Opinion ID: 766400
Heading Depth: 2
Heading Rank: 2

Heading: Covered Advertising Injuries

Text: 16 The policies at issue here define advertising injury to cover four specific categories: (1) slander, libel, or disparagement of goods, products, or services; (2) violation of a right of privacy; (3) misappropriation of advertising ideas or style of doing business; and (4) infringement of copyright, title, or slogan. This is standard language for defining advertising injury in commercial general liability policies. See Lee R. Russ & Thomas F. Segalla, 9 Couch on Insurance 3d § 129:25 (1997). The applicability of these categories to a variety of torts has been the subject of numerous cases in federal courts. With varying degrees of success, insured parties have sought coverage for the underlying actions of patent infringement, 3 trademark or trade dress infringement, 4 misappropriation of trade secrets or other confidential information, 5 and actions alleging harm to consumers rather than competitors. 6 Here, Frog seeks coverage based on allegations that it engaged in unfair competition by using misappropriated information and false advertising and reverse passing off under the Lanham Act. 17 We commence our Discussion with some analysis of Advance Watch Co., Ltd. v. Kemper National Insurance Co., 99 F.3d 795 (6th Cir. 1996), on which defendants rely. Advance Watch held that, where an insurance policy identifies specific language-based torts, unmentioned product-based violations cannot be thought reasonably to be within the same category. See id. at 804. Advance Watch held, specifically, that trademark infringement was not covered by the standard policy because there was no specific reference to trademark infringement. Because trademark litigation is a common and distinct category of lawsuit, the court found that if the insurer had intended to provide coverage it would have referred to trademarks by name, as it did with copyright. See id. at 803. The insurers urge us to adopt this reasoning with respect to the trade secret misappropriation and Lanham Act claims in this case. 18 Advance Watch has been sharply criticized for ignoring the real contours of intellectual property litigation, which often proceeds under a bewildering variety of different labels covering the same material facts. See, e.g., Industrial Molding Corp. v. American Manufacturers Mut. Ins. Co., 17 F. Supp. 2d 633, 639 (N.D. Tex. 1998). It may also stand in some tension with our decision in Granite State Insurance Co. v. Aamco Transmissions, Inc., 57 F.3d 316 (3d Cir. 1995), which declares that insurance policies governed by Pennsylvania law will be interpreted according to a reasonable insured's understanding rather than the narrow legal meaning of policy terms. Without passing on the merits of Advance Watch under Pennsylvania law, we conclude that Frog's alleged conduct does not fall within a reasonable insured's understanding of misappropriation of advertising ideas or style of doing business. 19 Frog relies on Sentex Systems, Inc. v. Hartford Accident & Indemnity Co., 882 F. Supp. 930 (C.D. Cal. 1995), aff'd, 93 F.3d 578 (9th Cir. 1996), in which there were similar allegations of misappropriation of trade secrets and other confidential information and use of those secrets to promote the insured's security systems in competition with the underlying plaintiff. The Sentex court held that the phrase misappropriation of advertising ideas or style of doing business, broadly construed, encompassed the common law tort of unfair competition, which the underlying plaintiff had alleged. 20 The defendants properly point out that the Court of Appeals for the Ninth Circuit affirmed only after expressing its unease with the breadth of the district court's holding and emphasized that the insured was alleged to have misappropriated a customer list, methods of bidding jobs, billing methods and procedures, and marketing techniques, all of which it exploited to gain new business. The appellate court found that [i]t is significant that[the] claims for misappropriation of trade secrets relate to marketing and sales and not to secrets relating to the manufacture and production of security systems. Sentex Sys., Inc. v. Hartford Acc. & Indem. Co., 93 F.3d 578, 580 (9th Cir. 1996). We would agree. Here, by contrast, the complaint does not allege that Frog misappropriated methods of gaining customers; it alleges that Frog misappropriated information about the manufacture of dipper buckets and then advertised the resulting product. 21 The insurers' basic point is that, to be covered by the policy, allegations of unfair competition or misappropriation have to involve an advertising idea, not just a non-advertising idea that is made the subject of advertising. See Atlantic Mut. Ins. Co. v. Badger Med. Supply Co., 528 N.W.2d 486, 490 (Wis. Ct. App. 1995) (an advertising idea is an idea for calling public attention to a product or business, especially by proclaiming desirable qualities so as to increase sales or patronage). As one court put it, the broadest reading of misappropriating advertising ideas is that the insured wrongfully take an idea about the solicitation of business. Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F. Supp. 1024 (N.D. Ill. 1998). 22 Thus, while some causes of action for unfair competition, theft of trade secrets, or misappropriation may be covered by the standard policy, many are not. See, e.g., Winklevoss, 991 F. Supp. at 1026, 1039 (insured allegedly misappropriated software program and promoted resulting product to underlying plaintiff 's customers; claim for coverage rejected because the trade secret taken did not relate to how a product was advertised); GAF Sales & Serv., Inc. v. Hastings Mut. Ins. Co., 588 N.W.2d 165 (Mich. Ct. App. 1997) (rejecting claim for coverage for defense against trade secret litigation where the misappropriated materials did not relate to advertising). The allegation that Frog engaged in unfair competition by misappropriating trade secrets relating to manufacture of a product line does not allege misappropriation of advertising ideas or styles of doing business as such. 23 Frog rejoins that, even if the initial unfair competition allegations were insufficient to trigger a duty to defend, the Second Amended Complaint's Lanham Act allegations did so. Decisionone Corp. v. ITT Hartford Insurance Group, 942 F. Supp. 1038 (E.D. Pa. 1996), found a duty to defend when the underlying plaintiff alleged that the insured falsely designated the source of its ability to maintain the plaintiff's equipment and falsely advertised that it could maintain the plaintiff's equipment, all in violation of the Lanham Act. 24 As the insurers note, however, in Decisionone the underlying complaint alleged that the insured made derogatory statements about the underlying plaintiff's own products, thus stating a cause of action for disparagement, which was covered as advertising injury by a separate part of the standard policy. By contrast, nothing in Amsco's complaints alleged that Frog said anything disparaging about Amsco's products. See also Microtec Research, Inc. v. Nationwide Mut. Ins. Co., 40 F.3d 968, 971 (9th Cir. 1994) (rejecting coverage for a reverse passing off claim because [t]he complaint alleged that Microtec passed off code created by Green Hills as though Microtec had written it, not that Microtec made disparaging statements about Green Hills . . .); cf. Electrographics Int'l Corp. v. Federal Ins. Co., No. 98-3220, 1998 U.S. Dist. LEXIS 14685 (E.D. Pa. Sept. 21, 1998) (finding potential coverage where the underlying complaint alleged that the Lanham Act violations involved misrepresentations related to the nature of both parties' products). 25 Frog emphasizes the Second Amended Complaint's reverse passing off claim. In Union Insurance Co. v. Knife Co., 897 F. Supp. 1213 (W.D. Ark. 1995), the underlying plaintiff alleged that the insured passed off its own products as the plaintiff 's, infringing on the plaintiff's trademark. The court held that passing off constitutes misappropriation of advertising ideas or style of business. See also Poof Toy Prods., Inc. v. U.S.F.&G., 891 F. Supp. 1228 (E.D. Mich. 1995) (same). Similarly, Dogloo, Inc. v. Northern Ins. Co., 907 F. Supp. 1383 (C.D. Cal. 1995), held that allegations that the insured misappropriated trade secrets in a doghouse design fit squarely within the policy language. The advertising idea or style of doing business misappropriated was manufacturing, advertising, and selling a dome-shaped doghouse. See id. at 1390; see also Elcom Tech., Inc. v. Hartford Ins. Co., 991 F. Supp. 1294 (D. Utah 1997) (where there were only two companies in a field, and one company advertised that it had the only patented technology for the product, allegations that the other falsely advertised that it had the only patented technology sufficiently alleged misappropriation of a style of doing business to trigger the insurer's duty to defend); P.J. Noyes Co. v. American Motorists Ins. Co., 855 F. Supp. 492, 494-95 (D.N.H. 1994) (allegation that the insured used the name Dustfree Precision Pellets arguably falls within misappropriation of advertising ideas or style of doing business where the underlying plaintiff alleged that it used similar words to mark its products). 26 We will assume for the sake of argument that trademark infringement is misappropriation of an advertising idea or style of doing business under Pennsylvania law. 7 Even so, trademark infringement differs from the allegations in ESCO's complaint. A trademark can be seen as an advertising idea: It is a way of marking goods so that they will be identified with a particular source. See Northam Warren Corp. v. Universal Cosmetic Co., 18 F.2d 774, 774 (7th Cir. 1927) (A trademark is but a species of advertising, its purpose being to fix the identity of the article and the name of the producer in the minds of people who see the advertisement . . . .). A trademark depends for its effectiveness on communicating a message to consumers about the marked good, which is the essence of advertising, and therefore allegations of trademark infringement arguably allege misappropriation of an advertising idea. See, e.g., Industrial Molding Corp., 17 F. Supp. 2d at 637-38 (citing cases to show that this is the majority position). 27 Knife, Dogloo, and the other passing off  cases all involved allegations that an insured was trading on the recognizable name, mark, or product configuration (trade dress) of the underlying plaintiff. In this case, however, the underlying complaint does not allege that what the insured took was itself an idea about identifying oneself to customers. The complaint did not allege that the misappropriated dipper bucket design served as an indication of origin, or that ESCO/Amsco's identifying marks were misused. Nor did ESCO allege that Frog took an idea about advertising dipper buckets (the idea of claiming a revolutionary new design as an enticement to customers); it alleged that Frog took the dipper bucket design itself and lied about the design's origin. See Applied Bolting Technology Prods., Inc. v. United States Fidelity & Guarantee Co., 942 F. Supp. 1029, 1034 (E.D. Pa. 1996) (making the distinction between taking an advertising idea and advertising falsely), aff'd without opinion, 118 F.3d 1574 (3d Cir. 1997); see also Sorbee Int'l Ltd. v. Chubb Custom Ins. Co., No. 2314 Philadelphia 735 A.2d 712, 716-17 (Pa. Super. July 21, 1999) (making the distinction between misuse in advertising of any idea and misappropriation of advertising ideas) (internal quotations omitted). 28 Similarly, ESCO alleged not that Frog copied a style of doing business--a plan for interacting with consumers and getting their business--but that Frog copied a particular product line that might be attractive to consumers. See Winklevoss, 991 F. Supp. at 1039 (style of doing business involves the outward appearance or signature of a business, while a claim for theft of trade secrets involved the theft of [the underlying plaintiff 's] products' inner workings, not their outward appearance); Applied Bolting Technology, 942 F. Supp. at 1033-34 (a single product from a product line is not a style of doing business). 29 We predict that, regardless of how Pennsylvania law would treat allegations of trademark infringement, Pennsylvania courts would not find that the allegations in this case fall within a reasonable understanding of the policy terms. Thus, the District Court was correct that the underlying complaint did not allege an advertising injury. Because of our resolution of this issue, we need not address the insurers' argument that there was no causal connection between Frog's advertising activity and ESCO's alleged injuries. 8 We also need not address Travelers's argument that various policy exclusions preclude Frog's suit. Finally, we reject in the margin Frog's claim for bad faith denial of coverage. 9 30 The Orders of the District Court will be affirmed.