Kreuger Int'l, Inc. v. Federal Ins. Co., ___ F. Supp. 2d ___, 2009 WL 2596507 (E.D. Wis. 2009)

Posted on September 17, 2009 by David Gauntlett

Following an earlier ruling that there was no duty to defend vis-à-vis Federal Insurance, the same result was attained by St. Paul. The court left open for additional factual development and proceedings St. Paul’s motion for reimbursement of defense fees paid.

The policies are St. Paul and Federal Ins. Co. variants of a 2001 ISO with express intellectual property exclusions. Pertinent coverage in the St. Paul policy was for advertising injury, the advertising injury offense of “unauthorized taking or use of any advertising idea, material, slogan, style or title of others and under Federal’s policy, advertising injury, which required injury solely out of . . . one . . . of the following offenses committed in the course of advertising your goods, products or services. Infringement of copyrighted advertising materials or infringement of trademark or service mark, titles or slogans. Each policy defined the term “advertisement.” St. Paul far more broadly than did Federal.

Wisconsin is a four-corner state looking rigorously at the allegation of the complaint and nothing beyond. Articulating the basis for a defense determination, the Court observed:

“The test is whether the complaint arguably asserts a form of liability covered by the policy.” Hamlin Inc. v. Hartford Accident & Indem. Co., 86 F.3d 93, 96 (7th Cir.1996) (applying Wisconsin law) . . . .

Id. at *5.

In analyzing the defense, the court observed:

Specifically, KI contends that S & P's amended complaint alleges injury arising out of the “[u]nauthorized taking or use of any advertising idea, material, slogan, style or title of others.”

Id. at *6.

Here, the plain language of the pertinent provision requires that St. Paul pay damages resulting from KI's advertising of its products that arise from misappropriating someone else's advertising. The word “advertising,” as used in this provision of the policy, is intended to modify not just “idea,” but each of the terms that follow. Otherwise, the enumerated offense would extend far beyond the area of advertising. Thus, St. Paul agreed to indemnify KI against liability for damages incurred where, in advertising its own products, KI misappropriated an idea, material, slogan, style or title from the advertising of another. In the context of this case, St. Paul would be required to indemnify KI for any damages KI incurred in advertising its own products if KI was found to have taken or used any of S & P's advertising ideas, materials, slogans, styles or titles without S & P's consent. Since S & P's lawsuit had nothing to do with its own advertising but was instead all about KI's alleged theft of its furniture design, it seems clear that no covered claim was alleged.

Id. at *7.

The court’s construction would add words of limitation not set forth in the policy to wit, that it is not possible to promote a product similar to that of a competitor, such that its mere promotion would be a misappropriation of an advertising idea, especially where the character of the liability as here, depended upon the content of advertising which would include physical display of furniture as an advertisement for the product itself on showroom floors falling within the broad meaning of the definition of the term “advertising” in St. Paul’s policy, which means, “attracting the attention of others by any means for the purpose of seeking customers or increasing sales or business.” Id. at *3.

Articulating the later argument, KI asserted:

First, . . . “S & P's allegations that KI took and improperly displayed CAMPUS in the KI showroom implicates coverage under the advertising materials language of the policy.” . . . Second . . . KI contends that “the aesthetic nature of [S & P's] design is the true advertising idea and style because it was designed to appeal to consumers through unique appearance,” . . . .

Id. at *7.

The court found that the physical display of the campus furniture in a showroom was made at a time when it purported to be representing the campus line and therefore could not be part of the misrepresentation conduct. Second, the court found that there is no evidence that the campus desk and chair that KI displayed at the showroom in 1995 were created by S & P for the purpose of advertising.

The court, thus, looks to the understanding that the claimant had in using materials misappropriated, not the effect of what the defendant did with those materials, which could be deemed to implicate advertising material. As liability attaches for the defendant’s conduct that could be actionable, the court’s focus appears improper.

The court specifically rejected the notion that the product itself by virtue of its design constitutes advertising, even under St. Paul’s broad definition of that term.

Instead, advertising is communication about a product, and as such it cannot logically be the product itself. This distinction is implicit in St. Paul's definition: “Advertising means attracting the attention of others [to the product] by any means for the purpose of seeking customers or increasing sales or business.” The advertising-the means or act of attracting attention-needs an object; it is not itself the object.

Id. at *9.

The addition of the bracketed phrase “to the product” is but one possible meaning. It does not look at all possible meanings of the term advertising, which is required in a duty to defend analysis nor the potential that a product can logically be an advertisement for itself in some circumstances. As these possibilities are not even examined by the court, and the court takes what it believes is the most logical understanding of how advertising is to be understood, it has only shown that there is one possible reading of the policy under which coverage would not arise, not that it couldn’t occur potentially herein. Although the court cites a number of cases for the proposition that the product cannot be in advertising for itself, they are an equally significant number and more of them recent than the court’s opinion, embracing the contrary view.

The court’s citations include Westport Reinsurance Management, LLC v. St. Paul Fire & Marine Ins. Co., 80 Fed. Appx. 277, 279 (3rd Cir. 2003) (product itself is not advertising); Green Machine Corp. v. Zurich-American Ins. Group, 313 F.3d 837, 841 (3rd Cir. 2002). (Marketing strategy or style of attracting customers was theft of underlying method, not an advertising idea.); Accessories Biz, Inc. v. Linda and Jay Keane, Inc., 533 F. Supp. 2d 381, 388 (S.D.N.Y. 2008) (“Advertising idea” does not include product itself, thus samples could not be a form of advertising.); Hosel & Anderson, Inc. v. ZV II, Inc., 2001 WL 392229, *2 (S.D.N.Y. 2001) (“[t]he product itself is not an advertisement within the meaning of the policy”).

Specific language of the policies could be determinative in each of these cases and the court does not cite it thereby running afoul of the rule that a policy must be interpreted in light of particular language not purported general rules instructions may not have application therein.

The court distinguished Fireman’s Fund Ins. Co. v. Bradley Corp., finding there that the court found that express coverage for trademark encompassed trade dress fact allegations. Consumer confusion caused by the mistaken impression through presentation of a product could be an advertising idea as the court noted. Indiana Ins. Co. v. Super Natural Distributors, Inc., 2003 WI App. 244, 2003 WL 22336427, *10 (Wis. Ct. App. 2003); Superformance Intern., Inc. v. Hartford Cas. Ins. Co., 203 F. Supp. 2d 587, 597 (E.D.Va. 2002).

The court distinguished Acuity Mutual Ins. Co. v. Bagadia, 750 N.W.2d 817 (Wis. 2008) because there, sending of copyrighted software samples and advertising of trademarked software was part and parcel of the injury alleged. The absence of alleged injury based on consumer confusion or any advertising of the product, even though it is implicit from the fact allegations referenced. The fact that in both Bradley and Bagadia, the claimant was a competitor of the insured defendant and the court’s view was noteworthy. It characterized a section of the complaint referring to display or advertising of the products as surplusage, as they were “not a component of any injury (since they do not relate to the merits of any of the claims).” Id. at *11.

The court seems fixated on whether the fact allegations support the theory of damages as articulated in the complaint, not as the court was compelled to do under applicable Wisconsin law, whether the facts could support recovery under any theory that might implicate possible coverage. Thus, the court cites, but does not consider the import of Curtis-Universal, Inc. v. Sheboygan Emergency Services, Inc., 43 F.3d 1119, 1122 (7th Cir. (Wis.) 1994). Skipping in its citation the part of the Seventh Circuit’s opinion that emphasized that the theory of relief, which it described as a legal label, was of no moment.

The same analysis was apropos as to Federal’s policies where “infringement of copyrighted advertising materials” was the offense analyzed.

[E]ven if the complaint in the underlying action could be read to allege copyright or trademark infringement based on KI's alleged misappropriation of S & P's furniture designs, there is certainly no allegation that KI made infringing use of copyrighted advertising materials, unless one regards the design itself as advertising, an argument that I have already fully addressed and rejected above.

Id. at *13.

  • St. Paul’s payment of $780,000 in defense fees and $315,000 to settle a lawsuit was no small matter and that it entitled St. Paul to potential reimbursement if issues could be factually addressed to the court’s satisfaction.
  • There was no authority for the proposition that reimbursement is not permitted even though Wisconsin law may stay proceedings in the underlying claim until the coverage question is resolved, since there is a direct action statute permitting that remedy.
  • The complexity attending resolution of commercial general liability coverage issues made this an inappropriate policy.
  • The right to reimbursement was a majority position, even though that appears not be true anymore with the recent spade of cases, including General Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods, Co., 828 N.E.2d 1092, 1101 (2005). Id at *18.
  • A motion for leave to amend to file a counterclaim seeking reimbursement remains.
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Conflict of Interest - Right to Independent Counsel

Posted on September 17, 2008 by David Gauntlett

Employers Ins. of Wausau v. California Water Service Co., No. C-06-03002 RMW, 2008 WL 3916096 (N.D. Cal. Aug. 25, 2008) (Whyte)

Judge Whyte issued an order in which he clarified that the concepts of estoppel and waiver were insufficient to penalize an insurer who failed to readily announce, with its appointment of appointed counsel, the insured’s rights to independent counsel where such existed. In essence, the issue was whether there was an affirmative duty by the insurer to advise its insured of its right to independent counsel at such point as counsel were appointed. The court side-stepped this issue but seemed to intimate that

such right did not arise as a matter of law. Notably, attorney Riddle, in his letter to the insured, claimed that as appointed counsel he represented only the insured and only received payment from the insurer Wausau but had no legal duties to them. This of course is not in accord with the applicable rules at stake in the tripartite relationship. Several years later, because of a change in applicable law, Wausau discontinued providing a defense for Cal Water due to the fact that there was no civil action but only an administrative agency notice respecting the environmental cleanup duties of the insured. After a suit was filed, a defense was provided through the same attorney thereafter, at the insurer’s expense but subject to reservation of rights. The court found that the attorney had become the attorney of the insured as of the date of the filing of suit and thus it was not denied representation by an attorney of its choice.
 

The trial court side-stepped the issue of whether the initially retained Riddle, when provided by the insurer, was other than appointed counsel even though he purported to have no legal relationship to Wausau at the time. The court concluded that:

[E]ven were the court to decide that Riddle was appointed by Wausau and that there was an actual conflict significant enough to require Wausau to inform Cal Water of its right to independent counsel, it would not find estoppel to be appropriate. Riddle viewed himself as Cal Water’s representation and there is no evidence that Riddle acted other than in the best interest of Cal Water.

Id. at *6.

The court then analyzed a series of issues regarding the duty to defend and found it owed, ruling that the sudden and accidental exception to the pollution exclusion was implicated. The court found no bad faith, however.
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Nevada Federal District Court Predicts the Texas Supreme Court Will Forbid Reimbursement of Defense Fees Following a Unilateral Reservation of the Right to Reimbursement

Posted on April 9, 2008 by David Gauntlett
The Ohio Casualty Insurance Company v. Biotech Pharmacy, Inc. et al. adv.
U.S.D.C., District of Nevada, Case No. 2:05-CV-1214, RLH-PAL (D. NEV. 4-2-2008)

In the first decision nationally to expressly address an issue of Texas law, the Court predicted that the Texas Supreme Court would, consistent with its prior precedent, find that “a unilateral reservation of rights letter cannot create rights not contained in the insurance policy which include the right to seek reimbursement of defense fees where there was no potential for coverage”. In previous cases, the Texas Supreme Court, following Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510, 515-16 (Wyo. 2000) found that a unilateral reservation of rights letter cannot create a right for an right for an insurer to seek reimbursement of settlement costs based on the logic of the Shoshone case which had expressly found that right extended to seek reimbursement of defense costs.

The Texas Supreme Court reaffirmed its earlier ruling in Matagorda finding in Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., No. 02-0730, ___S.W.3d___ ,2008 WL 274878, (Tex., Feb., 2008) that in Texas the same rule applied in a excess policy context.

The court denied a concurrent motion for reconsideration under FRCP rule 69 as moot in light of its finding vis-à-vis reimbursement. It had previously concluded that a 56(f) right to conduct discovery arose in determining whether a copyright infringement claim was based sufficiently on advertising to fall within the pertinent “advertising injury” coverage.  Gauntlett & Associates attorneys, David A. Gauntlett and Joseph S. McMillen represented Biotech Pharmacy, Inc.

The Texas Supreme Court’s decision appears to represent the modern trend on this issue. General Agents Ins. Co. of America v. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1102-1103.(2005) (“As a matter of public policy, we cannot condone an arrangement where an insurer can unilaterally modify its contract, through a reservation of rights, to allow for reimbursement of defense costs in the event a court later finds that the insurer owes no duty to defend. . . . [I]f an insurer wishes to retain its right to seek reimbursement of defense costs . . . the insurer is free to include such a term in its insurance contract. Absent such a provision in the policy, however, an insurer cannot later attempt to amend the policy by including the right to reimbursement in its reservation of rights letter.”)

See Westchester Fire Ins. Co. v. Wallerich, 527 F. Supp. 2d 896 (D. Minn. 2007) (“[T]his Court is of the view that the Minnesota Supreme Court would refuse to allow reimbursement unless an agreement to the contrary is found in the insurance policy.”); Perdue Farms, Inc. v. Travelers Cas. And Surety Co. Of America, 448 F.3d 252 (4th Cir. (Md.) 2006) (Accord.)

Each of these cases embraces a fundamental doctrine which has often been ignored by insurers and courts fail to recognize that an insurer, as a drafter of the policy, has within its power to carefully craft rights which it seeks to assert. When you attempt to add a reimbursement right, it is simply a redrafting of the policy for the insurer’s benefit.

By the same token, where a particular policy construction requires the addition of words not set forth in the policy, it is not for the court to add those after the fact. Thus, in the context of analyzing whether a blast facts claim asserting violations of the TCPA, which forbids the improper sending of facsimiles to a recipient who is not expecting to receive same, the courts have found “personal injury” coverage for invasion of privacy implicated, rejecting insurer arguments against such a construction. The insurers interpretation requires the addition of words or limitation not set forth in the policy.

Terra Nova Ins. Co. v. Fray-Witzer, 869 N.E.2d 565, 574 (Mass. 2007) (applying New Jersey law)

In effect, the insurers argue that the policy's definition of injury should be read to say “[o]ral or written publication of material, the content of which violates a person's right of privacy.” But New Jersey law is clear that when construing an ambiguous phrase in an insurance policy, courts should “consider whether clearer draftsmanship by the insurer ‘would have put the matter beyond reasonable question.’ ”

This approach is preferable to a vague “contextual reading” of the policy or one that relies on latin maxims which often reflect the results rather than the analytic process for determining proper coverage interpretation. See Black’s Law Dictionary, 8th Edition, Copyright 2004 Bryan A. Garner, pg. 620 “expressio unius est exclusio altrius [the negative implication] ‘[The recent disparagement by unanimous court] of this doctrine’s application [in Herman & MacLean v. Huddleston, 459 U.S. 375, 386, n.23, 103 S.Ct.683, 690 n.23 (1983)] puts its future in some doubt, but more likely confirms that judicial use of candidate for construction is opportunistic.’ Richard A. Posner, the Federal Courts; Crisis & Reform 282 (1985).” Id. at 621.
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