit itself is but a small part.”

Id. at *12.

The court found that the settlement was covered so long as it was reasonable since a wrongful denial of a defense entitled the insured to make such a settlement which could be used as presumptive evidence in the insured’s liability on the underlying claim, including the amount of such liability. Citing Isaacson v. California Ins. Guar. Assoc., 44 Cal. 3d 775, 791 (1988). Id. at *13.

Some portions of the settlement may be covered. It also delayed resolution of that issue to a later adjudication. The court concluded that Federal’s reading is a result out of an exclusion for “intellectual property laws or rights” was in bad faith, particularly if Align is able to prove its other allegations, finding the genuine issue rule did not preclude any possible bad faith action as a matter of law.

hired by the producers of the ad and claiming to be a dog walker, calls two Lorriland employees were unaware they were speaking with an actor who “tries to sell dog urine he has collected to ‘you tobacco people’ because ‘dog pee is full of urea and that’s one of the chemicals in cigarettes.’ ” Id. at *2.

Lorillard asserted that the ad contained “false and misleading” information and ran afoul of Massachusetts law, which prohibits the taping of a telephone conversation without consent. American Legacy Foundation v. Lorillard Tobacco Co., Civ. No. 19406, 2002 WL 927383 at *1 (Del.Ch. Apr. 29, 2002). Id. at *1.

On January 18, 2002 Lorillard sent a letter entitled “Notice of Intent to Initiate Enforcement Proceeding Under the MSA. Therein it stated:

“[I]t has become abundantly clear that [plaintiff's] ‘truth campaign’ is not about conveying the truth about tobacco products to the American public, so much as vilifying and personally attacking tobacco companies and their employees.”

Id. at *3.

Following a preemptive declaratory judgment action against Lorillard under the MSA, Lorillard filed suit in Chancery Court in Delaware. Lorillard filed its answer in the Delaware action along with the seven counterclaims containing similar allegations to those made in the North Carolina action. The Delaware action proceeded on Lorillard’s counterclaims. Lorillard claims to have spent $17 million in its defense. The instant coverage complaint was filed on May 4, 2007.

Travelers never responded to three separate written tenders because its specialist was assigned to the matter was either promoted or reassigned. AIG and I&O under distinct policies declined a defense. Counsel for plaintiff in the underlying action, Wilmer, Cutler & Pickering, submitted the draft complaint threatening suit for libel and slander to its carriers. I&O claimed no knowledge of the underlying carrier. Scottsdale, the underlying carrier, eventually surfaced by claimed late notice.

The Lorillard counterclaim, in contrast to the initial demand letter, did not assert any express cause of action for libel or slander. It alleged essentially in its counterclaims that plaintiffs public statement that Lorillard was “trying to stop the truth® campaign” with its litigation were “false statements … consistent with ALF’s pattern of attacks upon, and vilification of, Lorrilard.” Id. at *9.

The Chancery Court concluded:

While Lorillard initially expressed an intent to file claims of libel and slander, Lorillard ultimately changed its strategy and opted to pursue strictly contractual claims. Lorillard III, 886 A.2d at *9. Within the Delaware Action, in a “procedural maneuver,” Lorillard specifically decided not to contest the truthfulness of plaintiff's ads. Id. at *28. Lorillard and plaintiff agreed, therefore, “that the matter presented [was] a straightforward contractual issue that turns on the legal interpretation of the words of the settlement agreement,” specifically, section VI(h) of the MSA. Id. at *8. Although an inquiry into plaintiff's underlying conduct was a necessary prerequisite to determining breach of that section-a lengthy exercise undertaken by the Chancery Court in Lorillard III-that (tortious) conduct was never the subject of a direct counterclaim by Lorillard. On appeal, the Delaware Supreme Court addressed the dispute between the parties as a contractual matter. Lorillard IV, 903 A.2d at 731 (“The primary question on appeal is whether any of ALF's advertisements in their ‘truth ®’ campaign violated the contractual language of the MSA prohibiting ‘vilification’ or ‘personal attacks.’ ”).

Id. at 10.

The court found that plaintiff is not a signatory to the MSA, which predated its creation, it is ultimately bound by it because of its bylaw provisions and public statements of ALF officers. Such bylaws and certificate of incorporation are contracts under settled law. Benihana of Tokyo, Inc. v. Behihana, Inc., 906 A.2d 114, 120 (Del. 2006). Id. at *11.

Exclusion (k) bars an express contract or agreement which breach is a basis for liability. The other policies were not implicated because there was no slander or libel claim which was preserved as factually asserted in connection with the pleading and the breach of contract exclusion otherwise applied.

The umbrella policy from National Union barred coverage because the plaintiffs’ truth® campaign is not an advertisement or if an advertisement, there were no claims asserted in tort within the advertising injury coverage.

The court found that a cause of action for slander was therefore stated.

The court did not find the Employment-Related Practices Exclusion, however, surpassed and determined that it barred potential coverage because the alleged conduct was employment-related in its view.

The court reasoned,

At the very least, in calling Wilson a “nigger,” Plaintiff's employees intended to create a hostile, uncomfortable workplace environment. At most, in calling Wilson a “nigger,” Plaintiff's employees indicated their belief that he was not capable of performing the job competently. The point being made here is that no matter how one slices it, the underlying incidents were “employment-related practices, policies, acts or omissions” excluded under this provision.

Id. at *8.

The court did not directly deal with the issue of whether the fact, and that the actors were not the employer’s supervisors, but other employees made the acts, acts of the employer, so as to be employment-related in that all of the offenses, the harassment, humiliation, discrimination, demotion, coercion, evaluation and reassignment, were necessarily acts of an employer. There is no reason that defamation should be given a singular and distinct interpretation in context so as to make it actionable, if done by co-employees, where those were not the acts of the employer. The court assumes respondeat superior without analyzing this issue.

The Employment-Related Acts Exclusion

While the use of racial epithets may have occurred at the work site, the perpetrators were mere employees who were not acting either at the behest or direction of management nor whether acts ratified by management. More critically, since it is not the true facts but those alleged that count for coverage purposes, it was not alleged that conduct of these employees was attributable to the employer other than as a consequence of its alleged and implicit negligent supervision.

Had the complaint against Diversified been clearer in its fact allegations about negligent supervision, perhaps the court would have reached a different conclusion. At minimum, the court would have faced a tougher challenge in ruling as it did.

Had California case law specifically narrowly construed the scope of the employment-related exclusion on analogous facts as was the case in the Peterborough Oil Co., Inc. v. Great American Ins. Co., 397 F. Supp. 2d 230, 238-39 (D.Mass. 2005), the district court would also have had a harder task in ruling against Diversified.

Notably, the district court did not look to Peterborough or any other out-of-state authority (even though it was the case which was most directly on point) or seek to distinguish it or otherwise comment upon its non-applicability.

Although the suit asserted labeled causes of action for “harassment” Govt. Code § 12940(j) and discrimination Govt. Code § 12940(a) and (n) as the court observed which arose from acts on the employer’s premises and in an employment setting, that fact does not answer the question as to whether the unauthorized and unratified acts of non-managerial employees against another co-employee were an “employment related practice . . . act or omission” as the policy requires.

In this circumstance the conduct alleged would only be chargeable against Diversified for negligent supervision which under one plausible construction of the exclusion would not be within its ambit.

Per Peterborough Oil Co., Inc. v. Great American Ins. Co., 397 F. Supp. 2d 230, 238-39 (D. Mass. 2005) the provisions, when taken together “strongly suggest the common-sense conclusion that the term ‘employment-related’ has a relatively narrow meaning: it is intended to refer to matters that directly concern the employment relationship itself, such as the demotion, promotion, or discipline of employees by employers, and tortious acts that may accompany such personnel decisions, such as discrimination, harassment, or defamation. Conversely, it is not intended to refer to all matters that concern or relate to employees.

Implicit within this discussion is the premise that while the topic was one within the scope of the exclusion the chargeable acts must be those of an employer which is itself the actor who engaged in defamatory behavior.

In Truck Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64, 79 (Mo. Ct. App. 2005) negligent supervision asserted as an alternative to a respondeat superior claim was covered. Artfully pleaded allegations suggested a basis for liability due to employer’s knowledge that employees drank excessive amounts of alcohol while at work.

There was no allegation in the Wilson complaint that the shop supervisor was representing the employer, or was serving as a member of Diversified’s management team at the time the alleged acts took place. There was no allegation in the Wilson complaint that the shop supervisor was acting on behalf of the employer, or was a member of management.

In a telling part of his Order, Judge Gutierrez notes, “The statements made by Plaintiff’s employees [were] allegedly on Plaintiff’s behalf . . ., p. 12.

The court’s order assumes that the factual basis for the allegations directed against Diversified that were made allegedly on Plaintiff’s behalf “was respondeat superior. That the employer’s defamation statements were chargeable against Diversified because they were the acts of Diversified’s manager or agents. Yet this is but one, albeit not the most logical construction of the fact allegations against Diversified.

It is equally logical to presume that liability would still attach if the acts were chargeable to Diversified if the actors, who allegedly suffered defamation statements were negligently supervised by Diversified.

The complaint alleged that:

¶14. WILSON’s supervisor, individually, and for DCS and 105 defendant’s other agents engaged in the above-referenced actions [and] . . . should have known of these harassing actions because WILSON complained to his supervisor of the demeaning comments by his managers, supervisors, and other employees . . . DCS failed to take immediate and appropriate corrective action to stop the harassment.”

Liability could have been achieved against Diversified under this theory of recovery consistent with the above allegations where Diversified was negligent, i.e., “should have known” of the conduct of Wilson’s co-employers but either was unaware of their conduct and failed to have managers act to restrain the allegedly defamatory behavior.

A Kansas district court observed in Park Univ. Enters. v. American Cas. Co. of Reading, PA, 314 F. Supp. 2d 1094 (D. Kan. 2004) in a decision affirmed by the Tenth Circuit analyzing the analogous “personal injury” offense of invasion of privacy:

J.C. Hauling alleges that Park knew or should have known that the facsimile was unsolicited. “Should have known” is a term connoting negligence not intention. Restated, the J.C. Hauling complaint alleges alternatively that Park either (1) intentionally sent the facsimile, knowing that the recipient did not invite it, or (2) intentionally sent the facsimile, negligently believing that the recipient invited it. Because the J.C. Hauling complaint alleges that Park may have acted negligently, American should have considered that allegation when evaluating whether to defend Park in the underlying state court action.

Also germane to this analysis is a case cited in Park. Stegman v. Hunter Health Clinic, Inc. and Cincinnati Ins. Co., No. 97-1048-WEB, 1998 WL 748953 (Holding that facts available to insurer showed a possibility of coverage for defamation, even though retaliatory employment discrimination was not covered).

As Landmark’s exclusion may not bar employment related conduct that was not pertinent by the employer but rather a co-employee which the employer was liable for under theories of negligent supervision but which were not the acts of the employer, Landmark has not established that its exclusion would bar coverage in all possible worlds. Thus its exclusion should not bar a defense.

Even though it may ultimately be determined that Atlantic Mutual has a viable defense to coverage by virtue of the . . . exclusion, this can only affect its liability for indemnification. Its duty to defend depended on the existence of only a potential for coverage. That potential was never conclusively negated and obviously cannot be negated short of an actual trial to resolve what is clearly a genuine factual dispute. Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1040 (2002).

In other words, the court emphasized that the conduct was employment-related because it allegedly occurred on the work site. The court, however, did not explain why that was sufficient in and of itself to trigger the exclusion where another possible construction of employment-related exclusion, i.e., that the activity be for the benefit of the employer or in effectuating its purposes was not met by the allegations.

The court thus presumed that the employees who allegedly made the defamatory statements were acting on behalf of or with the knowledge of or agreement of Diversified, under the doctrine of respondeat superior. This is not what the complaint against Diversified alleged.

The court suggests that the racial epithets were uttered for the purpose of “undermining employee morale.” However, this understanding of the allegations is only one possible construction. Another possibility is the rogue acts of co-employees who are not engaging in conduct of which Diversified managers approved or knew of. The district court also fails to consider much less distinguish the point raised in our Reply:

“Diversified explained Mr. Williams’ negligent supervision theory and allegations in its moving papers. Landmark did not oppose that argument.”

Supervision of these employees, however, was not alleged to be as careful as it could have been and thus there was potential exposure for negligent supervision.

Applying Illinois law, the court rejected the applicability of the fortuity doctrine to offense-based coverage, reasoning, at 236-37:

Cincinnati contends that the defamation and libel counts alleged in the counterclaims do not allege any fortuitous loss and, therefore, no duty to defend was triggered. . . .

Federal responds that Cincinnati has conflated intentional acts with intentionally caused injuries. Federal argues that the assertion of intentional acts does not run afoul of the fortuity requirement. Federal notes that none of the cases cited by Cincinnati involve the personal and advertising injury coverage at issue here. Federal asserts that, to expressly grant coverage for intrinsically intentional conduct and at the same time disclaim a duty to defend because the underlying allegations assert intentional conduct suggests that the Cincinnati policies either provide virtually non-existent coverage or contain a fatal ambiguity. Federal contends that, if Cincinnati's reasoning is correct – that personal and advertising injury coverage does not apply to the intentional acts of the insured – the coverage would be illusory.
. . . .
   “Allegations of recklessness may bring a defamation claim within the potential coverage of a policy which covers defamation but excludes knowing falsehoods.”

The court expressly rejected the argument that case law in Illinois made the fortuitous losses “a requirement in every insurance liability policy” and the court noted that Cincinnati cited no authority extending the “fortuitous loss” concept as articulated by it from this context. Id. at 237.

Addressing the illusory contract prohibition, in light of the “occurrence” predicate to defamation coverage which would render it illusory if interpreted narrowly as Cincinnati urged, the court reasoned:

[T]he Cincinnati policies purport to provide coverage for defamation and libel, but the 2003 to 2006 policy and the definition of “occurrence” provide coverage only for unintentional conduct. Accordingly, as in [Hurst-Rosche Engineers, Inc. v. Commercial Union Ins. Co., 51 F.3d 1336 (7th Cir. 1995)], the Cincinnati policies contain internal inconsistencies because, “on the one hand Cincinnati purports to provide coverage for intentional tort claims, and on the other hand Cincinnati denies coverage for those same claims.” Hurst-Rosche, 51 F.3d at 1345. Based on the well-reasoned decisions in [Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037 (9th Cir. 1987)] and Hurst-Rosche, we find that the ambiguity in the Cincinnati policies must be resolved in favor of the insureds or, in this case, the assignee of the insureds, Federal.

Id. at 240.

The court also independently determined that the occurrence language did not preclude coverage for the underlying counterclaim for defamation and libel as the Hurst-Rosche court also found under its fact scenario, 51 F.3d at 1546.

[A]lleged deliberate misconduct does not always bring a claim within an intentional conduct exclusion:
“[I]t is important to this case that the exclusion is not of intentional torts as such (nor is defamation an intentional tort in any simple sense), but of tortious conduct in which there is an intent to injure or an expectation of injuring. And in the case of defamation, at least, the exclusion does not track the tort. * * * [D]efamation is often not intended or expected to injure anyone.” Cincinnati Insurance Co. v. Eastern Atlantic Insurance Co., 260 F.3d 742, 746 (7th Cir.2001).

Id. at 240.

Neither an “intent to injure” nor an “expectation of injury” is an element of the tort of defamation. Moreover, since allegations of recklessness “may bring a defamation claim within the potential coverage of the policy which covers defamation but excludes knowing falsehoods,” Cincinnati’s duty to defend was triggered. Id. at 241.

Equitable contribution rights arose between the insurers. While equitable contribution does not apply to primary/excess insurance issues because they cover different risks by their very definitions, that both primary insurers issued coverage to the same insureds with different policy triggers did not make a difference, i.e., they need not both be occurrence-based and should permit contribution. Here, claims-made policies issued by Cincinnati were implicated as were occurrence-based policies by Federal, and contribution rights arose.

The court emphasized that the “other insurance” provisions in each of the subject policies reinforce the conclusion that Cincinnati and Federal provide coverage on the same basis. It reasoned,

Notably, Cincinnati's policies state that, “[i]f all of the other insurance permits contribution by equal shares, we will follow this method also.” Federal's “other insurance” provision states, “[i]f Loss arising from a Claim made against any Insured is insured under any other valid policy, prior or current, then this policy shall cover such Loss * * * only to the extent that the amount of such Loss is in excess of the amount of payment from such other insurance,” whether primary or excess.

Id. at 242.

Equally critical here is that Federal, which narrowly covers defamation in its standard form policies, elected to seek contribution, as the carrier offering narrower coverage may well and often does. So understood, Federal’s articulated grounds for coverage, which the court repeated although it did not analyze under the facts herein, evidence why potential coverage for “false advertising” claims may arise in a number of fact scenarios under standard form ISO policies.

Federal also asserted that, the numerous allegations by Reed that AHMA deceptively advertised its 2004 trade show by suggesting that it was the continuation of the trade show to which Reed claimed exclusive rights, separately implicated the covered offenses of “[m]isappropriation of advertising ideas or style of doing business” and “use of another's advertising idea in your ‘advertisement’ ” under both Cincinnati policies. In addition, Federal asserted that, under Illinois law, the policies' personal and advertising injury offenses encompassed Reed's count for alleged trademark infringement.

Id. at 226.

Critically, the alleged false advertising did not involve direct “wrongful taking” of the advertising idea of another, but rather its misuse to promote AHMA’s association with the 2004 trade show as a continuation of a prior trade show to which the claimant asserted exclusive rights.

This is analogous to the Ohio Cas. Ins. Co. v. Albers Medical, Inc., No. 03-1037-CV-W-ODS, 2005 WL 2319820 (W.D. Mo. Sept. 22, 2005) case, where a pharmaceutical company urged that its product was Lipitor when it was not its originator, but Pfizer, who sued it, was. The court readily found that this fact allegation fell within the “use of another’s advertising idea in your ‘advertisement’ ” offense where there was a misstatement of the defendant insured’s rights to promote a particular product, allegedly misleading consumers as to its proprietary rights connected with that product as well as its capacity to advertise itself as associated with it.

employment-related practices.

The underlying defamation claims were based on the statements of the insured Greenspoint’s controller James Sparks, general manager Mort Hall, and used car sales manager Jamie Mouton, who made racist and defamatory remarks about Martinez to third parties and ultimately fired him. These included statements by Mr. Satterfield and Mr. Holland. Mr. Mouton told them that Mr. Martinez was a “thieving spic beaner” or “thieving Mexican.” Id. at 56-57. They found that the statements were defamatory and that there was actual malice at the time the statements were communicated and that the respondents actually knew their statements to be false at the time of communication. Id. at 57.

Each of the parties making statements was a vice principal of the insured Greenspoint Dodge and thus their statements bound management. The Court noted:

In a section entitled “Allocation of Liability,” the arbitration panel specifically stated that a corporation is liable for its agents who engage in defamation if the agents are vice-principals, and then found Greenspoint, Apple, Sparks, Hall, and Mouton jointly and severally liable for the actual damages and assessed separate amounts for each of them for the punitive damages.
 

Id. at 58.

The principal focus of the court’s analysis was whether the knowledge of falsity exclusion precluded coverage for the defamatory statements where made by corporate vice principals. Greenspoint’s argument was that

The motion for summary judgment states that “director” has a well-understood and specific meaning when used in the context of organizations and when itemized along with “officers” and “shareholders.” . . . [T]he arbitration panel's determination that Sparks, Hall, and Mouton were vice-principals of the corporation is insufficient to make any of them a director, executive officer, or stockholder of the corporation, which are the terms used by the insurance policy for people who are “the insured.”
 

Id. at 62.

The court observed that under the law of the underlying forum, Texas,

A person's “status as a vice-principal of the corporation is sufficient to impute liability to [the corporation].” GTE Sw., 998 S.W.2d at 618. Corporations can act only through their agents. . . .
. . . .
. . . Courts use the “vice-principal” doctrine to “distinguish between the acts of ‘the corporation itself’ and ‘that of a mere servant or employee.’ ”
 

Id. at 64.

Explaining why the “vice principal” concept was not properly applied here to make the parties’ acts those of Greenspoint for insurance coverage purposes, the court noted that none of the identified actors who committed wrongful acts were “executive officers, directors or shareholders” as the policy required.

Drawing a distinction between the capacity of vice principals for tort law and the contract limitations of the policy’s exclusionary language, the court stated:

Put simply, under tort law Greenspoint is responsible for the actions of certain people in supervisory positions because their actions are determined to be the actions of the corporation, and liability is imposed even though the supervisors are not officers, directors or shareholders of the corporation. But the policy excludes from coverage only a false statement by Greenspoint, as it is defined under the policy, as officers, directors or shareholders of the corporation. We conclude that the terms of the policy itself control the definition of which people make up the corporation, for purposes of the insurance coverage. See Grimes Constr., Inc. v. Great Am. Lloyds Ins. Co., 51 Tex. Sup.Ct. J. 545, 248 S.W.3d 171, 172 (Tex.2008) (“[L]abels of tort or contract could not override the language of the insuring agreement”) . . . .

Id. at 65-66.

The court found the “knowledge of falsity” exclusion unavailing as the policy required Greenspoint itself to have knowledge of the defamation, which was not alleged.

Shell Oil Co. v. Winterthur Swiss Ins. Co., 15 Cal. Rptr. 2d 815, 838 (Ct. App. 1993).

The allegations did not concern UMG’s good as TVT maintained ownership rights to the CMC album. Thus, it was of no moment that the Irv Gotti CD “announces the upcoming release of the CMC Album in November 2002,” making the album itself an “advertisement” so as to fall within the Policy’s coverage for infringement of copyright in your advertisement.

The court also found no personal injury coverage for disparagement:

Here, the statement that Def Jam mischaracterized something to the artists about TVT’s efforts to protect its own rights does not concern TVT’s goods or products. Neither does it state any inadequacy about TVT’s services to the artists. The allegation is so vague it is hard to say exactly what it means, but at most it merely alleges that TVT will not stand on its own rights, which is not disparagement of TVT’s services.

Id. at *2.

The slander argument was waived as it was not raised in the trial court pursuant to Monetary II Ltd. P’ship v. Comm’r, 47 F.3d 342, 347 (9th Cir. 1995). Id. at *3.

Judge Graber concurred and dissented in part, finding Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 123 Cal.Rptr.2d 256, 269-72 (Ct. App. 2002) pertinent under disparagement coverage and requiring a defense thereunder:

False statements that may influence a third party not to use the plaintiff’s services, to the financial detriment of the plaintiff, trigger the duty to defend a claim of disparagement of services.

Id. at *3.

The dissent was willing to look at the contextual scenario where the allegations that TVT will not stand on its own rights could disparage TVT’s services to third parties because TVT depends on the willingness of others to put themselves in its hands to release albums.

tenant estoppel certificates that set forth an opinion by ABM reflecting how two potential lenders evaluated the risk of making a loan. These lenders were then sued for interference with prospective economic advantage. The court also found that it was a “mere legal opinion, not a statement of fact,” that was the subject matter of the tenant estoppel certificate. The court does not explain why a legal opinion is not actionable. It urged:

Texas law requires as essential elements of [a libel] claim a factual statement that harms an individual’s or corporation’s reputation.
 

Id. at *1.

This approach does not permit reference to any implications which may have flowed from statements which were libelous, which implications the court does not evaluate.
 

Turning its attention to disparagement, the court found that the assertion of a legal position on the enforceability of a lease agreement expressed in a tenant estoppel certificate did not implicate a good, service or product under the ordinary meaning of those terms. This is a curious interpretation of the services to be rendered by a landlord to a tenant under the terms of a lease, which legal obligations include a number of actions which would be deemed services in most contexts. Notably, there is no contention that the particular statement was protected by a litigation privilege. So long as it could be actionable, it seems to matter not whether an opinion is stated which has the effect of libeling a party or disparaging its goods.
 

The Ninth Circuit’s perfunctory treatment of this issue evidences the court’s unwillingness to look to other prior precedent where it more broadly construed the scope of defamation/disparagement claims. The notion that a legal opinion is not actionable so as to create coverage for defamation and disparagement is inconsistent with Nvidia Corp. v. Federal Ins. Co., No. 04 C 7178, 2005 WL 2230190, at *12 (N.D. Ill. Sept. 6, 2005), where the statement that VisionTek was selling unlicensed goods was found to be both defamatory and disparaging. In Western Int’l Syndication Corp. v. Gulf Ins. Co., No. 05-55092, 2007 WL 625264, at *2 (9th Cir. (Cal.) Feb. 26, 2007), disparagement was implicated by statements which cast doubt on Apollo’s intangible right to broadcast shows. In Pennfield Oil Co. v. American Feed Industry Inc. Co. Risk Retention Group, Inc., No. 8:05CV315, 2007 WL 1290138, at *1, 8 (D. Neb. March 12, 2007), the assertion of FDA approval for multiple uses of a drug was in question. In Liberty Mutual Ins. Co. v. OSI Indus., Inc., 831 N.E.2d 192, 199 (Ind. Ct. App. 2005), statements that questioned who had ownership rights to exclusive secret technology were pertinent.
 

In short, in a number of prior cases, including those from the Ninth Circuit, the fact that a statement was part of an opinion – even a legal opinion – made no difference to the actionable character of the conduct, and the Texas cases cited do not require a contrary result even if the elements for proof of liability in the underlying action are of any moment. However, this juxtaposition of the underlying case with the coverage case is contrary to applicable law.
 

In Aurafin-OroAmerica, LLC v. Federal Ins. Co., No. 04-56681, 188 Fed. Appx. 565, 2006 WL 1880088 (9th Cir. (Cal.) June 26, 2006), the court reasoned:

The facts alleged in D & W’s counterclaims, taken together, could potentially allege a claim for true libel because an allegation that D & W was a patent infringer – a pejorative allegation of shady business practices – was implicit in OroAmerica’s statement to QVC that D & W’s gold chains infringed its patents. See Atlantic Mut. Ins. Co. v. J. Lamb Inc., 100 Cal.App.4th 1017, 123 Cal.Rptr.2d 256, 269 (Cal.App.2002).

        . . . The viability of the underlying claim against the insured does not affect an insurance company’s duty to defend. Rather, even “when the underlying action is a sham,” the insurer may terminate its duty to defend only by “demur[ring] or obtain[ing] summary judgment on its insured’s behalf.” Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 17 Cal.Rptr.2d 210, 846 P.2d 792, 799 (Cal.1993). Thus, the district court erred when it relieved Federal of its duty to defend based on the merits of D & W’s underlying defamation claim.
 

Id. at 566.

Finding defamation from the use of racial epithets, the court noted:

We conclude that there were sufficient allegations in each of the Pierre plaintiffs' complaints that, reasonably interpreted, possibly gave rise to coverage under Nautilus's policy-specifically, coverage of defamation claims. First, each of the complaints included allegations that the starters referred to the Pierre plaintiffs “in racially offensive terms” and that the defendants used “racial epithets.” Those allegations were sufficient to show that statements made by the Starplex starters were defamatory under the definition of such statements set out above. In addition, where each complaint alleged that the statements “referred to” the Pierre plaintiffs in those terms, that the statements were made at the airport, that the Pierre plaintiffs suffered “humiliation” as a result, that the statements were intended to interfere with the Pierre plaintiffs' business relations, and that the plaintiffs lost business as a result, we conclude that, for purposes of the duty to defend, the complaints adequately alleged or gave rise to an inference that the statements were published to third parties. Finally, even assuming that the statements were not defamatory per se because, on their face, they lacked the required nexus to the Pierre plaintiffs' competence to perform their jobs, we agree with the trial court that the Pierre plaintiffs alleged special harm in the form of detriment to their business operations.

Id. at 347.

The employment-related practices exclusion did not bar a defense, even though it stated, “This insurance does not apply to: ‘Bodily injury’ or ‘personal injury’ to: (1) A person arising out of any: . . . (c) Employment-related practices, policies, acts, or omissions, such as coercion, demotion, evaluation, reassignment, discipline, harassment, humiliation or discrimination directed at that person:”

Nothing in the analysis of the language in [Clinical Research Institute v. Kemper Ins. Co., 191 Or. App. 595, 84 P.3d 147 (2004)] suggests that the relevant wording, albeit broad, applies to nonemployees. As discussed above, in that case, the court determined that the term “employment-related” means connected or linked to employment, whether past, current, or future. However, the Pierre plaintiffs were not employed by either of the defendants in the Pierre litigation. Accordingly, the trial court's conclusion that the employment-related practices exclusion did not apply here was correct.

Id. at 349.

The court did not address the issue of what might have occurred had co-employees acted improperly in a way not overseen or corrected by the employer. While there is an express employee-employee exclusion available to carriers, none was included in this form of policy. Conduct that served no employment purpose and was not related to the supervisorial activities of the employer vis-à-vis the employee directly would appear outside the scope of this exclusion as well.