Court Opinion

ID: 3002660
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:32:05.781809+00
Date Added: 2024-06-11T11:45:50.475365
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

No. 08-1888

C APITOL INDEMNITY C ORP.,
                                                  Plaintiff-Appellant,
                                  v.

E LSTON S ELF S ERVICE W HOLESALE G ROCERIES, INC.,
L ORILLARD T OBACCO C O ., M ASHOUR “M IKE” D UKUM ,
IBRAHIM D UKUM , and D AVID D UKUM ,

                                               Defendants-Appellees.

             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
             No. 04 C 6536—Rebecca R. Pallmeyer, Judge.

    A RGUED F EBRUARY 12, 2009—D ECIDED M ARCH 12, 2009

 Before E ASTERBROOK, Chief Judge, and F LAUM and
M ANION, Circuit Judges.
  F LAUM, Circuit Judge. In the litigation underlying
this case, Lorillard Tobacco Co. (“Lorillard”) filed trade-
mark infringement, unfair competition, and Illinois Decep-
tive Trade Practices Act claims against Elston Self Service
Wholesale Groceries (“Elston”). Lorillard accuses Elston
2                                                No. 08-1888

and individual defendants of selling counterfeit ciga-
rettes bearing Lorillard’s federal trademark registration,
NEWPORT®. Elston tendered the underlying complaint
to its liability insurer, Capitol Indemnity Corp. Capitol
Indemnity filed suit against defendants Elston, Lorillard,
Elston’s owner Mashour “Mike” Dukum, and Elston
employees Ibrahim and David Dukum, seeking a declara-
tion that it has no duty to defend or indemnify Elston
and the Dukums in the underlying suit. The district court
granted partial summary judgment for Elston and the
Dukums. While the court declined to rule on Capitol
Indemnity’s duty to indemnify, the court ruled that the
advertising injury clause in Capitol Indemnity’s insur-
ance policy (“the Policy”) requires that Capitol Indem-
nity defend Elston in the underlying lawsuit, and no
exclusions in the policy negate this duty to defend.
Capitol Indemnity appealed, and we now affirm.

                      I. Background
   Elston is a distributor of wholesale merchandise, in-
cluding cigarettes. In July 2003, federal marshals raided
Elston and seized cigarettes. On July 9, 2003, Lorillard filed
suit against Elston. Lorillard later filed an amended
complaint naming the Dukums as additional defendants.
Lorillard’s claims arise from the alleged sale and offer
for sale of counterfeit cigarettes bearing the Newport
trademark. Lorillard accuses Elston and the Dukums of
misappropriating Lorillard’s federally registered trade-
marks as well as the goodwill associated with them. In
its amended complaint, Lorillard asserts that Elston and
No. 08-1888                                               3

the Dukums infringed Lorillard’s marks in violation of
15 U.S.C. § 1114(1) (Count I); falsely designated or mis-
represented goods being sold in violation of 15 U.S.C.
§ 1125(a) (Count II); diluted Lorillard’s marks in viola-
tion of 15 U.S.C. § 1125(c) and 765 ILCS 1036/65 (Counts III
and IV, respectively); engaged in unfair competition in
violation of Illinois common law (Count V); engaged in
deceptive trade practices in violation of 815 ILCS 510/2
(Count VI); engaged in common law fraud (Count VII);
and induced third parties to commit fraud (Count VIII).
Lorillard seeks an injunction prohibiting further wrong-
ful conduct; an order requiring defendants to deliver to
Lorillard for destruction anything in their possession
that bears the Lorillard marks, other than genuine
Lorillard cigarettes; an accounting and disgorgement of
profits from allegedly wrongful conduct; attorneys’ fees;
treble damages; statutory damages in lieu of actual dam-
ages; taxable costs of the action; and punitive damages. In
the underlying litigation, Elston filed a third-party com-
plaint, naming as third-party defendants Canstar and
Cam-Kat and alleging that it purchased the allegedly
counterfeit cigarettes from those two suppliers.
  This action is limited to insurance coverage claims.
Capitol Indemnity had insured Elston since 1993. It issued
the Policy implicated in this case, number BP00044456, to
Elston for the period from July 14, 2002 to July 14, 2003.
On April 22, 2004, Elston submitted a claim for coverage
under the Policy. Capitol Indemnity disclaimed any
duty to indemnify or defend Elston in the underlying
lawsuit on May 5, 2005.
4                                               No. 08-1888

  It is important to note that there is no allegation or
evidence that any cigarettes at issue in the underlying
case were purchased prior to the 2002 inception of the
Policy.
  In the Policy, Capitol Indemnity committed to “pay
those sums that the insured becomes legally obligated to
pay as damages because of ‘bodily injury,’ ‘property
damage,’ ‘personal injury,’ or ‘advertising injury’ to which
this insurance applies.” The Policy affords Capitol Indem-
nity the right and duty to defend Elston against any
suit seeking such damages, but it explicitly limits that
right and duty to claims to which the insurance applies.
 Advertising injury is most relevant to this case. The
policy defines advertising injury to include:
  a. Oral or written publication of material that slanders
or libels a person or organization or disparages a person’s
or organization’s goods, products or services;
  b. Oral or written publication of material that violates
a person’s right of privacy;
 c. Misappropriation of advertising ideas or style of
doing business; or
    d. Infringement of copyright, title or slogan.
   The Policy also contains three exclusions that the dis-
trict court found relevant to this case. First, the Policy
contains an “intentional conduct” restriction, which
dictates that the Policy’s coverage does not apply to
advertising injury “[a]rising out of oral or written pub-
lication of material, if done by or at the direction of the
No. 08-1888                                               5

insured with knowledge of its falsity.” Second, the Policy
includes a “prior publication” restriction: the “insurance
does not apply to ‘personal injury’ or ‘advertising injury’
[a]rising out of oral or written publication of material
whose first publication took place before the beginning
of the policy period.” Finally, the Policy contains a relief
exclusion, specifying that it “covers only compensatory
damages” and specifically excludes punitive damages,
exemplary damages, or statutory damages.
  In its third amended complaint, Capitol Indemnity
sought six declarations: (1) The underlying lawsuit does
not contain allegations that constitute advertising injury
under the Policy; (2) The underlying lawsuit does not
contain allegations that constitute personal injury under
the Policy; (3) There is no coverage in the underlying
lawsuit because every count of Lorillard’s Amended
Complaint alleged intentional acts or false publications;
(4) The Policy contains no coverage for the punitive or
statutory damages Lorillard seeks; (5) The Policy contains
no coverage for the equitable relief Lorillard seeks; and
(6) The Policy’s prior publication exclusion precludes
coverage in this case.
  The parties in this case filed cross motions for sum-
mary judgment, and on March 13, 2008, the district
judge issued a memorandum opinion and order granting
Elston’s motion in part and denying it in part. The
court declined to rule on Capitol Indemnity’s duty to
indemnify Elston or the Dukums. The district court ruled
that Capitol Indemnity owed no duty to defend the
underlying complaint under the “personal injury” cover-
6                                              No. 08-1888

age grant in its policy, but that Capitol Indemnity did owe
a duty to defend under the “advertising injury” coverage
grant in the Policy. The court reasoned that the injuries
alleged in the Lorillard amended complaint potentially
assert advertising injuries within the scope of the Policy.
The advertising injury clause covers infringement of
“copyright, title, or slogan,” and it covers “[m]isappro-
priation of advertising ideas.” The court held that title
infringement could include trademark infringement,
and it reasoned that trademark infringement is a misap-
propriation of advertising ideas.
  The district court also concluded that none of the
above-referenced exclusions eliminated Capitol Indem-
nity’s duty to defend. Most relevant to this appeal, the
court further reasoned that the prior publication ex-
ception did not apply because, even though advertising
and sales took place long before the Policy’s coverage
period began in 2002, there was nothing in the record to
indicate when the defendant started selling counterfeit
rather than genuine Newport cigarettes. In addition,
the court held that neither the exclusion for allegedly
intentional acts nor the relief exclusion applied.

                       II. Analysis
  As noted above, the Policy provides coverage for
alleged “advertising injuries” committed during the
Policy period, but Capitol Indemnity’s obligations under
this section are not absolute because the Policy contains
exclusions, including the prior publication exclusion. On
appeal, Capitol Indemnity does not develop an argument
No. 08-1888                                                 7

to dispute the district court’s finding that the sale of
counterfeit cigarettes can constitute “advertising injury”
caused by an offense committed in the course of adver-
tising. Therefore, Capitol Indemnity has waived this
point, and we shall not address it. See Garg v. Potter, 521
F.3d 731, 736 (7th Cir. 2008); Local 15, Int’l Bhd. of Elec.
Workers v. Exelon Corp., 495 F.3d 779, 783 (7th Cir. 2007)
(“ ‘A party waives any argument that it does not raise
before the district court or, if raised in the district court,
it fails to develop on appeal.’ ” (quoting Williams v. REP
Corp., 302 F.3d 660, 666 (7th Cir. 2002))); Doherty v. City
of Chicago, 75 F.3d 318, 326 (7th Cir. 1996). For the pur-
poses of this opinion, we will assume that the injuries
alleged in the Lorillard amended complaint potentially
assert advertising injuries.
   We recognize that Capitol Indemnity properly raises
its argument that the district court erred and it is not
obligated to defend Elston and the Dukums because the
prior publication exclusion in the Policy voids coverage.
We review this claim, which arises from a grant of sum-
mary judgment, de novo. Peters v. City of Mauston, 311
F.3d 835, 842 (7th Cir. 2002). We apply Illinois sub-
stantive law. Under Illinois insurance law, an insurer
is obligated to defend its insured if the underlying com-
plaint contains allegations that potentially fall within the
scope of coverage. Gen. Agents Ins. Co. of Am., Inc. v.
Midwest Sporting Goods Co., 828 N.E.2d 1092, 1098 (Ill.
2005). In order to determine whether an insurer has a
duty to defend its insured, we must compare the allega-
tions in the underlying complaint to the language of the
insurance policy. Id. “If the underlying complaint alleges
8                                                 No. 08-1888

facts within or potentially within policy coverage, an
insurer is obligated to defend its insured even if the
allegations are groundless, false or fraudulent.” Id.
  In this case, the underlying complaint alleges that
Elston and the Dukums infringed the Lorillard trade-
marks at the point of sale when they sold non-Newport
cigarettes that contained wrapping displaying the
Newport trademark and that were packaged in boxes
that displayed the mark. The underlying complaint does
not allege that defendants used Lorillard’s marks in an
infringing manner in any other material. As noted,
Lorillard does not allege that Elston sold any counterfeit
cigarettes prior to the 2002 inception of the Policy. There
is evidence that, to the consuming public, the trade-
marks on packaging and wrapping accompanying the
allegedly counterfeit cigarettes would have appeared
identical to trademarks on packaging and wrapping
accompanying genuine Newport cigarettes.1 Thus, our
task is to consider whether the prior publication ex-
clusion abrogates Capitol Indemnity’s duty to defend
because, prior to the Policy being issued, Elston sold
genuine Newport cigarettes that contained packaging
and wrapping displaying the Newport marks in a man-
ner that appeared identical to the alleged counterfeits.

1
  Lorillard employed a fraud expert, who was able to distin-
guish Elston’s allegedly counterfeit cigarettes from genuine
Newport cigarettes based on his “specialized knowledge of
Lorillard’s packaging.” Specifically, the expert found a dis-
crepancy of 1/8 of an inch in the package’s cellophane pull-tab
length, and he found out-of-sequence product coding.
No. 08-1888                                                9

   Capitol Indemnity argues that according to its plain
language (“insurance does not apply to . . . ‘advertising
injury’ [a]rising out of oral or written publication of
material whose first publication took place before the
beginning of the policy period”), the prior publication
exclusion bars coverage in this case because “the same
material,” i.e., the cigarette packaging and wrapping
containing the Newport trademarks, was first “published”
by Elston before the Policy began in 2002. According to
Capitol Indemnity, the word “material” in the exclusion
refers to the words, logo, or other content which is pub-
lished, not the legal effect of the publication.
   We do not share Capitol Indemnity’s interpretation of
the prior publication exclusion. We understand the term
“material” in the exclusion to refer to “injurious” material.
By its terms, the prior publication exclusion abrogates
the insurer’s duty to defend only where it can prove that
the insured’s prior publication of the same actionable,
injurious material alleged in the underlying complaint
occurred prior to the beginning of its policy. This inter-
pretation is logical because the exclusion exists to prevent
an insured from purchasing an insurance policy to cover
liability for illegal acts which it had undertaken prior
to purchasing the policy. Put another way, the purpose
of the exclusion is to prevent an individual who has
caused an injury from buying insurance so that he can
continue his injurious behavior.
  We do not see any ambiguity in the meaning of the
exclusion; it seems clear that the exclusion only abrogates
the duty to defend where the insured’s first publication
10                                               No. 08-1888

of actionable material occurred prior to the beginning of
its policy. Nevertheless, even if there were ambiguity in
the wording of the exclusion such that the exclusion
were open to two interpretations, under Illinois law we
would construe the terms of the Policy against Capitol
Indemnity. Hobbs v. Hartford Ins. Co. of the Midwest, 823
N.E.2d 561, 564 (Ill. 2005) (stating that when policy lan-
guage is ambiguous, courts are to construe the terms of
the policy against the insurer).
  Our interpretation of the prior publication exclusion
language is consistent with our reasoning in Taco Bell
Corp. v. Cont’l Cas. Co., 388 F.3d 1069 (7th Cir. 2004). In
that case, we wrote:
     The purpose of the “prior publication” exclusion (a
     common clause in liability-insurance contracts, though
     rarely litigated) can be illustrated most clearly with
     reference to liability insurance for copyright infringe-
     ment. Suppose a few months before insurance cov-
     erage began on October 7, 1997, the insured published
     an infringing book that it continued to sell after Octo-
     ber 6. The “prior publication” exclusion would bar
     coverage because the wrongful behavior had begun
     prior to the effective date of the insurance policy. The
     purpose of insurance is to spread risk—such as the
     risk that an advertising campaign might be deemed
     tortious—and if the risk has already materialized, what
     is there to insure? (citation omitted). The risk has
     become a certainty.
Taco Bell, 388 F.3d at 1072-73 (emphasis added). In Taco
Bell’s copyright hypothetical, it is the wrongful act that
No. 08-1888                                               11

triggers the prior publication exclusion. If the insured
does not publish actionable material prior to the policy
date, the prior publication exclusion will not apply,
regardless of whether the insured publishes very sim-
ilar material that is actionable after the policy inception.
  In the litigation underlying this case, there is no allega-
tion that Elston infringed Newport’s trademarks prior to
the inception of the Policy. That Elston “published”
Lorillard’s marks in a very similar manner both before
and after the Policy date is of no import. The trademarks
that Elston published on packaging and wrapping prior
to the Policy date were not actionable, and thus the
prior publication exclusion does not abrogate Capitol
Indemnity’s duty to defend Elston and the Dukums.

                     III. Conclusion
  We A FFIRM the district court’s partial grant of summary
judgment. Capitol Indemnity has a duty to defend in
the underlying litigation.

                           3-12-09