14‐3435‐cv, 14‐3474‐cv

United States Fidelity and Guaranty Co. v. Fendi Adele S.R.L. et al.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term 2015

(Argued: September 17, 2015    Decided: May 17, 2016)

Docket Nos. 14‐3435‐cv, 14‐3474‐cv

UNITED STATES FIDELITY AND GUARANTY COMPANY,

Plaintiff‐Counter‐Defendant‐Appellee,

v.

FENDI ADELE S.R.L., FENDI S.R.L., FENDI NORTH AMERICA, INC.,

Defendants‐Counter‐Claimants‐

Appellants,

BURLINGTON COAT FACTORY WAREHOUSE CORPORATION,

COHOES FASHIONS, INC.,

Intervenors‐Defendants‐Counter‐

Claimants‐Appellants,

ASHLEY REED TRADING, INC., SCOTT RESSLER, JAMES RESSLER,

Defendants‐Counter‐Claimants.

14-3435-cv, 14-3474-cv

United States Fidelity and Guaranty Co. v Fendi Adele S.R.L. et al
‐ 2 ‐ 

    ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

      

Before: SACK, CHIN, and DRONEY, Circuit Judges.

      

Appeal from a judgment of the United States District Court for the

Southern District of New York (Berman, J.) in this insurance coverage case.  A

seller of merchandise was insured under liability insurance policies for any

damages it was required to pay because of an ʺadvertising injury.ʺ  During the

coverage period, it sold goods bearing counterfeit trademarks.  In two

underlying lawsuits, it was found liable for, inter alia, trademark infringement.  

The insurer brought this action below seeking a declaration that it owed no duty

to indemnify the insured under the policies.  The district court held that the

policies did not cover the losses because they were not the result of an

ʺadvertising injury.ʺ   

AFFIRMED.   

      

ROBERT J. TRACY (Stefanie Robin Munsky, on the

brief), Clifton Budd & DeMaria LLP, New

York, New York, for Plaintiff‐Counter‐

Defendant‐Appellee United States Fidelity and

Guaranty Company.
‐ 3 ‐ 

VICTOR GENECIN (Richard L. Mattiaccio and

Corrine A. Irish, on the brief), Squire Patton

Boggs, LLP, New York, New York, for

Defendants‐Counter‐Claimants‐Appellants

Fendi Adele S.R.L., Fendi S.R.L., and Fendi

North America, Inc.

GEORGE M. VINCI, JR. (David B. Picker, on the

brief), Spector Gadon & Rosen, P.C.,

Philadelphia, Pennsylvania, for Intervenor‐

Defendants‐Counter‐Claimants‐Appellants

Burlington Coat Factory Warehouse

Corporation and Cohoes Fashions, Inc.

      

                       

CHIN, Circuit Judge:

In this case, a seller of merchandise was insured under two liability

insurance policies for any damages it was obligated to pay because of an

ʺadvertising injury.ʺ  During the coverage period, it sold goods bearing

counterfeit trademarks.  In two underlying lawsuits, it was found liable for, inter

alia, trademark infringement.  The insurer brought this action below seeking a

declaration that it owed no duty to indemnify the insured under the policies.  

The district court held that the policies did not cover the losses because they

were not the result of an ʺadvertising injury.ʺ  We agree, and we therefore affirm.
‐ 4 ‐ 

BACKGROUND

A. The Facts

Defendants‐Counter‐Claimants‐Appellants Fendi Adele S.R.L.,

Fendi S.R.L., and Fendi North America, Inc. (collectively, ʺFendiʺ) manufacture

luxury handbags, shoulder bags, purses, wallets, and other items, and own

associated federally‐registered trademarks.  Ashley Reed Trading, Inc. (ʺAshley

Reedʺ) engages in the purchase and sale of off‐price branded handbags and other

luxury goods in New York and elsewhere, and Scott Ressler and James Ressler

are its principals.  Intervenors‐Defendants‐Counter‐Claimants‐Appellants

Burlington Coat Factory Warehouse Corporation and its subsidiary Cohoes

Fashions, Inc. (together, ʺBurlingtonʺ) purchase clothing and other merchandise

at wholesale and resell to the public at discounted prices.  Burlington regularly

purchased merchandise from Ashley Reed.   

During the relevant time period, Ashley Reed sold counterfeit Fendi

goods ‐‐ fashion accessories that were not Fendi products, but that displayed one

or more Fendi trademarks and otherwise reproduced the appearance of genuine

Fendi products ‐‐ to Burlington and others.
‐ 5 ‐ 

Plaintiff‐Counter‐Defendant‐Appellee United States Fidelity and

Guaranty Company (ʺUSF&Gʺ) is an insurance company that provides

commercial, property, and liability insurance.  It issued three liability insurance

policies to Ashley Reed between 2003 and 2006.  Two of the policies are at issue

in this case ‐‐ the 2003 Policy, effective February 8, 2003 through February 8,

2004, and the 2004 Policy, effective February 8, 2004 through February 8, 2006

(together, the ʺPoliciesʺ).   

The Policies provide that USF&G will ʺpay those sums that the

insured becomes legally obligated to pay as damages because of . . . ʹadvertising

injuryʹ to which this insurance applies.ʺ  App. at 383, 964.  ʺAdvertisingʺ is

defined as ʺattracting the attention of others by any means for the purpose of

seeking customers or supporters or increasing sales or business.ʺ  Id. at 400, 981.  

ʺAdvertising injuryʺ includes injury resulting from four specified ʺoffenses,ʺ 

including:  ʺc.  The use of anotherʹs advertising idea in your ʹadvertisingʹ; [and] d.

Infringement of anotherʹs copyright, trade dress or slogan in your ʹadvertising.ʹʹʹ  

Id. at 400, 981.
‐ 6 ‐ 

B. The Underlying Lawsuits

1. The First Action   

    In January 2006, Fendi sued Ashley Reed for trademark

counterfeiting, false designation of origin, and trademark dilution in violation of

the Lanham Act, 15 U.S.C. §§ 1114(1)(a), 1125(a), and 1125(c), and unfair

competition and trademark dilution under New York law (the ʺFirst Actionʺ).  

Fendi sought treble damages pursuant to 15 U.S.C. § 1117(b), on the ground that

Ashley Reed intentionally used the Fendi trademarks with knowledge that they

were counterfeit.  The district court entered a permanent injunction, and

awarded Fendi treble damages, prejudgment interest, fees, and costs.   

    On appeal, this Court affirmed, but vacated the district courtʹs

limitation of the damages award to counterfeits sold by Ashley Reed between

2005 and 2006 and remanded for a determination of whether damages should be

awarded for the entire 2001 to 2006 period that Ashley Reed had infringed.  On

April 26, 2013, the district court entered on remand an award reflecting the

amount of Ashley Reedʹs sales of counterfeit goods from 2001 to 2006, trebled, as

well as attorneysʹ fees and costs, for a total monetary award of $34,650,885.91.  
‐ 7 ‐ 

    USF&G initially denied coverage for the First Action, by letter dated

May 11, 2006.  It later agreed, however, to pay for the defense of the action,

subject to a reservation of rights letter, but continuing to deny indemnification.   

2. The Second Action

In January 2006, Fendi separately sued Burlington, alleging the sale

of counterfeit Fendi‐branded merchandise that Burlington had purchased from

Ashley Reed (the ʺSecond Actionʺ).  Burlington asserted third‐party claims

against Ashley Reed.  Fendi and Burlington settled as to Fendiʹs claims against

Burlington, and on April 5, 2012, Burlington obtained a judgment requiring

Ashley Reed to pay it damages, attorneysʹ fees, costs, and interest totaling

$248,257.14.  This amount reflected Burlingtonʹs profits from the sale of

counterfeit goods it had purchased from Ashley Reed, as well as attorneysʹ fees,

costs, and interest.  See Fendi Adele S.R.L. v. Burlington Coat Factory Warehouse

Corp., 867 F. Supp. 2d 427, 434, 438 (S.D.N.Y. 2012).  Unlike in the First Action,

the damages here were not trebled.  Id. at 433‐34.

C. The Instant Action

On July 12, 2011, USF&G commenced this action below against

Fendi and the Ashley Reed defendants, seeking a declaration that it owed no
‐ 8 ‐ 

duty under the Policies to indemnify Ashley Reed with respect to the First

Action.  Fendi asserted a counterclaim seeking indemnification for the judgment

entered against Ashley Reed in the First Action.  Burlington was given

permission to intervene to seek indemnification under the Policies for the

judgment entered against Ashley Reed in the Second Action.  Cross‐motions for

summary judgment followed.   

On August 20, 2014, the district court granted summary judgment in

favor of USF&G.  The district court held that the basis of Ashley Reedʹs liability

ʺwas the sale ‐‐ not the advertising ‐‐ of counterfeit Fendi products,ʺ and

therefore that there was no basis for indemnification under the Policies.  U.S. Fid.

& Guar. Co. v. Ashley Reed Trading, Inc., 43 F. Supp. 3d 271, 278 (S.D.N.Y. 2014).    

Judgment was entered accordingly and this appeal followed.

DISCUSSION

I. Applicable Law

We review de novo a district courtʹs grant of summary judgment,

ʺconstruing the evidence in the light most favorable to the non‐moving party and

drawing all reasonable inferences in its favor.ʺ  SCR Joint Venture L.P. v.

Warshawsky, 559 F.3d 133, 137 (2d Cir. 2009) (internal quotation marks omitted).  
‐ 9 ‐ 

ʺBecause interpretation of an insurance agreement is a question of law, we

review the district courtʹs construction of the [Policies] de novo.ʺ  VAM Check

Cashing Corp. v. Fed. Ins. Co., 699 F.3d 727, 729 (2d Cir. 2012).

    The parties agree that New York law governs the interpretation of

the Policies.  In deciding whether an insurance policy requires an insurer to

indemnify an insuredʹs loss, we must first examine whether there is a ʺreasonable

basis for a difference of opinion as to the meaning of the policy.ʺ  Fed. Ins. Co. v.

Intʹl Bus. Machs. Corp., 18 N.Y.3d 642, 646 (2012) (internal quotation marks

omitted).  If there is, ʺthe language at issue would be deemed to be ambiguous

and thus interpreted in favor of the insured.ʺ  Id.  This is because ʺNew York

follows the maxim of contra proferentem in insurance cases: where the plain

language of a policy permits more than one reasonable reading, a court must

adopt the reading upholding coverage.ʺ  VAM Check Cashing, 699 F.3d at 732.

Under New York insurance law, the plain language of an insurance

policy is construed ʺin light of ʹcommon speechʹ and the reasonable expectations

of a businessperson.ʺ  Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 383

(2003) (quoting Ace Wire & Cable Co. v Aetna Cas. & Sur. Co., 60 N.Y.2d 390, 398
‐ 10 ‐ 

(1983)); see also Fieldston Prop. Owners Assʹn v. Hermitage Ins. Co., 16 N.Y.3d 257,

264 (2011).  In construing a policy,  

[a] reviewing court must decide whether, affording a

fair meaning to all of the language employed by the

parties in the contract and leaving no provision without

force and effect, there is a reasonable basis for a

difference of opinion as to the meaning of the policy.  If

this is the case, the language at issue would be deemed

to be ambiguous and thus interpreted in favor of the

insured.

Intʹl Bus. Machs. Corp., 18 N.Y.3d at 646 (internal citations, alterations, and

quotation marks omitted).

ʺThe duty to indemnify is determined by the actual basis for the

insuredʹs liability to a third person, and does not turn on the pleadings, but

rather on whether the loss, as established by the facts, is covered by the policy.ʺ  

Atl. Mut. Ins. Co. v. Terk Techs. Corp., 309 A.D.2d 22, 28 (1st Depʹt 2003) (internal

citations and quotation marks omitted); see also Robbins v. Mich. Millers Mut. Ins.

Co., 236 A.D.2d 769, 770 (3d Depʹt 1997) (ʺWhile the duty to defend is generally

measured against the allegations of the pleadings in the underlying action, the

duty to indemnify is distinctly different, for it is determined by the actual basis of

the insuredʹs liability to [a] plaintiff.ʺ).
‐ 11 ‐ 

Several cases have construed advertising injury provisions under

New York law.  The New York Court of Appeals has held that for a claimed

advertising injury to be covered, it ʺmust both arise out of an offense occurring in

the course of the insuredʹs ʹadvertising activitiesʹ and constitute one of the

enumerated offenses.ʺ  A. Meyers & Sons Corp. v. Zurich Am. Ins. Grp., 74 N.Y.2d

298, 303 (1989).  There, the court held that an insurer had no duty to defend

under a policy that covered the ʺnamed insuredʹs advertising activities,ʺ where

the insured had been accused of manufacturing, importing, and selling plastic

fasteners that infringed on another companyʹs patents.  Id. at 301‐03.  The insured

argued that its ʺinjuryʺ was covered because the complaint against it alleged

unfair competition, but the court held that because the alleged unfair competition

involved the importation and sale of infringing products, this was ʺnot injury

arising out of Meyersʹ ʹadvertising activities.ʹʺ  Id. at 303.    

In a similar case, the Second Department held that the insurer had

no duty to indemnify under an ʺadvertising injuryʺ clause where the insured had

been sued for trademark infringement.  Am. Mfrs. Mut. Ins. Co. v. Quality King

Distribs., Inc., 16 A.D.3d 607, 607‐08 (2d Depʹt 2005).  In the underlying action, the

insured had been found liable for selling counterfeit shampoo bottles bearing an
‐ 12 ‐ 

unauthorized trademark.  Procter & Gamble Co. v. Quality King Distribs. Inc., 123 F.

Supp. 2d 108, 118 (E.D.N.Y. 2000).  The Second Department held that the injury

was not an ʺadvertising injuryʺ and that therefore the insurer had no duty to

indemnify.  16 A.D.3d at 608.    

The sale of counterfeit goods bearing an unauthorized trademark

was also at issue in Century 21, Inc. v. Diamond State Insurance Co., 442 F.3d 79 (2d

Cir. 2006).  There, we held that because of the ʺʹexceedingly broadʹ contours of an

insurerʹs duty to defend,ʺ the insurer was obliged to defend the action where the

policy contained an ʺadvertising injuryʺ clause and the complaint in the

underlying action alleged that the insured ʺmarketed, distributed and soldʺ the

infringing goods.  Id. at 81‐83.  We held that:

a term as broad and multi‐faceted as ʺmarketingʺ may

be construed to include activities apart from selling and

distribution that are ʺwithin the embraceʺ of

ʺadvertisingʺ as that term is used in the policy . . . .

Id. at 83.  We did not reach the issue of the insurerʹs duty to indemnify, and we

specifically noted the possibility that a point might be reached in the underlying

proceedings when it became clear that the duty to defend ended because the

alleged marketing injury was not covered under the policy.  Id. at 83‐84; see also
‐ 13 ‐ 

Bridge Metal Indus., L.L.C. v. Travelers Indem. Co., 812 F. Supp. 2d 527, 542

(S.D.N.Y. 2011), affʹd, 559 F. Appʹx 15 (2d Cir. 2014) (in advertising injury

coverage case, recognizing distinction between broad duty to defend and

narrower duty to indemnify).  

II. Application

The Policies define ʺadvertisingʺ as ʺattracting the attention of others

by any means for the purpose of seeking customers or supporters or increasing

sales or business.ʺ  App. at 400, 981.  The Policies define ʺadvertising injuryʺ as

injury arising out of one or more of the following

offenses:

a. Oral or written publication of material that

slanders or libels a person or organization or disparages

a personʹs or organizationʹs goods, products or services;

b. Oral or written publication of material that

violates a personʹs right of privacy;

c. The use of anotherʹs advertising idea in your

ʺadvertisingʺ;

d. Infringement of anotherʹs copyright, trade dress

or slogan in your ʺadvertising.ʺ 

App. at 400, 981. Fendi and Burlington do not argue that Ashley Reedʹs ʺinjuryʺ 

arises out of the offenses enumerated in subsections (a) or (b), but they both
‐ 14 ‐ 

contend that subsection (c) applies, and Burlington also argues that subsection

(d) applies.  

    We conclude that the district court correctly held that the Policies

did not cover the injuries here, for subsections (c) and (d) require the use of

anotherʹs ʺadvertising ideaʺ or ʺcopyright, trade dress or sloganʺ in ʺyour

advertising,ʺ id. at 400, 981 (emphasis added), and there was no advertising by

Ashley Reed here.  Ashley Reed did not engage in any advertising of the

counterfeit goods, and in its complaints in the underlying actions, Fendi did not

allege that it suffered injury because of any advertising activities on the part of

Ashley Reed.  Rather, Fendi complained that it suffered injury because

defendants sold counterfeit goods, and damages were awarded in both of the

underlying actions based not on Ashley Reedʹs advertising activities but on its

sales of counterfeit products.  Accord Meyers, 74 N.Y.2d at 303 (holding that

insuredʹs liability for importing and selling infringing products was not

advertising injury); Am. Mfrs. Mut. Ins. Co., 16 A.D.3d at 608 (holding that

insuredʹs liability for selling counterfeit shampoo bottles bearing unauthorized

trademark was not advertising injury).     
‐ 15 ‐ 

    Fendi and Burlington argue that Ashley Reedʹs use of the Fendi

mark constituted advertising within the Policiesʹ broad definition of

ʺadvertisingʺ ‐‐ ʺattracting the attention of others by any means for the purpose

of seeking customers or supporters or increasing sales or business.ʺ  App. at 400,

981.  We reject the argument, in light of the well‐settled proposition that

insurance policies are to be construed ʺin light of ʹcommon speechʹ and the

reasonable expectations of a businessperson.ʺ  Belt Painting Corp., 100 N.Y.2d at

383 (quoting Ace Wire & Cable Co., 60 N.Y.2d at 398).  The parties could not have

reasonably expected that the advertising injury coverage of the Policies would

extend to the insuredʹs sale of infringing goods (where the insured engaged in no

advertising of the counterfeit goods) or that ʺadvertisingʺ would include the sale

(without more) of counterfeit products.  As a matter of common sense, there is a

difference between the placement of a counterfeit brand label on a handbag and

the act of soliciting customers through printed advertisements or other media.  

Here, the Fendi brand and logo were used as product identification (or, to be

more precise, misidentification) rather than as advertisement.  Clearly, Ashley

Reed could not have reasonably expected that it would be indemnified for

disgorgement damages based on the profits it improperly made from selling
‐ 16 ‐ 

goods that it knew bore a false designation of origin.  See XL Specialty Ins. Co. v.

Loral Space & Commcʹns, Inc., 82 A.D.3d 108, 115 (1st Depʹt 2011) (It is ʺwell‐

established . . . that there is no insurance where an insured is forced to disgorge

funds that it acquired wrongfullyʺ); see also Vigilant Ins. Co. v. Credit Suisse First

Boston Corp., 10 A.D.3d 528, 528 (1st Depʹt 2004) (ʺThe risk of being directed to

return improperly acquired funds is not insurable.  Restitution of ill‐gotten gains

does not constitute ʹdamagesʹ or a ʹlossʹ as those terms are used in insurance

policies.ʺ); J.P. Morgan Sec. Inc., 21 N.Y.3d at 334‐35.   

    In short, we conclude that Ashley Reedʹs injuries arose not from its

advertising activities, but from its sales of counterfeit products.   

The Policies also contain a falsity exclusion, which provides an

additional basis for denying coverage.  The Policies exclude coverage for an

advertising injury ʺ[a]rising out of oral or written publication of material, if done

by or at the direction of the insured with knowledge of its falsity.ʺ  App. at 389,

1000.  To the extent Ashley Reedʹs use of the Fendi logo on its handbags arguably

constitutes advertising ‐‐ and, again, we conclude that it does not ‐‐ the falsity

exclusion would be triggered, for the record is clear that Ashley Reed

intentionally published the material (that is, placed the Fendi logo on its bags)
‐ 17 ‐ 

with knowledge that it would be selling goods bearing a false designation of

origin.  See, e.g., Terk Techs. Corp., 309 A.D.2d at 31‐32 (holding that insurer had

no duty to defend or indemnify where insured intentionally sold counterfeit

goods, as insuredʹs conduct fell within ʺknown falsityʺ exclusion); A.J. Sheepskin

& Leather Co. v. Colonia Ins. Co., 273 A.D.2d 107, 107 (1st Depʹt 2000) (holding that

insurer had no duty to defend or indemnify where insured intentionally sold

infringing goods, as insuredʹs conduct fell within ʺknown falsityʺ exclusion).   

We conclude that the district court did not err in denying coverage.

CONCLUSION

    For the foregoing reasons, the judgment of the district court is

AFFIRMED.