CASE BRIEFS

Texas Court Rules on 'Advertising Injury'

Pa. Pulp & Paper Co. v. Nationwide Mut. Ins. Co., NO. 14-01-00996-CV (14th Dist. Tex. App. Houston 2/27/03), 2003 Tex. App. LEXIS 1693

The Texas 14th Court of Appeals recently held that counterclaims asserting tortious interference with business relationships and misappropriation of trade secrets do not constitute 'advertising injury' under a commercial general liability insurance policy. The court also held that a counterclaim alleging a groundless Texas Deceptive Trade Practices Act ('DTPA') claim was not covered as 'malicious prosecution.'

Nationwide Mutual Insurance Company ('Nationwide') issued a commercial general liability insurance policy to Pennsylvania Pulp & Paper Co. ('Pennsylvania Pulp'). Under the policy, Nationwide undertook a duty to defend Pennsylvania Pulp against any suit seeking damages for 'advertising injury' caused by an offense committed in the course of advertising the policyholder's goods, products, or services. Over the course of 2 years, Pennsylvania Pulp purchased four patented holographic imaging machines ('Light Machines') from Dimensional Arts, Inc. ('Dimensional'). The fourth machine purchased did not work properly. After two attempts by Dimensional to repair the Light Machine, Pennsylvania Pulp sued Dimensional Arts alleging breach of contract and DTPA violations. Dimensional responded with a counterclaim in which it asserted five claims against Pennsylvania Pulp: 1) breach of the licensing agreement; 2) tortious interference with prospective business relationships; 3) misappropriation of trade secrets; 4) filing of a groundless DTPA claim by Pennsylvania Pulp; and 5) patent infringement.

Pennsylvania Pulp and Nationwide filed cross-motions for summary judgment on the issue of coverage. In determining whether or not there was 'advertising injury' such that Nationwide had a duty to defend, the court looked at the counterclaims against Pennsylvania Pulp and characterized them as claims of tortious interference with business relationships and misappropriation of trade secrets.

The insurance policy provided coverage for ”Advertising injury' caused by an offense committed in the course of advertising [Pennsylvania Pulp's] goods, products or services.' 'Advertising injury' was defined in pertinent part to mean 'injury arising out of one or more of the following offenses: ' misappropriation of advertising ideas or style of doing business.' Dimensional did not allege in its counterclaim that Pennsylvania Pulp imitated or used Dimensional's advertising ideas or style of doing business. Dimensional also did not allege any facts related to, or injury from, advertising activity by Pennsylvania Pulp. Although Dimensional alleged Pennsylvania Pulp hired a third party company to operate and maintain the light machines, the court found that Dimensional did not assert that the third party company had access to any customer lists or that Pennsylvania Pulp solicited customers from any customer list. Additionally, the court found that Dimensional did not allege any facts suggesting Pennsylvania Pulp used Dimensional's advertising ideas to lure customers. Accordingly, the court held there was no 'advertising injury' alleged in the counterclaim, which would trigger Nationwide's duty to defend.

Pennsylvania Pulp also argued that Dimensional's counterclaim based on Pennsylvania Pulp's allegedly groundless DTPA claim was equivalent to a claim of malicious prosecution, thereby entitling Pennsylvania Pulp to coverage. Pennsylvania Pulp suggested that its DTPA counterclaim under section 17.50(c) of the Texas Business and Commerce Code fell under the ordinary meaning of 'malicious prosecution', and  the court should adopt this meaning rather than the meaning given in Texas common law.

The court acknowledged that 'malicious prosecution,' as used in a commercial general liability insurance policy, appeared to be an issue of first impression under Texas law.  However, the court observed that many other courts throughout the country have addressed this issue, holding that 'malicious prosecution' in an insurance policy means the technical legal definition of 'malicious prosecution' under the applicable jurisdiction's tort law.  The court rejected Pennsylvania Pulp's 'ordinary meaning' argument, instead holding that under an insurance policy, the Texas common law 'malicious prosecution' elements must be satisfied to trigger the duty to defend.  In the instant matter, the court found that there were no allegations which could be construed as satisfying these elements, namely: 1) the institution or continuation of civil proceedings against the plaintiff, 2) by or at the insistence of the defendant, 3) malice in the commencement of the proceeding, 4) lack of probable cause for the proceeding, 5) termination of the proceeding in plaintiff's favor, and 6) special damages resulting from some physical interference with a party's person or property in the form of an arrest, attachment, injunction, or sequestration.

Insureds' Claims Regarding Earthquake Damage Revived

Campanelli v. Allstate Life Insurance Co., 2003 U.S. App. LEXIS 3767 (9th Cir. March 3, 2003).

The Ninth Circuit Court of Appeals addressed the question of whether several insureds' lawsuits regarding damage caused by the 1994 Northridge, CA, earthquake was time-barred because the insureds did not file suit until 1998. The insureds alleged that they had accepted payments from Allstate in the 2 years after the earthquake based on the fraudulent nature of engineering reports provided by Allstate. The Ninth Circuit first ruled that the policies' 1-year contractual limitations period applied and that the claims were time-barred unless Allstate was estopped to assert the limitations period. The court concluded that Allstate was not estopped because the insureds had failed to present sufficient evidence in opposition to Allstate's motion for summary judgment. The court then addressed California Code of Civil Procedure section 340.9 Section 340.9 states in part that an insurance claim for damages arising out of the Northridge earthquake that is barred before January 1, 2001, solely because of a statute of limitations 'is hereby revived' except as to, among other things, '[a]ny claim that has been litigated to finality' prior to January 1, 2001. Allstate argued that the claim had been 'litigated to finality' because the district court's orders granting summary judgment had been filed before January 1, 2001. The Ninth Circuit rejected this argument, holding that 'a claim has not been litigated to finality until there has been a 'final resolution of the matter on appeal' or until the time for taking an appeal has expired without an appeal having been taken.'

Therefore, the court ruled that the insureds' claims were revived because their appeal was pending on January 1, 2001. The court also ruled that all of the insureds' claims were revived,

Lower Court Affirmed

Federal Ins. Co. v. CompUSA, Inc., No. 02-10768 (5th Cir. 2/12/03), 2003 U.S. App. LEXIS 2397.

Applying Texas law, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court's grant of summary judgment in favor of an insurer holding that where no claim was made or reported to the insurer during the insurer's policy period, coverage was precluded.

This month's Case Briefs were written by Ralph S. Hubbard III, Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, New Orleans; and Kirk Pasich, Howrey Simon Arnold & White, LLP, Menlo Park, CA.

Texas Court Rules on 'Advertising Injury'

Pa. Pulp & Paper Co. v. Nationwide Mut. Ins. Co., NO. 14-01-00996-CV (14th Dist. Tex. App. Houston 2/27/03), 2003 Tex. App. LEXIS 1693

The Texas 14th Court of Appeals recently held that counterclaims asserting tortious interference with business relationships and misappropriation of trade secrets do not constitute 'advertising injury' under a commercial general liability insurance policy. The court also held that a counterclaim alleging a groundless Texas Deceptive Trade Practices Act ('DTPA') claim was not covered as 'malicious prosecution.'

Nationwide Mutual Insurance Company ('Nationwide') issued a commercial general liability insurance policy to Pennsylvania Pulp & Paper Co. ('Pennsylvania Pulp'). Under the policy, Nationwide undertook a duty to defend Pennsylvania Pulp against any suit seeking damages for 'advertising injury' caused by an offense committed in the course of advertising the policyholder's goods, products, or services. Over the course of 2 years, Pennsylvania Pulp purchased four patented holographic imaging machines ('Light Machines') from Dimensional Arts, Inc. ('Dimensional'). The fourth machine purchased did not work properly. After two attempts by Dimensional to repair the Light Machine, Pennsylvania Pulp sued Dimensional Arts alleging breach of contract and DTPA violations. Dimensional responded with a counterclaim in which it asserted five claims against Pennsylvania Pulp: 1) breach of the licensing agreement; 2) tortious interference with prospective business relationships; 3) misappropriation of trade secrets; 4) filing of a groundless DTPA claim by Pennsylvania Pulp; and 5) patent infringement.

Pennsylvania Pulp and Nationwide filed cross-motions for summary judgment on the issue of coverage. In determining whether or not there was 'advertising injury' such that Nationwide had a duty to defend, the court looked at the counterclaims against Pennsylvania Pulp and characterized them as claims of tortious interference with business relationships and misappropriation of trade secrets.

The insurance policy provided coverage for ”Advertising injury' caused by an offense committed in the course of advertising [Pennsylvania Pulp's] goods, products or services.' 'Advertising injury' was defined in pertinent part to mean 'injury arising out of one or more of the following offenses: ' misappropriation of advertising ideas or style of doing business.' Dimensional did not allege in its counterclaim that Pennsylvania Pulp imitated or used Dimensional's advertising ideas or style of doing business. Dimensional also did not allege any facts related to, or injury from, advertising activity by Pennsylvania Pulp. Although Dimensional alleged Pennsylvania Pulp hired a third party company to operate and maintain the light machines, the court found that Dimensional did not assert that the third party company had access to any customer lists or that Pennsylvania Pulp solicited customers from any customer list. Additionally, the court found that Dimensional did not allege any facts suggesting Pennsylvania Pulp used Dimensional's advertising ideas to lure customers. Accordingly, the court held there was no 'advertising injury' alleged in the counterclaim, which would trigger Nationwide's duty to defend.

Pennsylvania Pulp also argued that Dimensional's counterclaim based on Pennsylvania Pulp's allegedly groundless DTPA claim was equivalent to a claim of malicious prosecution, thereby entitling Pennsylvania Pulp to coverage. Pennsylvania Pulp suggested that its DTPA counterclaim under section 17.50(c) of the Texas Business and Commerce Code fell under the ordinary meaning of 'malicious prosecution', and  the court should adopt this meaning rather than the meaning given in Texas common law.

The court acknowledged that 'malicious prosecution,' as used in a commercial general liability insurance policy, appeared to be an issue of first impression under Texas law.  However, the court observed that many other courts throughout the country have addressed this issue, holding that 'malicious prosecution' in an insurance policy means the technical legal definition of 'malicious prosecution' under the applicable jurisdiction's tort law.  The court rejected Pennsylvania Pulp's 'ordinary meaning' argument, instead holding that under an insurance policy, the Texas common law 'malicious prosecution' elements must be satisfied to trigger the duty to defend.  In the instant matter, the court found that there were no allegations which could be construed as satisfying these elements, namely: 1) the institution or continuation of civil proceedings against the plaintiff, 2) by or at the insistence of the defendant, 3) malice in the commencement of the proceeding, 4) lack of probable cause for the proceeding, 5) termination of the proceeding in plaintiff's favor, and 6) special damages resulting from some physical interference with a party's person or property in the form of an arrest, attachment, injunction, or sequestration.

Insureds' Claims Regarding Earthquake Damage Revived

Campanelli v. Allstate Life Insurance Co., 2003 U.S. App. LEXIS 3767 (9th Cir. March 3, 2003).

The Ninth Circuit Court of Appeals addressed the question of whether several insureds' lawsuits regarding damage caused by the 1994 Northridge, CA, earthquake was time-barred because the insureds did not file suit until 1998. The insureds alleged that they had accepted payments from Allstate in the 2 years after the earthquake based on the fraudulent nature of engineering reports provided by Allstate. The Ninth Circuit first ruled that the policies' 1-year contractual limitations period applied and that the claims were time-barred unless Allstate was estopped to assert the limitations period. The court concluded that Allstate was not estopped because the insureds had failed to present sufficient evidence in opposition to Allstate's motion for summary judgment. The court then addressed California Code of Civil Procedure section 340.9 Section 340.9 states in part that an insurance claim for damages arising out of the Northridge earthquake that is barred before January 1, 2001, solely because of a statute of limitations 'is hereby revived' except as to, among other things, '[a]ny claim that has been litigated to finality' prior to January 1, 2001. Allstate argued that the claim had been 'litigated to finality' because the district court's orders granting summary judgment had been filed before January 1, 2001. The Ninth Circuit rejected this argument, holding that 'a claim has not been litigated to finality until there has been a 'final resolution of the matter on appeal' or until the time for taking an appeal has expired without an appeal having been taken.'

Therefore, the court ruled that the insureds' claims were revived because their appeal was pending on January 1, 2001. The court also ruled that all of the insureds' claims were revived,

Lower Court Affirmed

Federal Ins. Co. v. CompUSA, Inc., No. 02-10768 (5th Cir. 2/12/03), 2003 U.S. App. LEXIS 2397.

Applying Texas law, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court's grant of summary judgment in favor of an insurer holding that where no claim was made or reported to the insurer during the insurer's policy period, coverage was precluded.

This month's Case Briefs were written by Ralph S. Hubbard III, Lugenbuhl, Wheaton, Peck, Rankin & Hubbard, New Orleans; and Kirk Pasich, Howrey Simon Arnold & White, LLP, Menlo Park, CA.