Eyeblaster, Inc. v. Federal Insurance Company , 613 F.3d 797 ( 2010 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 08-3640
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Eyeblaster, Inc., *
*
Plaintiff - Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
Federal Insurance Company, *
*
Defendant - Appellee. *
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Submitted: June 10, 2009
Filed: July 23, 2010
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Before COLLOTON, JOHN R. GIBSON, and BEAM, Circuit Judges.
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JOHN R. GIBSON, Circuit Judge.
Eyeblaster, Inc. (“Eyeblaster”) appeals from an adverse entry of summary
judgment in its action against Federal Insurance Company (“Federal”) arising out of
Federal’s denial of coverage under two insurance policies. A computer user sued
Eyeblaster, alleging that Eyeblaster injured his computer, software, and data after he
visited an Eyeblaster website. Eyeblaster tendered the defense of the lawsuit to
Federal, seeking coverage under a General Liability policy and an Information and
Network Technology Errors or Omissions Liability policy. Federal denied that it had
a duty to defend Eyeblaster, and Eyeblaster brought this action seeking a declaration
that Federal owed such a duty. The district court entered summary judgment in favor
of Federal, and Eyeblaster appeals. We reverse.
Eyeblaster is a worldwide online marketing campaign management company
that advertisers, advertising agencies, and publishers use to run campaigns across the
Internet and other digital channels. Its primary product assists in the creation,
delivery, and management of on-line interactive advertising. The company was
established in 1999 and has fourteen offices worldwide, with six employees located
in North America. In 2007, Eyeblaster delivered online marketing campaigns for
nearly 7000 brand advertisers and served ads across more than 2700 global web
publishers.
The industry in which Eyeblaster provides services is known as rich media
advertising. Rich media allows customers to create interactive ads in a wide range of
formats, and to track and manage the performance of the advertising campaigns.
Eyeblaster has the capacity to deliver ads simultaneously to billions of users globally
and to constantly monitor its systems with network and system technicians and
engineers. Its service uses cookies, which are typically used in the advertising
industry to measure and enhance the effectiveness of an advertising campaign. It also
uses JavaScript and Flash technology, which enliven web pages and increase the
Internet’s utility. Eyeblaster does not use spyware or introduce malicious contact such
as spam, viruses, or malware.
Eyeblaster purchased General Liability and Information and Network
Technology Errors or Omissions insurance policies from Federal for the period from
December 5, 2005 to December 5, 2007. Subject to the policies’ terms, Federal had
a duty to defend Eyeblaster against lawsuits, even if such suits were false, fraudulent,
or groundless.
David Sefton filed a lawsuit against Eyeblaster in Harris County, Texas in
October 2006. Eyeblaster removed the action to federal court, where Sefton filed his
First Amended Complaint the following month. Eyeblaster provided notice of and
tendered defense of the First Amended Complaint to Federal in December 2006. On
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March 12, 2007, Federal sent Eyeblaster a letter denying all coverage. When Sefton
amended his complaint a second time, Eyeblaster once again tendered defense of the
suit to Federal, and again Federal denied coverage. Federal’s position was that it
owed no coverage under the General Liability policy because Sefton did not assert
claims for bodily injury caused by an occurrence, as defined by the policy. In
addition, to the extent that Sefton alleged property damage, he did not allege that the
property damage was caused by an accident or occurrence as the policy required.
Federal also noted three exclusions but offered no explanation as to why they would
apply.
With respect to the Information and Network Technology Errors or Omissions
coverage, Federal acknowledged that Sefton had complied with the requirement of
claiming financial injury during the policy period. However, Federal claimed that
Sefton had not alleged that Eyeblaster committed a wrongful act (as defined by the
policy) in connection with a product failure or in performing or failing to perform its
service. Federal also pointed to general exclusionary language in the policy and to
three specific exclusions.
In his Second Amended Complaint, Sefton alleges that his computer was
infected with a spyware program from Eyeblaster on July 14, 2006, which caused his
computer to immediately freeze up. He further alleges that he lost all data on a tax
return on which he was working and that he incurred many thousands of dollars of
loss. Sefton hired a computer technician to repair the damage. Although he alleges
that no repair was possible, he stated that his computer became operational again.
Sefton asserted that he has experienced the following: numerous pop-up ads; a
hijacked browser that communicates with websites other than those directed by the
operator; random error messages; slowed computer performance that sometimes
results in crashes; and ads oriented toward his past web viewing habits.
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Sefton alleged violations of the Computer Fraud and Abuse Act, 18 U.S.C.
§1030, and the Texas Business and Commercial Code §§ 48.052 and 48.101, a
deceptive trade practice under Texas law, prima facie tort under Texas law, trespass,
conversion, fraud, nuisance, invasion of privacy, intrusion upon seclusion, and
conspiracy. In stating these alleged violations, Sefton accused Eyeblaster of
intentionally accessing a protected computer without authorization, knowingly
committing deceptive trade practice violations, intending to deceive Sefton, and
intentionally installing unwanted spyware onto a user’s computer.1
Eyeblaster asserts that Federal knew of its business because Eyeblaster
completed an application to obtain professional liability insurance. Eyeblaster
disclosed to Federal that its core business activity is the technology used for
interactive advertising content delivery and management, and any allegation that
Eyeblaster intentionally served an ad would have been in the ordinary course of its
business. Eyeblaster points out that it reasonably expected to be covered by Federal’s
policies at issue, and to suggest otherwise would reduce Federal’s coverage to the
point where it had no commercial justification.
The parties brought cross-motions for summary judgment. The district court
granted Federal’s motion and denied Eyeblaster’s, thus concluding the case in
Federal’s favor. The district court determined that Federal owed no duty to defend
under either policy and, having made that decision, did not reach any of the
exclusions.
Eyeblaster asserts on appeal that the district court erred in failing to address
coverage under the General Liability policy for “loss of use of tangible property that
is not physically injured,” and in failing to recognize that the Sefton complaint alleged
1
Sefton dismissed his action against Eyeblaster in December 2007 pursuant to
a confidential settlement.
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“physical injury to tangible property.” Eyeblaster also asserts that the district court
erred in determining that the Sefton complaint did not accuse Eyeblaster of
committing a “wrongful act” and that Federal therefore owed no duty to defend under
the Errors or Omissions policy.
I.
We review the district court’s grant of summary judgment de novo, viewing the
facts in the light most favorable to Eyeblaster, the non-movant. See Northland Cas.
Co. v. Meeks, 540 F.3d 869, 872 (8th Cir. 2008). We apply the same de novo review
to the district court’s interpretation of the insurance contracts at issue, id., which is an
issue of state law, Meister v. W. Nat’l Mut. Ins. Co., 479 N.W.2d 372, 376 (Minn.
1992). There is no dispute that the Federal policies are controlled by Minnesota law.
Under Minnesota law, an insurer’s duty to defend is distinct from and broader
than its duty to indemnify the insured. SCSC Corp. v. Allied Mut. Ins. Co., 536
N.W.2d 305, 316 (Minn. 1995), overruled on other grounds by Bahr v. Boise Cascade
Corp., 766 N.W.2d 910 (Minn. 2009). The burden is on the insurer to prove that it has
no duty to defend, SCSC Corp., 536 N.W.2d at 316, and in so doing the insurer must
show that “each claim asserted in the lawsuit clearly falls outside the policy.” Murray
v. Greenwich Ins. Co., 533 F.3d 644, 648 (8th Cir. 2008) (applying Minnesota law).
Although the duty is generally determined by comparing the allegations in the
underlying complaint to the policy, if the insured presents facts that arguably
demonstrate coverage or if the insurer becomes aware of such facts, the insurer then
bears a “heavy burden” of proving that it has no such duty. Id. at 648-49.
II.
The General Liability policy Eyeblaster purchased from Federal obligates the
insurer to provide coverage for property damage caused by a covered occurrence.
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Property damage means “physical injury to tangible property, including resulting loss
of use of that property . . . ; or loss of use of tangible property that is not physically
injured.” The definition of “tangible property” excludes “any software, data or other
information that is in electronic form.”
The district court concluded that the Sefton complaint does not allege damage
to tangible property because it only claims damage to software, which is by definition
excluded. The district court relied on America Online, Incorporated v. St. Paul
Mercury Insurance Company, 347 F.3d 89 (4th Cir. 2003), in which America Online,
Inc. (“AOL”) attempted to require its insurer to defend against claims that AOL’s
proprietary software package had “altered the customers’ existing software, disrupted
their network connections, caused them loss of stored data, and caused their operating
systems to crash.” 347 F.3d at 93. The Fourth Circuit rejected AOL’s argument
because its insurance policy covered liability for “physical damage to tangible
property,” and the court identified the configuration instructions, data, and
information as intangible and abstract. Id. at 96. Eyeblaster attempts to distinguish
this portion of the AOL case without success. The Sefton complaint alleges direct
injury to the operation of his computer, but it alleges no damage to the hardware itself.
The complaint would have had to make a claim for physical injury to the hardware in
order for Eyeblaster to have coverage for “physical injury to tangible property.”
Eyeblaster argues that the district court erred in failing to consider Federal’s
duty under the second part of the definition of “property damage,” which obligates the
company to provide coverage if Eyeblaster is alleged to have caused the “loss of use
of tangible property that is not physically injured.” The tangible property is Sefton’s
computer, and Eyeblaster points to language from the Sefton complaint in which he
alleges his computer was “taken over and could not operate,” “froze up,” and would
“stop running or operate so slowly that it will in essence become inoperable.” Sefton
also alleges that he experienced “a hijacked browser - a browser program that
communicates with websites other than those directed by the operator,” and “slowed
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computer performance, sometimes resulting in crashes.” Sefton asserts that his
computer has three years of client tax returns that he cannot transfer because he
believes the spyware files would also be transferred, and he therefore must reconstruct
those records on a new computer. He thus argues that his computer is no longer
usable, as he claims among his losses “the cost of his existing computer.”
Federal did not include a definition of “tangible property” in its General
Liability policy, except to exclude “software, data or other information that is in
electronic form.” The plain meaning of tangible property includes computers, and the
Sefton complaint alleges repeatedly the “loss of use” of his computer. We conclude
that the allegations are within the scope of the General Liability policy. See Am.
Online, Inc. v. St. Paul Mercury Ins. Co., 207 F. Supp. 2d 459, 470 (E.D. Va. 2002)
(district court found loss of use of tangible property when complaint alleged that AOL
caused loss of use of computers and computer functionality, but concluded no
coverage existed because allegations were otherwise excluded), aff’d, 347 F.3d 89(4th Cir. 2003); State Auto Prop. & Cas. Ins. Co. v. Midwest Computers & More, 147
F. Supp. 2d 1113, 1116 (W.D. Okla. 2001) (in case with “property damage” language
identical to language of Eyeblaster policy, court holds that “[b]ecause a computer
clearly is tangible property, an alleged loss of use of computers constitutes ‘property
damage’ within the meaning of plaintiff’s policy”).
Federal argues that, even if it owes a duty to defend because Sefton alleged a
loss of use of tangible property, that coverage is barred by the exclusion for Impaired
Property/Property Not Physically Injured. Under Minnesota law, an insured is entitled
to have its case considered by the fact-finder once it has established a prima facie case.
The insurer then has the burden to prove that an exclusion applies. SCSC Corp. v.
Allied Mut. Ins. Co., 536 N.W.2d 305, 313 (Minn. 1995), overruled on other grounds
by Bahr v. Boise Cascade Corp., 766 N.W.2d 910 (Minn. 2009). Exclusions are
narrowly interpreted against the insurer. SCSC Corp., 536 N.W. 2d at 314.
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Federal points to an exclusion in the General Liability policy entitled “Damage
to Impaired Property or Property Not Physically Injured,” which states that the
insurance does not apply to property damage to impaired property or property that has
not been physically injured if the damage arises out of any defect, deficiency,
inadequacy, or dangerous condition in Eyeblaster’s product or work. “This exclusion
does not apply to the loss of use of other tangible property resulting from sudden and
accidental physical injury to your product or your work after it has been put to its
intended use.” The policy also defines “impaired property:”
Impaired property means tangible property, other than your product or
your work, that cannot be used or is less useful because:
• it incorporates your product or your work that is known or
thought to be defective, deficient, inadequate or dangerous; or
• you have failed to fulfill the terms or conditions of a contract
or agreement;
if such property can be restored to use by:
• the repair, replacement, adjustment or removal of your product
or your work; or
• your fulfilling the terms or conditions of the contract or
agreement.
Federal asserts that, if Sefton lost the use of his hardware, it would be “impaired
property.” It also asserts that Sefton’s computer would be “property not physically
injured” because it was damaged by the allegedly defective and dangerous condition
in Eyeblaster’s software.
We conclude that Federal has not met its burden of proving that the exclusion
applies. Sefton’s computer cannot be considered “impaired property” because no
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evidence exists that the computer can be restored to use by removing Eyeblaster’s
product or work from it. The record shows that Eyeblaster provides advertising
services to its clients to enable those clients to reach and interact with online computer
users such as Sefton. It is not clear that an Eyeblaster product or Eyeblaster’s work
ever existed on Sefton’s computer, and thus it is equally unclear that such product or
work could be removed from the computer. Sefton alleges that the website that he
believes caused the damage to his computer “was owned and operated by Eyeblaster
or person’s [sic] or entities that are controlled directly or indirectly by Eyeblaster.”
Such a broad characterization does not suffice to satisfy the requirement that
Eyeblaster incorporated its product or work into Sefton’s computer.
Even if the Sefton complaint could be read to meet the first part of the
definition of “impaired property,” Sefton alleges that he unsuccessfully attempted to
have the damage to his computer repaired. Federal thus cannot demonstrate that
Sefton’s computer could be restored by the removal of Eyeblaster’s product or work.
See Corn Plus Coop. v. Cont’l Cas. Co., 444 F. Supp. 2d 981, 990 (D. Minn. 2006)
(applying Minnesota law to identical exclusionary language, court holds that repair
and replacement of defective welds in piping system cannot restore damaged product
running through the system and thus does not fall within definition of “impaired
property,” citing cases from other jurisdictions).
Federal suggests that two more exclusions to its General Liability policy apply.
The first is the “Expected Or Intended Injury” exclusion, which precludes coverage
for property damage arising out of an act that is intended by the insured or that would
be expected from the standpoint of a reasonable person in the circumstances of the
insured to cause property damage. The second is the “Intellectual Property Laws Or
Rights” exclusion, which excludes damages related to infringement or violation of any
intellectual property law or right. Federal advances no convincing argument in favor
of either, and we conclude that these exclusions likewise do not apply.
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III.
Eyeblaster next asserts that the district court erred by concluding that the Sefton
complaint does not allege a cause of action covered by Federal’s Information and
Network Technology Errors or Omissions policy. The policy obligates Federal to pay
loss for financial injury caused by a wrongful act that results in the failure of
Eyeblaster’s product to perform its intended function or to serve its intended purpose.
“Financial injury” is defined as economic injury resulting from property that cannot
be used or is less useful. As the name of the policy suggests, the Errors or Omissions
policy specifically covers intangible property such as software, data, and other
electronic information. Under the policy, a “wrongful act” is an error, an
unintentional omission, or a negligent act.
Federal concedes that Sefton’s complaint does allege a “financial injury,” which
the district court acknowledged. However, the district court determined that the
Sefton complaint does not claim a “wrongful act” because the complaint alleges that
Eyeblaster acted intentionally in placing its software on Sefton’s computer. The
district court rejected Eyeblaster’s argument that the policy covers allegedly intended
acts resulting in unintended injuries, and concluded that the “substance of the
allegations” is that Eyeblaster intended to place its product on Sefton’s computer.
Recognizing that Minnesota law places the burden on the insurer to prove that
it has no duty to defend, and in so doing it must show that “each claim asserted in the
lawsuit clearly falls outside the policy,” Murray v. Greenwich Ins. Co., 533 F.3d 644,
648 (8th Cir. 2008), we conclude that Federal owes a duty under its Errors or
Omissions policy.
The Sefton complaint is lengthy and contains many, many allegations. Both
parties can selectively cite words and phrases to support their arguments. However,
under the appropriate standard of review, Federal cannot demonstrate that each claim
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in the Sefton complaint falls outside the coverage of its Errors or Omissions policy.
This court has defined “error” in a technology errors and omissions policy to include
intentional, non-negligent acts but to exclude intentionally wrongful conduct. St. Paul
Fire & Marine Ins. Co. v. Compaq Computer Corp., 539 F.3d 809, 815 (8th Cir.
2008). Sefton alleges that Eyeblaster installed tracking cookies, Flash technology, and
JavaScript on his computer, all of which are intentional acts. However, Federal can
point to no evidence that doing so is intentionally wrongful. As Eyeblaster points out
in an affidavit filed with the district court, Federal’s parent company utilizes
JavaScript, Flash technology, and cookies on its own website. Federal cannot label
such conduct as intentionally wrongful merely because it is included in the Sefton
complaint; Federal has a duty to show that the use of such technology is outside its
policy’s coverage. Federal points to no evidence that the allegations concerning
tracking cookies, etc. spoke of intentional acts that were either negligent or wrongful.
Under St. Paul, therefore, the Sefton complaint does allege a wrongful act.
The record also contains the Consent Judgment and Permanent Injunction
entered by the United States District Judge in the Sefton action, which includes the
following stipulation:
Sefton acknowledges that after a review of the evidence supplied in
discovery, he had no basis in fact to allege that [Eyeblaster] had acted
willfully, intentionally, or otherwise with malice aforethought, to injure
him or his business or to violate any laws and accordingly he is now
willing to submit himself . . . to the within permanent injunction against
pursuing claims like those asserted in this case against [Eyeblaster].
While the Consent Judgment and Permanent Injunction obviously did not exist until
the Sefton lawsuit was concluded, the quoted language serves to confirm that
Eyeblaster’s use of technology was subject to coverage under Federal’s Errors or
Omissions policy. Under Minnesota law, if the insured presents facts that arguably
demonstrate coverage or if the insurer becomes aware of such facts, the insurer then
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bears a “heavy burden” of proving that it has no duty to defend. Murray, 533 F.2d at
648-49 (internal quotation marks omitted). Federal did not meet that burden.
Just as with the General Liability policy, Federal argues that several exclusions
would apply if we were to conclude that coverage exists under the Errors or
Omissions policy. Those exclusions speak of intentional conduct that Federal has not
carried its burden to show.
IV.
For the foregoing reasons, we reverse the district court judgment and remand
for further proceedings.
COLLOTON, Circuit Judge, concurring in the judgment.
I agree, substantially for the reasons stated by the court, that Federal Insurance
Company has not established that all parts of David Sefton’s claims against
Eyeblaster, Inc., fall clearly outside the scope of coverage provisions under the
General Liability and Errors or Omissions policies that Eyeblaster purchased from
Federal, although I would not rely on the consent judgment cited by the court, ante,
at 12, because it did not exist at the time of Federal’s disputed denial. I do not join the
court’s conclusion about exclusions under the General Liability policy. While I agree
that Sefton’s computer is not “impaired property” for purposes of the first exclusion,
the computer is “property that has not been physically injured” – indeed, the court
concludes elsewhere that the computer is “tangible property that is not physically
injured.” Ante, at 6-7. And it is likely that Sefton’s complaint should be read to allege
that the damage to his computer arose out of a dangerous condition in Eyeblaster’s
product or work, thus satisfying the second criterion for the exclusion. I do agree,
however, that there is no applicable exclusion that bars coverage under the Errors or
Omissions policy. Because an insurer’s duty to defend arises when any part of the
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claim against the insured is arguably within the scope of coverage afforded by the
policy, Metro. Prop. & Cas. Ins. Co. v. Miller, 589 N.W.2d 297, 299 (Minn. 1999),
I agree that Federal had a duty to defend. Therefore, I concur in the judgment.
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