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

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.
 

The court concluded otherwise, finding that the bankruptcy case and related hearings were subject to reimbursement.

Unresolved was the issue of whether Erie breached its duty to defend under the policy by not agreeing to pay the bankruptcy-related defense fees, triggering thereby a foreclosure from raising any further challenges to coverage.

[N]one of the cases considers an insurer's duty to defend an insured in the bankruptcy court after a pending lawsuit is stayed by the insured's bankruptcy petition. However, bankruptcy proceedings are civil proceedings, and to the extent LifeScan pressed its claims in the underlying litigation in this Court, the same principles would apply to make the coverage determination.

Id. at *3.

In the November Memorandum, LifeScan alleged that the Debtor continued to sell test strips in violation of the previous injunction, and alleged violations of the Lanham Act for selling purportedly harmful products. Concerning the Lanham Act claims, LifeScan made identical allegations of copyright and trademark infringement as it did in its complaint in the New York action. Moreover, the November Memorandum discusses the New York litigation in detail, specifically LifeScan's seizure of test strips and the temporary restraining order issued in that action. The November Memorandum is replete with allegations of trademark and copyright violations, seizure orders under the Lanham Act, and harm LifeScan allegedly suffered due to the Debtor's actions. . . . The claims made in the October Motion and November Memorandum are virtually identical to the allegations in the complaint in the New York action, and those claims constitute a “suit” against the Debtor just as the New York complaint did.

In the same way, LifeScan's bankruptcy pleadings allege “personal and advertising injuries” as defined in the Policy, and also allege that LifeScan suffered damages from these injuries. LifeScan claims that the Debtor infringed upon its copyrights and trademarks, violated the Lanham Act, and engaged in advertising that caused injury to LifeScan. . . . the policy arguably provides coverage, meeting the requisite standard. Acuity v. Bagadia, 310 Wis. 2d 197, 750 N. W. 2d 817 (2008).

Id. at *5.

Citing Johnson Controls, 264 Wis. 2d at 89 the court concluded that there was no narrow and technical meaning for the term “damages” under Wisconsin law as urged by the insurer based on the rejection of earlier case authority in Sch. Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 368, 488 N.W. 2d 82, 89 (1992).

Giving the term “damages” its ordinary meaning as interpreted by a reasonable insured, the Court finds that the pleadings filed by LifeScan in this Court do allege damages as defined by Wisconsin insurance law.

Id. at *6.

The court did not agree that the Rule 2004 examinations were Erie’s legal responsibility noting that even though they LifeScan with discovery in the underlying litigation, Rule 2004 examinations were a right given to creditors under the Bankruptcy Code to investigate the affairs of the debtor.

It also concluded that an insurer was not required to fund an insured’s affirmative claims. See, e.g., Wis. Prof’l Baseball Park Dist. v. Mitsubishi Heavy Indus. Am., Inc., 304 Wis. 2d 637, 738 N.W.2d 87 (Ct. App. 2007) (apportioning costs between offensive and defensive claims). Under this principle, an action initiated by an insured is, by it nature, not a defense cost properly covered under a policy. Towne Realty, Inc. v. Zurich Ins. Co., 201 Wis. 2d 260, 273, 548 N.W.2d 64, 69 (1996) (policy's language providing for defense of claims “clearly precludes” recovery for offensive actions).

The court parted company with case law nationally which finds that offensive litigation activity can serve the defensive end and thus, where reasonably related to a defense in some jurisdictions and others where it is conducted against liability be recoverable as noted in Adobe Systems, Inc. v. St. Paul Fire & Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492 (N.D. Cal. Nov. 5, 2007):

Adobe contends that it initiated the London and California actions as a necessary legal strategy to defend itself against an impending claim from Agfa/ITC. The Court finds persuasive the reasoning in IBP, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, which held that even though an insured initiates a lawsuit, that fact does not automatically preclude coverage for defense-type legal fees and expenses where the insured is resisting a contention of liability for damages. 299 F.Supp.2d 1024, 1031 (D.S.D.2003) (citing Simon v. Maryland Cas. Co., 353 F.2d 608, 613 (5th Cir.1965) (holding that sub-contractor insured was entitled to recover legal fees and expenses from insurer for bringing a declaratory judgment action asserting it was not negligent and was entitled to be paid funds withheld by the general contractor, despite a “defense” clause in policy); Potomac Elec. Power Co. v. California Union Ins. Co., 777 F.Supp. 980, 984-85 (D.D.C.1991) (finding that an affirmative suit brought by an insured is not per se unrecoverable as a defense cost)). Id. at *9.

The court then stated:

To be clear, the Policy does not cover the fees the Debtor incurred to file bankruptcy, prepare Schedules, negotiate a cash collateral agreement, or any other general bankruptcy matters, because those costs do not relate to the defense of the LifeScan's claims. If the Debtor objects to LifeScan's proof of claim, Erie would be responsible for the costs of “defending” the Debtor against that proof of claim. However, to date, the Policy covers only the Debtor's fees and costs associated with defending against the October Motion and November Memorandum.

Id. at *7.

The defense of the underlying New York action under reservation of rights was sufficient under Wisconsin law to maintain Erie’s coverage defenses, especially where separate bankruptcy counsel was retained in order to deal with issues therein.

Id. at *8.

The refusal to assist argument was rejected by the court because of the defense under reservation of rights as no estoppel arose respectively under Wisconsin law.

solutions which was an “important differentiator” between competing products, even though some competitors offered products for these exact features was disparaging of one principal competitor, Sigma, who did not purport to have such capabilities.

The Court reasoned,

The gravamen of the Underlying Complaint, therefore, is that Plaintiff made false claims about the superiority of its own products, which clearly and necessarily implied the inferiority of Sigma's competing products, resulting in damages to Sigma.

Id. at *6.