• Insured Fails To Prove Covered Advertising Injury Under Liability Policy
  • August 13, 2007 | Author: Colleen A. Brown
  • Law Firm: Clausen Miller PC - Chicago Office
  • In Federal Ins. Co.  v. Symons Corp., 2007 WL 689679 (Cal. App. 1 Dist.), the California Appellate Court, First District found that damages arising from a false advertising claim did not fall within the terms of a liability policy and thus, the insurer had no duty to indemnify the policyholder. 

    Facts

    A. Background

    The policyholder (“Symons”) sold and distributed heavy steel concrete farming equipment.  A competitor, EFCO Corporation (“EFCO”) sued Symons for false advertising in violation of the Lanham Act, misappropriating trade secrets, inducing a former EFCO employee to breach fiduciary duty, and intentionally interfering with EFCO’s contractual relations.  EFCO alleged Symons induced a former EFCO employee to disclose to Symons trade secrets belonging to EFCO.  Symons allegedly used this confidential information to develop, produce, market and sell a competing product.  EFCO alleged that Symons used false or misleading representations of fact to misrepresent the nature, characteristics and qualities of its and, by comparison, EFCO’s goods, services and/or commercial activities.  EFCO specifically alleged that Symons misrepresented the strength, weight and relative usefulness of its products in comparison to EFCO’s products.

    A jury awarded EFCO $13 million in compensatory damages for Symons’ false advertising in violation of the Lanham Act, $12.3 million for Symons misappropriation of trade secrets and  $200,000 for inducing a former EFCO employee to breach a fiduciary duty.

    B. Procedural History

    A coverage action was filed to determine whether Symons’ insurers had a duty to indemnify Symons for the compensatory damages awarded in the underlying action.  Symons and the insurers filed competing motions for summary judgment contesting whether the damages Symons was obligated to pay on account of the  underlying judgment were covered under the advertising injury clauses of the various insurance policies at issue.  The trial court entered summary judgment for the insurers, concluding Symons had failed to meet its burden of establishing that the damages awarded in the underlying action were awarded for an advertising injury.  Symons appealed the trial court’s decision.

    Analysis

    The First District Appellate Court affirmed the trial court’s ruling that the damages awarded against Symons in the underlying action were not covered under the liability  policies at issue. 

    The court focused on the definition of “advertising injury” within the policies.  The policies defined advertising injury to include “(1) oral or written publication of material that … disparages a person’s or organization’s goods, product or services,” or “(2) misappropriation of advertising ideas or style of doing business.”  The court noted that the insurers did not undertake to insure against all of Symons activities arising from its advertising or marketing of its product.  Instead, indemnity was only required if Symons were held liable for damages arising from its publication of a disparaging statement of another person’s or organization’s goods, products or services, or its misappropriation of advertising ideas or style of doing business in the course of advertising activities.

    The court rejected Symons’ argument that disparagement is inherent in the false advertising challenged by EFCO in the underlying action.  The court noted that not all negative comments about a competitor’s products or claims of product superiority constitute disparagement.  The Lanham Act applies both to false and misleading statements about the defendants own products and to false and misleading statements made by defendant about plaintiff’s products.  Thus, the underlying jury was not required to predicate liability under the Lanham Act on the basis that Symons made statements disparaging EFCO’s products.  Instead, the jury could have predicated its verdict on a finding that Symons falsely represented its own products.  That the jury might have or could have found that Symons attributed undesirable characteristics to EFCO’s products is irrelevant.  Symons bore the burden of establishing that the underlying judgment was entered on the theory actually covered by the policies.  Thus, Symons were required to show the underlying judgment necessarily encompassed an award of damages for disparaging statements concerning EFCO’s products.  That it could not do.

    Learning Point:

    The policyholder bore the burden of showing that underlying damages were awarded on an advertising injury theory covered by the policies.  Where the policyholder could not do so, damages were not covered under the policy.