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

The allegations note ITI’s testing and demonstration of 3M Tape in video, internet, and comparative advertising for Frog Tape. These are set forth in subheading (c), (d) and (e). There were objections that the AMCO representative was not given access to information requested in connection with its evaluation of the defense. Nevertheless,

On August 18, ITI received a letter from AMCO, which stated that AMCO would pay WW's attorney's fees from May 22, 2008, to the present at Johnson & Condon's billing rate; that it would pay for ITI's defense through Johnson & Condon (Kuderer); that if ITI rejected Kuderer as defense counsel and retained WW, ITI “will be responsible for all expenses incurred”; and that “AMCO['s] ... acceptance of [ITI's'] defense has to date been without reservation of rights.”

Id. at *3.

Upon completion of its evaluation, however, AMCO on October 1, 2008 advised that there were certain exclusions that might bar coverage and that it was conserving rights in the consequence.

An eventual settlement with 3M included AMCO’s funding of same on ITI’s behalf. Thereafter AMCO filed a declaratory relief action on October 16, 2008 claiming it had no duty to defend or indemnify ITI and that 3M’s claims fell within the scope of exclusionary provisions of the policy. The action addresses whether AMCO is responsible for paying WW’s attorneys’ fees.

The specific exclusions relied upon were that for “Knowledge of Falsity” and for “Defects or Errors in Testing,”

Both exclusions barred a defense.

The Court agrees with AMCO that “[i]t would defy logic to interpret th[e complaint's] language as alleging anything other than [that] ITI acted falsely and with knowledge of that falsity.” . . . (citing Callas Enters., Inc. v. Travelers Indem. Co. of Am., 193 F.3d 952, 957 (8th Cir.1999)). That is, in the first two factual allegations in the complaint and in the answers to ITI's interrogatories about those allegations, 3M clearly asserts that ITI intentionally altered, or “manipulated,” photos of 3M Tape in an attempt to deceive consumers about Frog Tape's comparative merits. Accordingly, 3M's first two factual allegations fall squarely within the Policy's knowledge of falsity exclusion.

Id. at *5.

Contrary to the court’s analysis, the claim of manipulation could be successful without “knowledge of falsity” because there is no specific statement but rather an image which purports to be that of an actual photograph which was not misstated under one scenario but simply manipulated. In this sense, the term manipulated is analogous to the term misleading which can be established despite negligence or even gross negligence.

The court rejected the arguments which were preferred in a slightly different manner by noting, “[b]y presenting manipulated images of 3M Tape, ITI intended to deceive and confuse, and did deceive and confuse, potential customers for 3M tapes.” Id. at *6.

Here, the court is evaluating a factual issue as to whether there was liability for the asserted claim, making the determination that the only basis asserted appears to be consistent with the finding under which ITT would be libel and thus finding the exclusion applicable.

This approach intermixes a focus on the merits with a question of whether there is a potential for coverage under the asserted facts. As the case was not adjudicated, this ruling is inconsistent with the Aearo decision (Aearo Corp. v. American Int’l Specialty Lines Ins. Co., 676 F. Supp. 2d 738 (S.D. Ind. 2009)), which was neither distinguished nor cited by the parties to this case. Therein, Judge Hamilton, sitting by designation from the Seventh Circuit noted,

The majority of those courts have determined that the exclusion does not apply if the plaintiff in the underlying lawsuit could have succeeded without proving intentional misconduct. See Orlando Nightclub Enterprises, Inc. v. James River Ins. Co., 2007 WL 4247875, at *8 (M.D.Fla. Nov. 30, 2007) (collecting cases). These courts reason that, if the insured were to proceed to trial without the defense of its insurer, it could be found liable under a theory that did not require a showing of intentional conduct and was otherwise covered under the insurance policy. In such a case, the insurer would have a duty to indemnify the insured for its losses. Because the duty to defend is broader than the duty to indemnify, the insurer is thus required to defend the insured if the underlying lawsuit could succeed on any theory without proof of intentional conduct. Id. at *8-9. These cases are persuasive and are consistent with principles of Indiana law.

Aearo, 676 F. Supp. 2d at 748-49.

The court suggested that subsequent interrogatory answers also clarified that the statements were only capable of being understood in a sense that would preclude a defense. Again, the court was in effect anticipating adjudication of the underlying action and improper focus on the underlying merits.

The court also rejected the argument that the allegations were, in the alternative, negligently made with reckless disregard and that that would not prove the knowledge of falsity exclusion.

The court contends that there are no such alternative allegations though implicitly suggests had they been made that then the exclusion would not bar a defense. It distinguished Amerisure Co. v. Laserage Technology Corp., 2 F. Supp. 2d 296, 304 (W.D.N.Y. 1998) (applying Illinois law) because there the court concluded that coverage was not excluded because certain paragraphs in the complaint did not plead defendants’ knowledge of falsity. Laserage, 2 F. Supp. 2d at 304. Id. at *6.

The court also rejected the notion that the knowledge of falsity exclusion is limited to the offenses of libel, slander and invasion of privacy, citing Adolfo House Distrib. Corp. v. Travelers Prop. & Cas. Ins. Co., 165 F. Supp. 2d 1332, 1341 (S.D. Fla. 2001). Id. at *6.

The court relied on Callas, which was subsequently disavowed by the Supreme Court of Minnesota for a number of propositions in General Cas Co. of Wis. v. Wozniak Travel, Inc., 762 N.W.2d 572, 576 (Minn. 2009).

The logic of the court’s analysis does not consider the fact that the term “advertising injury” defined imports all elements of same and so as applied to the pertinent knowledge of falsity exclusion it is 4 – 2 = 2, not 4. Since only those offenses with oral or written publication or material are among the four, defined within the advertising injury offenses put into controversy by the reference to advertising injury.

At minimum, this construction is a plausible, contextually viable one rendering the phrase “ambiguous” and requiring its construction against the insurer – a proposition the court does not consider. The case is therefore not authority for any such proposition.

The “Defects or Errors in Testing” exclusion applied to subheading (c), (d) and (e) wherein 3M alleged that ITI’s testing data was deficient because (1) the data “did not accurately depict the performance of 3M Tape under conditions similar to typical usage in the marketplace or under any test protocol sufficiently reliable or scientific to support ITI’s claims.” Id. at *7.

The pertinent defects for errors and testing exclusion provided that the exclusion would bar otherwise coverage suits arising out of:

a) An error, omission, defect, or deficiency
(i) In any test performed, or any evaluation, consultation or advice given by or on behalf of you [or] any insured; or
(ii) In experimental data or the insured’s interpretation of that data
b) The reporting of or reliance upon any such test, evaluation, consultation or advice.

Id. at *7.

The court determined that the final three factual claims in 3M’s complaint were premised in ITI’s testing and demonstration of the 3M Tape.

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.

According to the court, Climb Tech “further alleged that Aearo ‘confuses the consuming public by falsely claiming in its sales materials ... that Aearo/SafeWaze has “[t]he only removable/reusable anchor point for concrete applications,” accompanied by a picture of Climb Tech's expansion bolt device.’ ” Id. at *2.

Analyzing a 1986 ISO policy, the court rejected AISLIC’s argument that the word “solely” in its definition of advertising injury imposes a more rigorous requirement “on the insured, requiring ‘nothing less than a showing that the insured’s advertising be the ‘sole cause’ of the alleged injury’ . . . quoting Discover Financial Services LLC v. Nat’l Union Fire Ins. Co. of Pittsburgh, 527 F.Supp.2d 806, 820, 823 (N.D.Ill.2007).” Id. at *5.

The pertinent policy definition of advertising injury read, “injury arising out of your advertising activities as a result of one or more of the following offenses . . . .” Id. at *6.

Interpreting the word “solely” the court determined that the better reading of it was “if the insured successfully makes that showing for at least one particular claim, then the general rule applies and the insurer is obligated to defend the entire suit.” Id. at *5.

The court readily found that “misappropriation of advertising ideas” or “style of doing business” includes trademark infringement, citing Auto Owners Ins. Co. v. La Oasis, Inc., 2005 WL 1313684, at *7-9 (N.D. Ind. May 26, 2005); Fidelity & Guar. Ins. Co. v. Kocolene Marketing Corp., 2002 WL 977855, at *8-9 (S.D. Ind. March 26, 2002). Id. at *6. The Advance Watch approach was inconsistent with Indiana law citing Cincinnati Ins. Co. v. BACT Holdings, Inc., 723 N.E.2d 436, 439-40 (Ind. App. 2000) (ambiguities in policy language are “strictly construed against the insurer”). Id. at *6.

Trademark infringement claim fell within the offense of infringement of “title” citing Charter Oak Fire Ins. Co. v. Hedeen & Companies, 280 F.3d 730, 735-36 (7th Cir. 2002). Id. at *7.

Reading Erie Ins. Group v. Sear Corp., 102 F.3d 889, 894 (7th Cir. 1996) (applying Indiana law) with Discover Financial Services LLC analyzing a similar “arising solely out of” policy language the court determined that:

[U]nder the policy, the insured's activities promoting its goods or services must be the sole cause of the alleged injury that brings the underlying suit within the policy's coverage, though not the sole cause of all injuries alleged in the case.

Id. at *7.

Trademark infringement suit met that standard:

Climb Tech's trademark infringement claim satisfies that requirement. Without Aearo's advertising activities, Climb Tech would not have had a claim for relief under 15 U.S.C. § 1125(a), the federal trademark statute. . . . Climb Tech alleged instead that Aearo, before selling its infringing products, first marketed those products “through the same dealer network that previously resold” Climb Tech's products.

Id. at *7.

The court emphasized:

What is important here is not the mere use of the words “market” or “promote” but the fact that the only activities for which Aearo could possibly be held liable under § 1125(a) were advertising activities or followed directly from those advertising activities. . . . Even if Aearo had only “marketed” and “promoted” its infringing products using Climb Tech's trademark without making a single sale, it would still have been liable for trademark infringement. See CAT Internet Systems, Inc. v. Providence Washington Ins. Co., 153 F.Supp.2d 755, 762 (E.D.Pa.2001) (holding that trademark infringement was “caused by” advertising activities because the injury “was complete in the advertisement, requiring no further conduct”). . . .
Where the insured's advertising activities were the only activities alleged to give rise to an injury, and those activities were sufficient to give rise to the injury, then it is fair to say that the injury arose solely from those advertising activities.

Id. at *7-8.

As “Climb Tech could have recovered on its trademark infringement claims without proving that Aearo acted with knowledge of falsity,” the court found a duty to defend implicated. Id. at *8.

The fact that additional damages including punitive damages under Federal and Texas law were available, is of no moment in analyzing the duty to defend as such contentions were not proven.

Citing Orlando Nightclub Enterprises, Inc. v. James River Ins. Co., 2007 WL 4247875, at *8 (M.D.Fla. Nov.30, 2007) the court opined that:

Because the duty to defend is broader than the duty to indemnify, the insurer is thus required to defend the insured if the underlying lawsuit could succeed on any theory without proof of intentional conduct.

Id. at *8.

The Del Monte Fresh Produce N.A., Inc. v. Transportation Ins. Co., 500 F.3d 640 (7th Cir. (Ill.) 2007) court was distinguishable as it addressed claims of “known” fraud. The court also suggested that Del Monte was inconsistent with the court’s reasoning in Cincinnati Ins. Co. v. Eastern Atlantic Ins. Co., 260 F.3d 742, (7th Cir. 2001) by noting the issue was, “could the insurer arguably have been held liable on an otherwise covered claim without proof of intentional misconduct?” Id. at *9.

On the facts before it, the court found that liability could be established without proof of intentional conduct, therefore the exclusion did not bar a defense.

To the extent that AISLIC's cases hold that the knowledge of falsity exclusion applies whenever the complaint alleges intentional misconduct, regardless of the possibility of the insured's liability on a covered claim, they are unpersuasive as guides to Indiana law. . . . When the legal theories in the underlying complaint leave open the possibility of the insurer's duty to indemnify, the insurer's broader duty to defend is triggered and the knowledge of falsity exclusion does not apply.

Id. at *10.

The court rejected the argument that there was a brief of confidentiality and distribution agreements between Climb Tech and Aearo and that that was the genesis of asserted liability and thus the breach of contract laws precluded a defense.

As Judge Rodovich has explained, Indiana's courts have not spoken on this question. He predicted in a thoughtful opinion, however, that Indiana would follow the majority of other jurisdictions so that a breach of contract exclusion would apply only if the claim in question would not have existed but for the insured's alleged breach of contract.

Id. at *10.

The phrase “arising out of” meant “caused by” under applicable Indiana authority and thus the exclusion should be properly and narrowly construed.

In this sense, Aearo was able to infringe the trademark only because of its agreement with Climb Tech. . . . The trademark infringement claim, however, is based on a legal theory entirely different from a claim for breach of contract. Climb Tech's rights in its trademark, the rights on which it is able to sue for trademark infringement, came into being before any contract with Aearo was signed and were independent of any such contract. See Hugo Boss, 252 F.3d at 623 n. 15; J.P. Structures, 1997 WL 764498, at *4.

Id. at *11.

No further adjudication of any issues necessary since the insurer, having declined to defend and to participate in settlement, was bound the reasonable settlement made and attorneys’ fees incurred.

Under Indiana law, when an insurer denies coverage and refuses to defend its insured, it will be held liable for the costs of defense and settlement if it turns out to be wrong about its coverage obligations. See Frankenmuth Mutual Ins. Co. v. Williams, 690 N.E.2d 675 (Ind.1997); Employers Ins. of Wausau v. Recticel Foam Corp., 716 N.E.2d 1015 (Ind.App.1999).

Id. at *11.
 

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.