Frog, Switch & Manufacturing Co. v. Travelers Insurance ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
9-30-1999
Frog, Switch & Mfgr'g Co. v. Travellers Ins. Co.
Precedential or Non-Precedential:
Docket 98-7552
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"Frog, Switch & Mfgr'g Co. v. Travellers Ins. Co." (1999). 1999 Decisions. Paper 269.
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Filed September 30, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 98-7552 and 98-7553
THE FROG, SWITCH & MANUFACTURING CO., INC.,
Appellant in No. 98-7552
v.
THE TRAVELERS INSURANCE COMPANY
(D.C. Civ. No. 98-cv-00643)
THE FROG, SWITCH & MANUFACTURING CO., INC.,
Appellant in No. 98-7553
v.
UNITED STATES FIRE INSURANCE COMPANY
(D.C. Civ. No. 98-cv-00758)
On Appeal From the United States District Court
For the Middle District of Pennsylvania
District Judge: Honorable William W. Caldwell
Argued: July 13, 1999
Before: BECKER, Chief Judge, ROTH and RENDELL,
Circuit Judges.
(Filed: September 30, 1999)
R. JAMES REYNOLDS, JR.,
ESQUIRE (ARGUED)
Thomas, Thomas, Armstrong
& Niesen
212 Locust Street
P.O. Box 9500
Harrisburg, PA 17108
Counsel for Appellant The Frog,
Switch & Manufacturing Co.
WILLIAM T. CORBETT, JR.,
ESQUIRE (ARGUED)
Shanley & Fisher
131 Madison Avenue
Morristown, NJ 07962-1979
Counsel for Appellee
Travelers Insurance Co.
FRANCIS J. DEASEY, ESQUIRE
(ARGUED)
Deasey, Mahoney & Bender
1800 JFK Boulevard, Suite 1300
Philadelphia, PA 19103-2978
Counsel for Appellee United States
Fire Insurance Company
OPINION OF THE COURT
BECKER, Chief Judge.
This case requires us to interpret two insurance policies
to determine whether the insurers had a duty to defend the
insured against a lawsuit brought by a competitor for theft
of trade secrets, unfair competition, and reverse passing off.
The policies covered claims against the insured for
"advertising injury." The definition of"advertising injury" in
standard business insurance policies has troubled and in
some cases confounded courts for years. This case involves
allegations that the insured stole various ideas and then
advertised the results of that theft; the question is whether
the advertising converts the theft into "advertising injury."
2
We conclude that it does not, and that, by the plain terms
of the policies, the insurers had no duty to defend against
such claims. We also rule that the insured cannot maintain
actions for bad-faith denial of coverage against them. We
therefore affirm the District Court's order granting
summary judgment to the principal insurer, Travelers
Indemnity Co. (named as "Travelers Insurance Co." in the
caption) ("Travelers"), and its Fed. R. Civ. P. 12(b)(6) order
dismissing the insured's complaint against the excess
carrier, United States Fire Insurance Co. ("USFIC").
I. Facts and Procedural History
Plaintiff is The Frog, Switch & Manufacturing Co.
("Frog"), a manufacturer of industrial products. Defendants
are Travelers and USFIC, which issued insurance policies
to Frog that are identically worded in relevant part.
Travelers issued a basic policy with an advertising injury
limit of $1,000,000, and USFIC issued an excess policy that
covered claims that exceeded the retained limit. Under the
policies, the insurance companies agreed to pay sums that
Frog became legally obligated to pay as damages for
"advertising injury" "caused by an offense committed in the
course of advertising your goods, products, and services."
"Advertising injury" was defined as, inter alia, "injury that
arises out of your advertising activity as a result of: . . . (3)
misappropriation of advertising ideas or style of doing
business." The policies further provided that the insurance
companies had the right and duty to defend against any
suit seeking damages covered by their policies.
On July 17, 1995, a Frog competitor, ESCO, filed suit
against Frog and one of Frog's employees, John Olds. ESCO
alleged that, in January 1995, it had acquired a dipper
bucket product line from Amsco Cast Products, Inc.
("Amsco"), including Amsco's trade name, trademarks, and
copyrights. The complaint (hereinafter "the underlying
complaint") maintained that, prior to ESCO's acquisition of
Amsco, Olds--who had been Amsco's chief engineer for the
dipper bucket product line--misappropriated from Amsco
trade secrets and confidential business information,
including drawings and prints related to the dipper bucket
3
product line and delivered that information to his new
employer, Frog.
ESCO also alleged that Frog then entered the dipper
bucket product market, using Amsco's proprietary trade
secrets, confidential business information, and technology
misappropriated by Olds. The complaint asserted that Frog
had engaged in unfair competition based on the
misappropriated information. ESCO's Revised Second
Amended Complaint also added two causes of action for
false advertising and reverse passing off under the Lanham
Act, 15 U.S.C. S 1125(a), which prohibits false or
misleading descriptions of fact in commercial advertising
and promotion.
The relevant paragraphs of Count Nine, "False
Advertising Under Lanham Act," are as follows:
76. Shortly after Olds became employed by Frog
commencing October 17, 1994, defendant Frog
launched a promotional campaign to the market for all
cast manganese dipper buckets. This campaign
included widespread distribution of a product
promotional brochure, publication in an industry trade
journal, and verbal and written direct communication
to customers. In this campaign, defendant Frog falsely
represented that it had developed a new and
"revolutionary" design for dipper bucket parts and
components, and falsely depicted a dipper bucket with
a "Frog, Switch" logo.
77. In fact, at the time of defendant Frog's campaign,
it had done no design work whatsoever, and the parts
and components Frog was offering for sale and was
selling were made from engineering drawings
unlawfully appropriated by Olds from Amsco and used
by Frog. The market was falsely led to believe that
products of the type contained in the Amsco line could
readily be replicated, produced and sold by Frog.
78. Plaintiffs have been damaged by defendant Frog's
actions in an amount to be proved at trial.
Count Ten, "Reverse Passing Off Under Lanham Act,"
alleged in relevant part:
4
81. The parts and components sold in commerce by
defendant Frog as its own were really Amsco products
made by use of the stolen drawings, a form of "reverse
passing off."
82. Plaintiffs have been damaged by defendant Frog's
actions in an amount to be proved at trial.
Frog timely gave Travelers and USFIC notice of the ESCO
litigation and copies of the complaint and the amended
complaint, and requested that the insurance companies
defend the suit, on the grounds that the ESCO complaint
alleged acts that were potentially covered by the insurance
policies. Both Travelers and USFIC refused. On June 5,
1997, prior to trial, Frog and ESCO settled for $2,625,000.
Frog sued the insurance companies for breach of contract
and for bad faith in failing to honor the insurance policy
under 42 Pa. Stat. Ann. S 8371. The District Court granted
summary judgment to Travelers and granted USFIC's
12(b)(6) motion to dismiss.1
II. The Duty to Defend
A. General Principles
The parties agree that the insurance contracts are
governed by Pennsylvania law. The policy was issued by a
Pennsylvania agent to a Pennsylvania corporation. See
Travelers Indem. Co. v. Fantozzi ex rel. Fantozzi, 825 F.
Supp. 80, 84 (E.D. Pa. 1993) (Pennsylvania conflict of laws
principles dictate that an insurance contract is guided by
the law of the state in which it is delivered).
General rules of insurance contract construction require
us to read the policy as a whole and construe it according
to its plain meaning. See Atlantic Mut. Ins. Co. v. Brotech
Corp., 857 F. Supp. 423, 427 (E.D. Pa. 1994), aff'd, 60
F.3d 813 (3d Cir. 1995). Ambiguities must be construed in
_________________________________________________________________
1. We treat the insurers together despite the differing procedural
background. A 12(b)(6) motion may be granted where the insurance
contract unambiguously reveals that an insured is not entitled to
coverage. See Bartley v. National Union Fire Ins. Co., 824 F. Supp. 624(N.D. Tex. 1992).
5
favor of the insured because the insurer writes the
contract, but a provision is ambiguous only if reasonable
people could, in the context of the entire policy, fairly
ascribe differing meanings to it. See id.We need only examine the insurer's duty to defend to
resolve this appeal. An insurer's duty to defend an insured
in litigation is broader than the duty to indemnify, in that
the former duty arises whenever an underlying complaint
may "potentially" come within the insurance coverage. See
Erie Ins. Exch. v. Claypoole, 673 A.2d 348, 355 (Pa. Super.
Ct. 1996). Furthermore, if a single claim in a multiclaim
lawsuit is potentially covered, the insurer must defend all
claims until there is no possibility that the underlying
plaintiff could recover on a covered claim. See Erie Ins.
Exch. v. Transamerica Ins. Co., 533 A.2d 1363, 1368 (Pa.
1987). It follows that there may be a duty to defend without
a duty to indemnify. See Aetna Life & Cas. Co. v.
Barthelmy, 836 F. Supp. 231 (M.D. Pa. 1993), rev'd on other
grounds, 33 F.3d 189 (3d Cir. 1994). In determining the
existence of a duty to defend, the factual allegations of the
underlying complaint against the insured are to be taken as
true and liberally construed in favor of the insured. See
Biborosch v. Transamerica Ins. Co., 603 A.2d 1050, 1052
(Pa. Super. Ct. 1992).
Relying on Safeguard Scientifics, Inc. v. Liberty Mut. Ins.
Co., 766 F. Supp. 324, 330 (E.D. 1991), Frog argues that
the duty to defend also arises if the underlying complaint
could reasonably be amended to state a claim under the
policy. Safeguard Scientific's formulation of the duty to
defend applies in a particular situation--when the
underlying complaint alleges intentional action, but
negligent or reckless action would suffice to make the
insured's conduct actionable--and is merely a way of
saying that such a complaint "potentially" comes within the
insurance coverage.2 At all events, Frog argues that the
_________________________________________________________________
2. More specifically, Safeguard Scientifics holds that the insured should
not be dependent on the underlying plaintiff 's pleading on state of mind,
which may be inapt. When a complaint alleges intentional misconduct
(which insurance policies exclude from coverage) but might be amended
to allege some other state of mind that would both trigger coverage and
show liability, then the complaint should be treated as setting forth
facts
that potentially justify coverage. See Safeguard Scientifics, 766 F. Supp.
at 329-30. This rule reflects the way that the complaint will actually be
treated in the courts during the underlying litigation.
6
ESCO complaint, either initially or in amended form, did in
fact allege injury covered by the policy.
B. Covered Advertising Injuries
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 S 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
underlyingactions 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.
We commence our discussion with some analysis of
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3. See, e.g., Elan Pharmaceutical Research Corp., 144 F.3d 1372 (11th
Cir. 1998); Iolab Corp. v. Seaboard Surety Co. , 15 F.3d 1500 (9th Cir.
1994); Atlantic Mutual Ins. Co. v. Brotech Corp. , 857 F. Supp. 423 (E.D.
Pa. 1994), aff 'd, 60 F.3d 813 (3d Cir. 1995); Gencor Indus., Inc. v.
Wausau Underwriters Ins. Co., 857 F. Supp. 1560 (M.D. Fla. 1994);
National Union Fire Ins. Co. v. Siliconix, Inc., 729 F. Supp. 77 (N.D.
Cal.
1989).
4. See, e.g., Advance Watch Co. Ltd v. Kemper Nat'l Ins. Co., 99 F.3d 795(6th Cir. 1996); Union Ins. Co. v. The Knife Co., 897 F. Supp. 1213 (W.D.
Ark. 1995); Poof Toy Prod., Inc. v. United States Fidelity & Guar. Co.,
891
F. Supp. 1228 (E.D. Mich. 1995).
5. See, e.g., Simply Fresh Fruit, Inc. v. Continental Ins. Co., 94 F.3d
1219(9th Cir. 1996); Sentex Sys. Inc. v. Hartford Accident & Indem. Co., 882
F. Supp. 930 (C.D. Cal. 1995), aff'd, 93 F.3d 578 (9th Cir. 1996).
6. See, e.g., Granite State Ins. Co. v. Aamco Transmissions, Inc., 57 F.3d
316 (3d Cir. 1995).
7
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.
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."
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
8
common law tort of unfair competition, which the
underlying plaintiff had alleged.
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.
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).
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.
9
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.
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.
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").
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
10
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 afield,
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).
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,
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7. Recent dicta from the Pennsylvania Superior Court suggests this to be
the case. See Sorbee Int'l Ltd. v. Chubb Custom Ins. Co., No. 2314
Philadelphia 1998, 1999 WL 512077, at *4 & n.2 (Pa. Super. July 21,
1999).
11
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).
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 1998, 1999 WL
512077, at *5 (Pa. Super. July 21, 1999) (making the
distinction between "misuse in advertising of any idea" and
"misappropriation of advertising ideas") (internal quotations
omitted).
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).
We predict that, regardless of how Pennsylvania law
would treat allegations of trademark infringement,
12
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
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8. We note, however, that there is much confusion in the caselaw
concerning when an "advertising injury" is"caused" by advertising within
the meaning of standard business insurance policies. As a reading of the
briefs in this case reflects, many courts have conflated the requirement
of "advertising injury" as defined in the standard policy with the
requirement that the injury occur in the course of advertising, with the
unfortunate result that they have distorted standard causation
principles. See, e.g., Novell, Inc. v. Federal Ins. Co., 141 F.3d 983(10th
Cir. 1998). Thus, the courts reach the correct result that an injury was
not "advertising injury" and then reason, incorrectly (and unnecessarily),
that the advertising did not cause the injury.
For example, suppose the underlying complaint alleges patent
infringement, and alleges that the plaintiff lost sales because the
insured
aggressively advertised the infringing product. Standard tort principles
(not to mention common sense) tell us that the advertising was a cause
in fact of at least a portion of the plaintiff 's damages. Courts that
reason
that the injury could have taken place without the advertising, see
Simply Fresh Fruit, Inc. v. Continental Ins. Co., 94 F.3d 1219, 1222 (9th
Cir. 1996), are misstating the relevant tort liability principles, which
ask
whether the advertising did in fact contribute materially to the injury.
Similarly, courts that hold that, as a matter of law, advertising a
misappropriated product is merely "coincidental," are not confronting the
causal connection between advertising and harm. See Fluoroware, Inc. v.
Chubb Group of Ins. Cos., 545 N.W.2d 678, 682 (Minn. 1996).
Some courts have solved the problem by requiring that the injury be
complete in the advertisement, requiring no further conduct. See, e.g.,
Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 339 n.3 (9th Cir. 1996)
(discussing the California approach); Dogloo, 907 F. Supp. at 1390 ("The
cases . . . illustrate that advertising injury coverage does not extend to
cases in which advertising alone is not actionable."). We believe that
this
formulation is a reasonable way to limit the scope of causation. Thus, if
an advertisement invaded a person's privacy (causing an advertising
injury), and the insured's product also invaded a person's privacy
(causing an advertising injury), the advertisement would cause part of
13
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
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the total harm and would constitute a complete tort in itself. In such a
case, we think that there would be a duty to defend. See id. The duty to
indemnify, however, would be limited to the harm caused by the
advertisement.
At all events, the belt-and-suspenders approach to denying coverage is,
in this case, unnecessary. Causation alone does not equate to insurance
coverage. Perhaps courts have failed to engage in rigorous causation
analysis in many cases because they have already found that there is no
advertising injury. Indeed, we have found no actual case in which a
court has found "advertising injury" but not causation. Cf. International
Communication Materials, Inc. v. Employer's Ins., No. 94-1789, 1996 U.S.
Dist. LEXIS 21825 (W.D. Pa. May 29, 1996) (finding that, where the
policy listed patent infringement under the definition of "advertising
injury," there was a genuine issue of material fact regarding whether the
infringement caused harm in the course of advertising). While Amsco's
underlying complaint specifically alleges that Frog's advertising
contributed to its injuries, thus sufficiently alleging a causal
connection
between the advertising and the injury, that is not enough to trigger the
insurers' duty to defend.
9. A refusal, with no good cause, to provide a defense or to indemnify
when the policy provides for coverage violates Pennsylvania's bad faith
insurance statute. See 42 Pa. Stat. Ann.S 8371 (creating a remedy "if
the court finds that the insurer has acted in bad faith towards the
insured"). Bad faith is a frivolous or unfounded refusal to pay, lack of
investigation into the facts, or a failure to communicate with the
insured.
See Coyne v. Allstate Ins. Co., 771 F. Supp. 673, 678 (E.D. Pa. 1991)
(bad faith is failure to acknowledge or act promptly on the claims, or
refusing to pay without reasonable investigation of all available
information); Romano v. Nationwide Mut. Fire Ins. Co., 646 A.2d 1228(Pa. Super. Ct. 1994). Good faith is no defense if there was in fact no
good cause to refuse coverage. See Gedean v. State Farm Mut. Auto. Ins.
Co., 188 A.2d 320, 322 n.4 (Pa. 1963). However, mere negligence or bad
judgment does not constitute bad faith; knowledge or reckless disregard
of a lack of a basis for denial of coverage is necessary. Winner
International Corp. v. Continental Casualty Co., 889 F. Supp. 809 (W.D.
Pa. 1994), aff 'd without opinion, 54 F.3d 767 (3d Cir. 1995).
The District Court reasoned that bad faith claims cannot survive a
determination that there was no duty to defend, because the court's
determination that there was no potential coverage means that the
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The Orders of the District Court will be affirmed.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
insurer had good cause to refuse to defend. See Lucker Mfg. v. Home Ins.
Co., 23 F.3d 808, 821 n.19 (3d Cir. 1994); Hyde Ath. Indus., Inc. v.
Continental Cas. Co., 969 F. Supp. 289, 306 (E.D. Pa. 1997).
Frog argues that a bad faith claim is not contingent on success on the
underlying breach of contract claim, citing Doylestown Electric Supply
Co. v. Maryland Casualty Insurance Co., 942 F. Supp. 1018, 1020 (E.D.
Pa. 1996). But that case involved a situation in which the statute of
limitations had expired on the breach of contract claim; a breach of a
duty to defend was unredressable for procedural reasons, but it was still
possible that a bad faith claim could succeed. Here, where there was no
duty to defend, there was good cause to refuse to defend against a suit.
15