Aearo Corp. v. American Int'l Specialty Lines Ins. Co., No. 1:08-cv-0604-DFH-DML, 2009 WL 5069013 (S.D. Ind. Dec. 17, 2009)

The trademark infringement lawsuit arising out of the suit by Climb Tech LLC against Aearo Corporation and Company for alleged wrongs arising out of Aearo’s distribution of Climb Tech’s fall protection products and other products that were similar to Climb Tech’s products.

AISLIC denied a defense. The court found that denial to be wrongful and concluded a duty to defend arose.

The underlying suit was brought by the claimant who was located in Texas in the United States District Court in Texas. The insured elected to sue the umbrella carrier, AISLIC, after the primary insurer, Liberty, denied a defense. The deceptive practice and unfair competition claims were based on the representation that Aearo “[‘expressly portrayed and represented [the infringing product] as an “enhanced version” of [Climb Tech's product], creating the false impression that the newer product comes from the same source as the earlier product.’]” Id. at *2.
 

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.
 

Super Duper, Inc. v. Pennsylvania Nat'l Mut. Ins. Co, ___ S.E.2d ___, 2009 WL 2948516 (S.C. 2009)

Answering a certified question from a federal district court, the Supreme Court of South Carolina found that a trademark infringement lawsuit could implicate potential coverage under the offense of “misappropriation of advertising ideas” or “style of doing business” as well as “infringement of copyright, title or slogan,” “use of another’s advertising idea in your ‘advertisement’” and “infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’ ”

Notably, the court found that alleged trademark infringement was only in the first certified question, but not the remaining three.

The court’s discussion of why an advertising idea is implicated is of greatest interest.

[T]he use of another's advertising idea may include trademark infringement because to infringe upon someone's trademark, which is an advertising device, one improperly uses another's advertising idea to draw the consumer's attention to a product. Accordingly, we answer the third certified question, yes.

Id. at *6.

The court found that a trademark may be a product slogan and that trademark infringement potentially relates to the improper use of another slogan.

It finally found that a trademark infringement may occur when a party infringes upon another’s trade dress or slogan in its advertisement because “a trademark may serve as an element to the overall trade dress of a product.” Id. at *6.

America's Recommended Mailers, Inc. v. Maryland Cas. Co., No. 08-41106, 2009 WL 2391523 (5th Cir. (Tex.) Aug. 4. 2009)

Affirming the district court’s denial of coverage, the Fifth Circuit, analyzing a 1998 ISO policy, found that a suit by the AARP against Mailers alleging a fraudulent scheme to sell financial services to older America’s that falsely claimed endorsement by the AARP did not fall within the policy’s potential coverage. The key to the decision was a regressive application of the eight-corners rule under Texas law. GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W. 3d 305, 307 (Tex. 2006). The insured urged that the false advertising claims alleging misrepresentation should be characterized as trade dress claims specifically falling within the offense “infringing upon another’s . . . trade dress. . . injury in ‘your advertisement.’”

The court rejected this argument stating:

While the AARP has alleged that Mailers inappropriately used the AARP's trademark in a deceptive manner, the AARP is not challenging the shape, design, color scheme, or any other aesthetic aspect of the cards or the similarity of Mailers's cards to any other advertisements for financial products. The AARP is only challenging the fact that Mailers used the AARP name on its cards. This is not a trade dress claim.

Id. at *2.

The court did not analyze whether the use of the words American Association of Retired Persons instead of the abbreviation AARP which changed the result since the eight corners rule did not permit such a speculative analysis of the allegations of the complaint.

The trademark infringement claims could not fall within the misappropriation of advertising ideas or style of doing business offense uncharacteristically maintained in this policy form as it is part of the 1986 standard policy form because of the Sport Supply Group, Inc. v. Columbia Cas. Co., 335 F.3d 453, 464-65 (5th Cir. 2003) case concluding that “trademark infringement claims do not involve misappropriation of advertising ideas.”

This decision has been criticized by other decisions including that in State Auto Prop. & Cas. Ins. Co. v. Travelers Indem. Co. of America, 343 F.3d 249 (4th Cir. (N.C.) 2003) (“Finally, the term ‘misappropriation’ is necessarily ambiguous: Although it could refer specifically to the common law tort of misappropriation, it also could refer more generally to the wrongful acquisition of property. Significantly, the courts in other jurisdictions are unable to agree on how to interpret the term “misappropriation.” (emphasis added)).

It asked the wrong question, not what is the nature of the trademark claim but whether the fact allegations in a trademark claim may constitute a “misappropriation of advertising ideas,” this ambiguous string of non-tort terminology that can encompass within its ambit a number of fact scenarios including many articulating relief trademark infringement.

See also Lebas Fashion Imports of USA, Inc. v. ITT Hartford Ins. Group, 50 Cal. App. 4th 548, 565 (Cal. Ct. App. 1996) (“There is nothing about the terms “misappropriation of an advertising idea” or “misappropriation of a style of doing business,” neither of which constitutes a recognized tort, which compels us to conclude one way or the other as to just how broadly or narrowly they should be read. Nor is there anything about the statutory offense of trademark infringement which necessarily precludes its inclusion as a part of either.”).

Curiously, the policy form had it included “use of another’s advertising idea in your advertisement” as in a standard 1988 ISO form would, would have escaped the Support Supply argument. It would also have fallen within case authority finding trademark claims fall within the ambit of such an allegation. Ohio Cas. Ins. Co. v. Albers Medical, Inc., No. 03-1037-CV-W-ODS, 2005 WL 2319820 (W.D. Mo. Sept. 22, 2005).

Milwaukee Notions, Inc. v. Erie Ins. Exch., No. 06-25918-svk; No. 07-2292, 2009 WL 1351101 (Bankr. E.D. Wis. May 11, 2009)

The court found no breach of Erie’s duty to defend as it defended under reservation of rights and there has been no determination of the underlying claims. Various expenses within the bankruptcy court in the court’s view were not recoverable.

The underlying complaint alleged that the Debtors and others distributors counterfeit diabetic test strips, including causes of action for federal trademark infringement, federal false advertising, federal dilution of mark, common law unfair competition and unjust enrichment.

Conceding that a defense was owed in the underlying New York action, Erie urged that the defense did not cover motions in the early stages of the bankruptcy case.

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.

E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., ___ F. Supp. 2d ___, 2008 WL 5396889 (N.D. Cal. Dec. 16, 2008)

Analyzing implicit disparagement claims court noted,

At least one other jurisdiction has specifically addressed the issue of whether disparagement coverage can be triggered when a policy holder was not alleged to have disparaged a specifically identified product or business. See Knoll Pharmaceutical Co. v. Automobile Ins. Co. of Hartford, 152 F.Supp.2d 1026, 1037-38 (N.D.Ill.2001) (applying Illinois law). . . . In the litigation underlying the insurance coverage dispute in Knoll, the plaintiffs alleged that the policyholder had advertised its thyroid drug as “more effective than or superior to the other drugs available to treat hyperthyroidism” and had wrongly claimed that its drug was “not bioequivalent to competing products,” thereby disparaging competing manufacturers. Id. at 1036. Although the complaint in the underlying litigation did not allege disparagement of any specific competitors or products, the court in Knoll found a duty to defend because allegations of statements that the policyholder's drug was superior to other drugs were “disparaging in that they criticize the quality of other companies' ... products as being inferior.” Id. at 1038.

Id. at *5.

In finding disparagement by implication in E.piphany, the court noted that statements made by the insured that were allegedly false, it was the “only” producer of “all Java” “fully J2EE” software

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.

Australia Unlimited, Inc. v. Hartford Casualty Ins. Co., ___ P. 3d ___, 2008 WL 5234761 (Wash. Ct. App. (Div. 1) 2008) (Dec. 15) (Cox)

The pertinent “advertising injury” offense, “copying, in your ‘advertisement,’ a person’s or organization’s ‘advertising idea’ or style of ‘advertisement’ ” did not trigger a defense for the Colorado II action asserting trade dress claims in connection with a producer, importer and distributor of the NothinZ brand shoes sued by Crocs.

Whereas the underlying policy contained an express exclusion as applied to Crocs claims, the appeal dealt only with the umbrella policy’s provisions. Under the pertinent policy, “advertisement” was defined as:

[T]he widespread public dissemination of information or images that has the purpose of inducing the sale of goods, products, or services through . . . c. Any other publication that is given widespread public distribution.

Id. at *3.

“Advertising idea” is defined in the underlying policy as “any idea for an ‘advertisement[.]’ ” Id.
The court conceded that Crocs’ complaint provides notice of pleading of an “advertising injury” within the scope of the policy definition. Hence, the complaint rested

upon AU’s material breach of the settlement agreement in “[m]anufacturing, displaying, distributing, offering for sale, and selling footwear ... based on a design not approved by Crocs.”

Id. at *9.

Here, Crocs not only made general allegations of trade dress infringement, it also specifically included in its trade dress description its “marketing and sales materials” that “share an overall unique look and feel” that serve to identify Crocs as the origin. Crocs also expressly identified All’s NothinZ brand website as a source of infringing activities. And Crocs sought damages for AU’s profits from its “marketing” of products bearing any “copy or colorable imitation” of the Crocs Trade Dress.

Id. at *5.

Distinguishing coverage under cases asserting patent infringement from trademark or trade name or trade dress infringement, the court observed:

[W]hat Northern appears to overlook is that, in contrast to a claim for patent infringement – which is limited to the making, using, or selling of another’s product – Section 43(a) of the Lanham Act provides a remedy for “a false designation of origin, or any false description or representation.” 15 U.S.C. § 1125(a).... [T]rademark or tradename infringement ... necessarily involves advertising, or use, of the mark or name to identify the merchant’s goods or services.

Id. at *5.

Some causal connection between injury and the insured’s advertising activity arose as the complaint alleged that

“[d]efendants market, import, and/or sell footwear that infringes the Crocs Trade Dress,” and that “[d]efendants copied the Crocs Trade Dress with the intent to trade on the goodwill developed by Crocs in establishing the Crocs Trade Dress.”

Id. at *6.

The injunctive relief request related to marketing of shoes and infringement of Crocs’ trade dress instructive. Advance Watch was readily distinguished, noting that the flawed logic of Advance Watch was properly exposed in Westfield Cos. v. O.K.L. Can Line, 155 Ohio App. 3d 747, 756 (2003).

The policy contained an exclusion that limited all personal and advertising injury except to the extent that the underlying assurance was applicable to personal or advertising injury and claims arising out of that “personal and advertising injury.” Hartford’s argument was that the advertising injury coverage in the umbrella policy was meant to follow form the underlying policy in terms only of excess coverage for the underlying insurance. The court rejected Hartford’s narrow construction of the “knowledge of advertising injury” provision:

Hartford’s reading of the exception focuses on the word “that” – the umbrella policy will apply to “personal and advertising injury” if the underlying policy applies to personal and advertising injury and also to claims arising out of that (particular) personal and advertising injury.

Id. at *7.

AU’s distinct reading was more consistent with the plain language of the exception. Finding any ambiguity must be resolved against Hartford, the court concluded that AU’s argument should apply.

AU reads the second provision of the exception to mean that the underlying insurance must cover claims arising out of that category of offenses defined as “personal and advertising injury.” Even though the underlying insurance here admittedly does not cover intellectual property claims, the underlying insurance covers other personal and advertising injury claims. The exception only requires that the underlying insurance be applicable to some claims arising out of the personal and advertising injury category. It does not say that the underlying insurance must apply to “the” (specific) claim, it only states that underlying insurance must be applicable “to claims arising out of that” category.

Id. at *8.

The court, however, found that the federal court action in Colorado which stayed the proceeding pending resolution of the equivalent claim through the ITC action did not create an independent basis for defense of the ITC proceeding. The absence of a request for monetary damages in the ITC proceeding pursuant to 19 U.S.C. § 1337 precluded a defense opportunity therein. Pursuant to section 1337 the ITC did not have the authority to enter an order for monetary damages.
Since these actions were ultimately settled and thereafter AU sought to manufacture new designs, a case thereafter brought in Colorado II, which contested those activities which were allegedly in violation of the settlement agreement, was not within coverage.

The basis of the Colorado II compliant was AU’s “copy or colorable imitations of the Crocs Trade Dress” and use of “a design not approved by Crocs” not a specific advertisement of products related to that design and thus the court found no coverage.

Kreuger Int'l, Inc. v. Federal Ins. Co., No. 07-C-0736, 2008 WL 4962669 (E.D. Wis. Nov. 19, 2008) (Grisebach)

Alleged misappropriation of an Italian company’s furniture design for academic-style furniture, its designated CAMPUS line. See Studio & Partners v. KI, No. 06-C-0628, 2007 WL 3342597 (E.D. Wis. Nov. 7, 2007).

In 2003 KI applied for and received patents on an Einstein/Intellect desk and chair which are allegedly misappropriated from S&P’s furniture line. Also among the asserted claims was correction of patent inventorship

as well as misappropriation.

Both Federal and St. Paul initially denied a defense, and thereafter St. Paul reconsidered, though subject to a right to seek reimbursement. The court found that allegations that KI displayed the CAMPUS furniture in its showroom without authorization does not amount to a claim KI improperly used S&P advertising materials.

The key issue in the court’s view is whether the unique aesthetic design of the furniture may be considered in and of itself to be an advertising idea or material such that its unauthorized use or display would constitute advertising injury under the relevant policy language. Id. at *8.

The court rejected KI’s suggestion that the product itself by virtue of its design constitutes “advertising.” The court reasoned:

It is not the product per se that is the advertising, because even the best product can lie dormant in a forgotten cellar somewhere and no one would say its intrinsic qualities alone had “advertised” it. 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.

Relying on New York case law, the court surveyed none that reached an opposite conclusion on this point.

[See] Accessories Biz, Inc. v. Linda and Jay Keane, Inc., 533 F.Supp.2d 381, 388 (S.D.N.Y.2008) (“L & J argues that the Samples themselves are a form of advertising, but New York courts have routinely held that the phrase ‘advertising idea’ does not include the product itself.”); 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”).

Id. at *9.

On closer examination, each of these cases deals with the precise policy language at issue or involves an improper assumption that liability attaches because the advertising aspect and nexus to same are met. The product may constitute a form of “advertising injury” offense under certain circumstances; i.e., it’s an advertising idea. Unique trade dress as well as design patent claims would appear to meet this criteria.

Recharacterizing the suit as one simply based on misappropriation of design and not its promotional use, the court does not parse the specific allegations, which suggest the latter.

Distinguishing other cases, the court found that false advertising fact allegations, which created a mistaken impression about the original product, could trigger a defense. Indiana Ins. Co. v. Super Natural Distributors, Inc., 2003 WI App 244, 2003 WL 22336427, at *10 (Wis. Ct. App. 2003); Superformance Int’l, Inc. v. Hartford Cas. Ins. Co., 203 F. Supp. 2d 587, 597 (E.D. Va.2002).

In Acuity Mutual Ins. Co. v. Bagadia, 750 N.W.2d 817 (Wis. 2008), the court found that sending samples of a trademarked or copyrighted product to potential customers met the causal nexus between injury and advertising activity and that advertising likely materially contributed to consumer confusion. Id. at 831. The court found, on the fact allegations, no injury alleged based on consumer confusion or any advertising of the product. Kreuger, 2008 WL 4962669, at *10.

The court found the absence of any competitive relationship between KI and S&P critical, as S&P had never developed or sold any of the furniture itself. KI was simply a former distributor who decided to create its own duplicative furniture line. In a telling part of the opinion, the court describes certain parts of the opinion where references to display or advertising of products are asserted as “essentially surplusage.” Id. at *11. The court continued:

These citations within the complaint are not a component of any injury (since they do not relate to the merits of any of the claims), but rather are offered as simply background material or evidence.

Id. at *11.

This attempt to parse what are fact allegations that are the thrust of the allegations does not prove that there is no possibility for coverage under the fact allegations noted that could relate to liability for the dissemination of misappropriated items as a separate ground for relief. The court found it telling that KI was not alleged to have stolen S&P’s advertising idea, material, slogan, style, or title. Id. at *12.

The court found that St. Paul’s failure to specify in its counterclaim a request for reimbursement of defense fees barred it from such relief. The court, after serving authority and determining that the right to reimbursement was a majority not minority rule, agreed to permit St. Paul the right to amend its pleading but not to recover relief thereon, which would be the subject of further proceedings.

America's Recommended Mailers, Inc. v. Maryland Cas. Co., ___ F. Supp. 2d ___, 2008 WL 4346287 (E.D. Tex. 2008) (Schell)

The court found an applicable intellectual property exclusion which expressly eliminated coverage for trademark infringement barred coverage for a suit which alleged consumer confusion as to whether the AARP had sent cards that were in fact sent by a Mail House. A high-pressure sales pitch about financial services and living trusts, promoted to senior citizens by various Financial Services Defendants, was forwarded to them by the Mail House Defendants. The recipients could not determine that the pitch did not come from the AARP.

Thus, the AARP mark was used in an “improper way”.

Despite the fact that distinct claims for both trademark infringement and unfair competition in violation of 15 U.S.C. § 1125 were asserted, the court did not analyze – nor, apparently, did the parties raise – the potential argument that a defense could arise from the unfair competition claims in the event the trademark infringement claims were not held to be viable.

Applying Texas law, the court appeared to view each of the potential claims as so interrelated that the potentiality for a nonexistent trademark claim was not in play.

Judge Hilton, in Corporate Risk Int’l, Inc. v. Assicurazioni Generali, S.p.A., No. 95-1440-A, 1996 U.S. Dist. LEXIS 19720, at *8-9 (E.D. Va. Mar. 15, 1996), rejected an insurer argument that a broader exclusion than that in force here applied to false advertising and unfair competition claims because the underlying plaintiff’s claims went beyond the express terms of the exclusion.

After a reading of the underlying complaint, it is clear that the complained of conduct goes beyond trade or service mark infringement. . . . Each of the Lanham Act counts . . . complains of CRI’s conduct in the promotion, sale, and offering for sale of its corporate security services in conjunction with the allegedly infringing marks. Further, at paragraph thirty, the complaint asserted that CRI’s advertising activity was “in direct contravention of Plaintiffs’ CONTROL RISKS MARKS and other proprietary rights.” That reference to other proprietary rights is again made at paragraph sixty-five. Finally, . . . the Prayer for Relief asks that the underlying defendants be enjoined from “engaging in any conduct that tends falsely to represent that, or is likely to confuse, mislead, or deceive Defendants’ customers” into believing that CRI’s services were sponsored by Control Risks Group. The prayer also asks for damages resulting from CRI’s “unfair activities.”
 

False Advertising Claims Trigger Coverage or a Competitor Initiates Suit Under Advertising Injury Coverage

Two distinct decisions, one applying North Carolina the other Illinois law, both found false advertising claims fell within standard advertising injury coverage where initiated by competitors.

Granutec, Inc. v. St. Paul Fire & Marine Ins. Co., No. 5:96-CV-489-BO(2), 2008 WL 312146 (E.D.N.C. Jan. 16, 2008)

Granutec, Inc. (“Granutec”) is a North Carolina corporation that manufactures and sells generic, over-the-counter (“OTC”), pharmaceutical products. Following an initial agreement with Johnson & Johnson in 1989 to employ a color scheme for generic caplets different from that of the Tylenol Gelcaps, in February 1994 Granutec changed the color scheme to mimic the Tylenol Gelcaps. This conduct precipitated a suit against it for Lanham Act claims under 15 U.S.C. § 1125(a) and 43(a)(2) for false and deceptive advertising, as well as trademark trade/trade dress infringement.

Following issuance of a preliminary injunction against Granutec on December 21, 1995, Granutec agreed to market its OTC product in a color scheme that was conspicuously different from that used by McNeil, a Johnson & Johnson subsidiary, after incurring $500,000.00 in defense fees. Two policy forms were in effect from June 30, 1994 to July 31, 1994, a 1986 ISO form covering as “advertising injury” “misappropriation of advertising ideas or style of doing business”, and from August 1, 1994 to August 1, 1995, a St. Paul variant of an ISO 2001 policy form covering as “advertising injury” “unauthorized taking or use of any advertising material, slogan or title of others” the later policy included intellectual property exclusion.

Focusing on the express unfair competition claim pursuant to NCGS § 75-1.1 et seq., which prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce,” the court found a defense owed. It noted under the earlier 1986 ISO policy issued by Aetna:

McNeil alleged in its amended complaint that its advertising idea – portraying two “Gelcaps” on the front of the Tylenol box in a red and yellow color scheme – was wrongfully taken by Granutec for its own use on its generic packaging. . . . Granutec’s adoption of this color scheme will likely cause consumer confusion as to origin and generic equivalence. . . . Changing its generic product’s color scheme from red/orange to red/yellow represented an attempt by Granutec to simulate the likeness of the Tylenol Gelcap product. . . . Such allegations establish not only a prima facie case of unfair trade practices in violation of § 75-1.1 but also arguably fall within the meaning of “misappropriation of advertising ideas.”

Id. at *4-8.

The court found the causal nexus to advertising readily satisfied because the advertising content of the color scheme change was the basis for asserted liability. St. Paul was also held to have a duty to defend since there were distinct unfair competition allegations outside the scope of the intellectual property exclusion and the term “unauthorized taking or use of any advertising material” was deemed to be synonymous with misappropriation and advertising material to encompass ideas as well as tangible marketing tools.


Greenwich Ins. Co. v. RPS Products, Inc., 882 N.E.2d 1202 (Ill. App. Ct. (1st Dist.) 2008)

The underlying suit asserted claims for patent and trademark infringement as well as unfair competition. At issue was alleged infringement of the Holmes patent for its “HAPG 600 Harmony Air Filter.” An amended complaint tendered after denial by the carrier under a patent infringement exclusion asserted false advertising claims, to wit, the pertinent allegations assert in paragraph 9 that

The label on the H600 Replacement Filter box prominently displays the claim that it ‘Fits Holmes®,’ and lists the following Holmes® Harmony® Air Purifier Models: HAP 615, 625, 650, 675, 675RC. This designation is literally false because the RPS Replacement Filters do not meet Holmes performance standards, a high proportion of the RPS Replacement Filters are defectively manufactured and, when the RPS Replacement Filters are placed in one of the Holmes machines that they purportedly ‘fit’, the RPS filter will not allow the door to close.

Id. at 1204. It is further alleged in paragraph 13 that the replacement filter “substantially and materially underperforms.” Id.

The court quickly rejected the argument that a patent is property and the infringement of the patent is “damaging.” The court pointed out that property damage is defined in the Greenwich policy as “physical injury to tangible property, including all resulting loss of use of that property . . . .” A patent right encompasses intangible, incorporeal rights, not tangible property. Newark Morning Ledger Co. v. United States, 507 U.S. 546, 556, 123 L.Ed.2d 288, 300, 113 S.Ct. 1670, 1676 (1993).

Looking to the causal nexus sufficient to meet the requirement that the advertising of infringing products falls within the definition of advertising injury as contained in the Greenwich policy, the court noted:

The advertisement must instruct or explain to the purchaser exactly how to recreate or reassemble the product into one that infringes a patent. Count I of Holmes’ amended complaint (that RPS manufactured and sold allegedly infringing products) does not allege that RPS provided any detailed instructions to its customer on how to infringe the patent. RPS’ argument is, therefore, unpersuasive.

Id. at 1209 (citation omitted).

The court also found the patent infringement exclusion applicable to bar a defense in any event.

The court found the absence of the term “unfair competition” within the 1998 ISO policy language problematic. Neither disparagement nor trade dress infringement were specifically asserted in the court’s view. The court noted that trademark infringement is expressly excluded from the policy and therefore that count cannot trigger a defense as well. The court found that it was not problematic that the policy excluded trademark advertising injuries, yet covered trade dress advertising injuries. The court reasoned

The answer to RPS’ inquiry lies in the fact that trade dress infringement and trademark infringement are two different causes of action. See Schwinn Bicycle Co. v. Ross Bicycles, Inc., 870 F.2d 1176, 1182 (7th Cir.1989) (“[a] product’s trade dress is the overall image used to present it to its purchasers * * *. [Citation.] A trademark is thought of as something more specific, such as a logo” (emphasis in original )). We therefore find RPS’ argument unpersuasive.

Id. at 1212.

Notably, the court did not explain what coverage the trademark infringement might fall within, though it seems conceivable that the “use of another’s advertising idea in your ‘advertisement’ ” offense might have been contemplated. However, the court does not make its analysis on this point clear. Indeed, for a court of appeal decision it is remarkably inarticulate about the basis for its analysis. The court also fails to look at fact allegations that might underlay both the trade dress and trademark claims, as well as other case authority finding trademark claims readily covered, applying Illinois law under the very policy language at issue herein, to wit: Central Mut. Ins. Co. v. StunFence, Inc., 292 F. Supp. 2d 1072 (N.D. Ill. 2003).