2d Circuit Holds No Duty to Defend Intellectual Property Claim

In its recent decision titled Feldman Law Group v. Liberty Mut. Ins. Co., 2012 U.S. App. LEXIS 7787 (2d Cir. Apr. 18, 2012), the United States Court of Appeals for the Second Circuit, applying Pennsylvania law, had occasion to consider whether a claim for copyright and trade dress infringement involving designer jewelry triggered coverage under a general liability policy as an advertising injury.

Feldman Law Group (“FLG”), as the assignee of the insured, The Hyman Companies, sued Liberty to recover its costs in defending Hyman in a suit brought by Van Cleef & Arpels Logistics, S.A.  The suit alleged that Hyman violated Van Cleef’s copyright and trade dress, specifically with respect to the design of certain jewelry.  Liberty had denied a duty to defend or indemnify Hyman on the basis that Van Cleef’s suit did not allege an advertising injury, since the complaint made no reference to “advertising,” defined by the Liberty policy as a “paid announcement that is broadcast or published in the print, broadcast or electronic media to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The Southern District of New York held in Liberty’s favor on motion to dismiss.

On appeal, the Second Circuit agreed that the underlying suit contained no allegations that would qualify as an advertising injury offense, or that would even qualify as advertising in the first instance.  Rather, the suit related to Hyman’s efforts to reproduce, copy and imitate Van Cleef intellectual property, i.e., its jewelry designs.  The court specifically rejected FLG’s argument that the generic allegation in the complaint alleging that Hyman “offered [the jewelry] for sale and/or distributed copies of the [protected intellectual property]” constituted an advertising injury offense.  As the court explained:

FLG urges us to infer that the references to reproduction and distribution "by sale and other means" could refer to the placement of a "paid announcement" in the public media. Such references, however, are far too general to support the conclusion that Van Cleef's complaint encompassed an injury resulting from any paid advertisement by Hyman, when the complaint specifically and repeatedly refers only to Hyman's conduct in "designing" jewelry "that is confusingly similar" to Van Cleef's design, and "reproducing such design without authorization and distributing copies thereof," thus infringing its trade dress and copyright.  The factual allegations of the complaint thus specifically invoke Hyman's design, manufacture and sale of infringing goods, but nowhere discuss, allege or allude to any advertisement of those goods.

The court went on to note that even if the complaint could be construed as alleging advertisement, advertisement of misappropriated goods, in and of itself, does not constitute an advertising injury offense as defined by the Liberty policy.  For instance, Van Cleef did not allege that its intellectual property was misappropriated as a result of Hyman’s advertising.  Citing to the seminal Pennsylvania decision in Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 20 F. Supp. 2d 798, 803 (M.D. Pa. 1998), aff’d, 193 F.3d 742 (3d Cir. 1999), the court noted that “the advertisement, and not the product being advertised, must itself infringe the underlying plaintiff's rights.”  The court further rejected FLG’s argument that Hyman’s possible use of catalogues and circulars to advertise its jewelry constituted “advertising” as defined by the Liberty policy, which required a paid announcement in public media.  Circulars and catalogues, explained the court, did not fall within this definition.

In rear end collisions, liability is often considered to be automatic. But the Court of Appeal has reminded us that there is no such fixed rule.

In Martin-Vandenhende v. Myslik, 2012 ONCA 53 (C.A.), the plaintiff alleged the defendant rear-ended her vehicle as she slowed to make a left turn. She testified she activated her left turn signal prior to slowing down and commencing the turn. The defendant’s version of events was that the plaintiff activated her right turn signal and pulled to the right, which he interpreted to mean she was pulling over to allow him to pass. As he pulled around her vehicle, she turned left into him.

The trial judge found in favour of the plaintiff. He held that “taken at its highest”, the signal was “perhaps confusing” and the plaintiff was “perhaps giving [the defendant] inconsistent signals”. The Court held that this was not taking the defendant’s evidence at its highest, as his evidence was unequivocal: he was not confused or being given inconsistent signals, as he testified the plaintiff indicated she was going right, not left.

Justice Blair cited Beaumont v. Ruddy , [1932] O.R. 441 (C.A.) for the proposition that generally speaking, where one car runs into another from behind, the fault lies with the driver of the rear car, and he must satisfy the Court that the collision did not occur as a result of his negligence. Since the trial judge did not make factual findings to resolve the conflicting testimony between the parties, it could not be said one way or another whether Beaumont had been satisfied. Justice Blair held:

31 In addition, the trial judge's approach was wrong in law, in my view. The common law principle enunciated in Beaumont v. Ruddy does not prescribe that a following driver is always at fault if he or she runs into another from behind. It simply states that generally speaking this will be the case, and shifts the onus to the following driver to show otherwise. There is no principle of law of which I am aware that automatically fixes a following driver who runs into another vehicle from the rear with liability "no matter what [the lead driver] chooses to do, within [his or] her own lane." Subject to the law's general bias in favour of fault on the part of the following driver and the "following too closely" jurisprudence, liability - as in any negligence case - depends upon whether the following driver was acting reasonably in the circumstances and, conversely, whether the lead driver was as well.

The Court allowed the appeal and ordered a new trial.

- Tara Pollitt

7th Circuit Holds No Coverage for Restitution Claim Under D&O Policy

In its recent decision in Ryerson Inc. v. Federal Ins. Co., 2102 U.S. App. LEXIS 7372 (Apr. 12, 2012), the United States Court of Appeals for the Seventh Circuit, applying Illinois law, had occasion to consider whether an underlying suit seeking rescission of a fraudulent transaction triggered coverage under a directors and officers liability policy.

The underlying facts in Ryerson involved the insured’s allegedly fraudulent sale of a number of subsidiaries to EMC Group.  EMC later sued Ryerson, seeking rescission of the sale and restitution of the purchase price on the theory that Ryerson withheld certain material information concerning one of the subsidiaries.  EMC claimed that Ryerson fraudulently concealed this information in an effort to induce the sale.  EMC also alleged causes of action for breach of contract and breach of warranty.  Federal Insurance Company denied coverage to Ryerson, and Ryerson subsequently settled the matter with EMC for $8.5 million.

Federal’s policy provided coverage for “all LOSS for which [the insured] becomes legally obligated to pay on account of any CLAIM … for a WRONGFUL ACT … .”  Federal argued that “loss” does not and cannot include restitution.  The court agreed, stating that allowing coverage for such claims would, in essence, encourage fraud.  Citing to a number of cases, including its seminal decision in Level 3 Communications, Inc. v. Federal Ins. Co., 272 F.3d 908 (7^th Cir. 2001), the court explained that:

If disgorging [the proceeds of ill-gotten gains] is included within the policy’s definition of “loss,” thieves could buy insurance against having to return money they stole.  No one writes such insurance.

The court further explained that regardless of whether the for restitution claim is based on fraud or an innocent mistake is of no consequence.  Rather, the key determination is whether the claim is for compensatory damages or for return of “something that belongs of right not to [the defendant] but to the plaintiff.”  As such, the court noted, it was not a relevant consideration that EMC styled its complaint as one for damages:

EMC was seeking to recover a profit made at its expense by Ryerson’s fraud, which means that if the insurance company were liable to Ryerson, Ryerson would get to keep profits of fraud.  Having to surrender those profits was not a “loss” to Ryerson within the meaning of the insurance policy … .

The court acknowledged that in some instances, a judgment or settlement in a fraud case can include a combination of restitution and damages, the latter of which may be covered.  For instance, the EMC complaint initially sought recovery “transaction costs,” which the court agreed “would not be restitution because Ryerson gained nothing from the money that EMC paid its lawyers and accountants to handle the acquisition [of the subsidiary group].”  The court nevertheless concluded that because the underlying settlement made no effort to allocate as between restitution and such transaction costs, Ryerson forfeited any right it may have had for such amounts.

Kusnierz - Combining Impairments in Determining Catastrophic Impairment

Kusnierz v. The Economical Insurance Company (2012) 108 O.R. (3d) 272 (C.A.)

Kusnierz is an important Court of Appeal decision regarding catastrophic impairment under the SABS.

Mr. Kusnierz suffered a below the knee amputation and clinical depression in a 2001 accident. The parties disagreed as to whether he met the criteria to be declared catastrophically impaired, and the trial judge held that he did not. The key issue was whether physical and psychological impairments can be combined in evaluating whether a person is catastrophically impaired under the SABS.

The Court of Appeal held that it is permissible to combine physical and psychological impairments for the following reasons:

1. The legislator did not expressly forbid the combination;
2. The AMA Guides aim to assess the total effects of a person’s impairments on daily activities;
3. The Guides describe a number of situations where physical impairments should take into account mental and behavioural impairments;
4. The combination of impairments is consistent with the purpose of the SABS. The Court noted that the respondent conceded that there are few cases where physical and psychological impairments are catastrophic when combined but not when assessed separately. The class of persons who are CAT will therefore remain small; and
5. Combination promotes fairness and the objectives of the statutory scheme.

Although Kusnierz has the potential to open up the floodgates for catastrophic claims, it may be that the class of cases that fit into this situation remains small, as predicted by the Court of Appeal. It may take time before the full effects of Kusnierz are truly known.

- Tara Pollitt

Delaware Court Rejects Extrinsic Facts In Determining Duty to Defend Additional Insured

In its recent decision in The Premcor Refining Group v. National Fire Insurance Co. of Hartford, 2012 U.S. Dist. LEXIS 49097 (D. Del. Apr. 6, 2012), the United States District Court for the District of Delaware considered what allegations and extrinsic evidence can be considered in the context of determining a duty to defend a putative additional insured.

National Fire’s insured, Griffith Roofing, had contracted with Premcor to perform construction work.  One of Griffith’s employees was hurt while performing this work, and brought suit against Premcor, alleging that his injuries were caused by Premcor’s sole negligence.  Premcor tendered its defense as an additional insured under Griffith’s policy with National Fire.  While the National Fire policy had an endorsement providing coverage for additional insureds, where required by contract, the endorsement excluded liability resulting from the putative additional insured’s “sole negligence.”

Notwithstanding this exclusion, and the fact that the complaint alleged liability resulting from Premcor’s sole negligence, Premcor argued that it was entitled to a full defense under Griffith’s policy.  Premcor first argued that a certificate of liability insurance issued by Griffith’s broker modified the policy’s additional insured coverage because it stated that Premcor was an additional insured and the certificate did since it did not contain any language limiting the scope of coverage.  The court rejected this argument, pointing out that the certificate expressly stated that it was for informational purposes only and did not amend the coverage actually afforded by express terms of the policy.  In any event, explained the court, Griffith’s broker did not have actual or apparent authority to amend the terms of the National Fire policy.

More significant for the court was Premcor’s argument that the court should look beyond the pleadings in the underlying suit, since the facts established through discovery indicated that the underlying accident was not the result of Premcor’s sole negligence.  In other words, Premcor argued that the duty to defend, at least in the context of additional insured coverage, should not be limited to the four corners of the complaint. 

The Premcor court acknowledged, but ultimately distinguished, two decisions by the Delaware Supreme Court in which extrinsic facts were considered in determining a duty to defend.  In Pike Creek Chiropractic Center, P.A. v. Robinson, 637 A.2d 418 (Del. 1994), the court considered extrinsic evidence from the underlying case, where discovery had already been completed, to determine whether the insured’s contractual duty to defend was triggered.  Likewise, in American Ins. Group v. Risk Enterprise Management, Ltd., 761 A.2d 826 (Del. 2000), the court held that notwithstanding the general rule that a duty to defend is based on the four corners of the complaint, consideration of extrinsic facts was allowed in determining a duty to defend a third-party action where discovery was completed in the first party action and, in fact, the first party action had already settled. 

The Premcor court noted that Pike Creek and American Ins. Group were exceptions to the rule and limited to situations where “a complete discovery record had been developed and the underlying litigation was resolved.”  In fact, National Fire cited to a case involving Premcor where it cited to these very two cases, unsuccessfully, for the proposition that extrinsic evidence could be used in determining a duty to defend a putative additional insured.  See, Premcor Refining Group, Inc. v. Matrix Service Industries, 2009 WL 960567 (Del. Super. 2009).  The court therefore rejected Premcor’s argument, explaining that:

Absent completion of discovery and resolution of the underlying case, Delaware law is inclined against looking beyond the pleadings to determine whether a duty to defend exists. 

Thus, concluding that the underlying lawsuit alleged injuries as a result of Premcor’s sole negligence, the court held that National Fire had no duty to defend or indemnify Premcor at the present time. 

Material Changes in Risk – Duty of Insurers to Communicate to Insureds

Thomas v. Aviva Insurance Co. [2011] N.B.J. No. 371

A fire occurred in an elderly insured’s home which was caused by a wood stove. When the insured had applied for insurance seven years earlier, he had indicated that he had electric heat as his primary heating source. One year later, a wood stove had been installed as a secondary heat source.

The insurer voided the policy and denied coverage on the basis that the insured failed to notify them of the installation of the wood stove. The insurer took the position that the installation of the wood stove constituted a material change in risk.

The insured was sent renewal policy notices that contained a caution to ensure that all information in the policy was accurate. The insured had dropped out of school at the age of 16 and never read the policy and was unaware of the obligation to inform the insurer of the installation of the wood stove.

The insured sued for breach of contract and was successful at trial. The trial judge held that the “insured’s knowledge was the determinative factor and the lack of guilty knowledge on the part of the insured supported the conclusion that the wood stove, as a supplementary or auxiliary heating unit, was not a material change of risk”.

The insurer appealed to the New Brunswick Court of Appeal. The appeal was dismissed. Chief Justice Drapeau found that the insurer had treated the matter of auxiliary heating sources as inconsequential “and effectively advised [the insured] in its various renewal notices that only the information provided in the original application was material to the risk”. In the original application for insurance, the insured was only asked about his home’s primary heating source. This suggests that the insurer did not consider the installation of the wood stove to be a material circumstance requiring disclosure. Lastly, Chief Justice Drapeau held that even if the installation of the wood stove constituted a change material to the risk, the insurer’s duty of good faith to the insured required that the insured be advised of this in plain language. This last point seemed to be especially important in this case as the insured had “very limited formal education”.

- Kristen Dearlove, Student-at-Law

Pennsylvania Court Holds Pollution Exclusion Applies to Pig Farm Odor Claim

In its recent decision in Travelers Property Casualty Company of America v. Chubb Custom Insurance Co., 2012 U.S. Dist. LEXIS 44756 (E.D. Pa. Mar. 30, 2012), the United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, had occasion to consider whether noxious odor emanating from a pig farm constituted a pollutant for the purpose of a total pollution exclusion.

The insured operated commercial pig farms in several states, including a facility in Indiana that contained some 2,800 sows and their babies.  The facility collected the pig excrement into a large, cement pit that eventually drained through a drag line.  The drag line, in turn, deposited the waste onto nearby fields for use as fertilizer.  The insured and other entities were sued by several neighbors who alleged that the facility produced “harmful and ill-smelling odors, hazardous substances and contaminated wastewater” that resulted in personal injury and property damage.  Among other things, the complaint alleged that the “offensive and noxious odors” impaired plaintiffs’ use and enjoyment of their properties and caused “sudden onset” ailments, including nausea, vomiting, headaches, respiratory problems, irritation and aggravation of existing medical conditions.

Travelers and Zurich, which issued successive years of primary general liability coverage, denied coverage based on their policies’ respective total pollution exclusions, which in pertinent part applied to the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” After engaging in a lengthy choice of law analysis in which the court determined that the policies were governed by Pennsylvania rather than Indiana law, the court addressed the issue of whether noxious odors fell within the policies’ definitions of “pollutants,” defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” 

The court conceded that the issue of whether odors emitted from a large livestock facility are a pollutant was a matter of first impression under Pennsylvania law.  The court therefore relied on several Pennsylvania cases applying standard dictionary definitions to the terms used in the definition of “pollutant.”  Thus, for example, contaminant is generally defined as  “something that renders another thing impure” and waste is generally defined as “superfluous material produced during or left over from a manufacturing process or industrial operation.”  The court also looked to Pennsylvania cases holding that fumes can qualify as pollutants for the purpose of pollution exclusions.  See, e.g., Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100 (Pa. 1999) (fumes from cement curing agent); Matcon Diamond, Inc. v. Penn National Ins. Co., 815 A.2d 1109 (Pa. Super. Ct. 2003) (carbon monoxide fumes).  Relying on these definitions and cases, the court determined that:

… noxious odors produced by pig excrement (or waste) that cause bodily injury and property damage appear to fit squarely within the definition of pollutant under the policies.  The fact that pig waste is spread over fields as fertilizer is of no moment, as “waste” includes materials left over from a production operation, and the policies’ definition of pollutant expressly includes waste that is to be reused.

In reaching its holding, the court considered the insured’s argument that “simple odors cannot be pollutants.”  Specifically, the insured argued that “because odors can be unpleasant or sweet, harmful or innocuous, the allegation of foul odors is too ambiguous to be construed as a pollutant barring coverage.”  The court, however, rejected such a bright line rule.  Instead, the court held that it is the nature of the alleged odors, in relation to the alleged harm, that determines whether it is a pollutant.  Thus, explained the court, noxious odors emanating from a pig farm that allegedly resulted in harms beyond mere nuisance, but actual bodily injury (i.e., nausea, vomiting, breathing difficulties, etc.), unambiguously fell within the definition of “pollutant.”  The court also rejected the insured’s argument that the exclusion did not apply because manure odors are commonplace in rural areas.