kln-steel-products-company-ltd-appellantcross-appellee-v-cna ( 2008 )

OPINION
No. 04-07-00830-CV
KLN STEEL PRODUCTS COMPANY, LTD.,
Appellant/Cross-Appellee
v.
CNA INSURANCE COMPANIES, National Fire Insurance Company of Hartford, Continental
Casualty Company, and American Guarantee and Liability Insurance Company,
Appellees/Cross-Appellants
From the 150th Judicial District Court, Bexar County, Texas
Trial Court No. 2006-CI-09448
Honorable Michael P. Peden, Judge Presiding
Opinion by: Rebecca Simmons, Justice
Sitting: Alma L. López, Chief Justice
Catherine Stone, Justice
Rebecca Simmons, Justice
Delivered and Filed: December 31, 2008
AFFIRMED IN PART, REVERSED IN PART, AND RENDERED IN PART
This is a duty to defend case. KLN Steel Products Company, Ltd. (KLN) sued CNA
Insurance Companies, National Fire Insurance Company of Hartford, Continental Casualty
Company (collectively CNA) and American Guarantee and Liability Insurance Company
(AGLIC) seeking a declaration that CNA and AGLIC have a duty to defend KLN and indemnify
04-07-00830-CV
KLN against a competitor’s suit. 1 KLN also asserted claims for breach of contract and extra-
contractual claims. All parties moved for summary judgment and the trial court denied all
parties’ motions. 2 This mutually agreed interlocutory appeal followed.
On appeal, KLN contends that CNA and AGLIC have a duty to defend KLN against the
lawsuit brought against it by Michelle D. Connell and Hi-Tech Beds Systems Corp. (collectively
Hi-Tech). Both CNA and AGLIC respond that they have no duty to defend KLN, as a matter of
law, and even assuming potential coverage, Hi-Tech’s allegations fall within the policies’
exclusions. Because (1) the allegations in Hi-Tech’s complaint do not reveal a potential claim
within the covered risks under the insurance policies, and (2) alternatively, the allegations in the
complaint fall within clearly defined exclusions, we affirm the trial court’s denial of summary
judgment with regard to KLN and reverse and render judgment with regard to the trial court’s
denial of summary judgment in favor of CNA and AGLIC.
BACKGROUND
A. Procedural History
Hi-Tech filed suit against KLN and Clark/Blinderman/Knight, L.L.C. (Clark) specifically
asserting claims in its complaint for (1) patent infringement, (2) misappropriation of trade
secrets, (3) unfair business practices and unfair competition, and (4) interference with a
prospective business relationship. CNA and AGLIC subsequently denied coverage under the
policies and consequently refused to defend KLN. In the alternative, CNA and AGLIC claimed
multiple policy exclusions defeat any duty to defend KLN. The trial court denied both summary
1
The underlying suit, Michelle D. Connell & Hi-Tech Beds Systems Corp. v. KLN Steel Products Co. &
Clark/Blinderman/Knight, L.L.C., Case # 04-C-0194, is pending in the District Court of the Northern District of
Illinois. CNA and AGLIC denied coverage and this declaratory judgment action ensued.
2
KLN moved for partial summary judgment on its claim for duty to defend only. It did not move for summary
judgment on its breach of contract or insurance violation claims.
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judgments and this appeal followed pursuant to Texas Civil Practice and Remedies Code section
51.014(d). TEX. CIV. PRAC. & REM. CODE ANN. § 51.014(d) (Vernon 2008).
B. The Hi-Tech Complaint
Since a determination of the duty to defend an insured is based on the factual allegations
contained within the complaint, a brief summary of pertinent allegations is set forth. According
to Hi-Tech’s complaint, Hi-Tech learned in 1999 that the United States Navy planned to
construct open barracks at its Naval Station Great Lakes training center and would need to
purchase beds. In response, Hi-Tech supplied its original version of the SB-200, which is a
mobile space saving storage sleeper or bed, both to the Navy and Clark, a procurement company,
with the Navy’s and Clark’s assurances that (1) the design would be kept confidential and (2) the
bed would be kept in a restricted part of the training center. The Navy and Clark also knew that
the SB-200 was the embodiment of pending patents. 3
KLN had been the major provider of beds for the Navy’s training center prior to 2000.
Upon learning of the training center expansion, KLN determined that it would submit only its
current model bed to the Navy for use at the training facility. In the latter part of 2001 and early
2002, Clark, the procurement company, issued a request for proposals for beds with
specifications almost identical to the Hi-Tech SB-200. KLN used its special relationship and
influence with the Navy to gain access to and examine Hi-Tech’s first version of the SB-200. As
a result, KLN obtained, through improper means, confidential information not available to the
public regarding the SB-200. KLN was thus able to design a bed equivalent to the SB-200 and
submit a response to Clark’s request for proposals for the manufacture of a bed with the same
features as the SB-200. Thereafter, KLN repeatedly gained improper access to, and acquired
3
We acknowledge that KLN set forth the facts as alleged by Hi-Tech solely for argument before this Court and
without any admission of the facts described therein.
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proprietary and confidential information about, improved versions of the SB-200 located at the
training center and used that information to create infringing, competing products. KLN then
used its infringing models, based on the SB-200, to usurp sales of the Hi-Tech SB-200. The
specific allegations that KLN contends create a duty to defend will be discussed below.
STANDARD OF REVIEW
Whether a duty to defend exists is a question of law that we review de novo. St. Paul Ins.
Co. v. Tex. Dep’t of Transp., 999 S.W.2d 881, 884 (Tex. App.—Austin 1999, pet. denied). In an
insurance coverage dispute, the insured has the initial burden of establishing that its claim comes
within the scope of coverage provided by the policy. Venture Encoding Serv., Inc. v. Atl. Mut.
Ins. Co., 107 S.W.3d 729, 733 (Tex. App.—Fort Worth 2003, pet. denied). The burden then
shifts to the insurer to show that the claim falls within a policy exclusion or limitation of
coverage. Id. If the insurer succeeds in showing the applicability of an exclusion, the burden
shifts back to the insured to show that an exception to the exclusion brings the claim within
coverage. Id.
DUTY TO DEFEND
KLN asserts that a liberal reading of the facts alleged in the Hi-Tech complaint reveals a
potential claim within the coverage of the policy and, thus, a duty to defend KLN against the
claim. KLN specifically focuses on potential claims that fall under “personal and advertising
injury,” including claims of (1) publication of disparaging material and (2) trade dress
infringement. We first address the rules governing our review of the pleadings and the insurance
policies and then analyze each of the foregoing claims separately.
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A. The Eight-Corners Rule
“‘[T]he duty to defend is distinct from, and broader than, the duty to indemnify.’” Zurich
Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490 (Tex. 2008) (alteration in original) (quoting 14
LEE R. RUSS & THOMAS F. SEGALLA, COUCH ON INSURANCE § 200:1 (3d ed. 2007)). An
insurer’s duty to defend is triggered if the factual allegations in the plaintiff’s complaint
potentially support a covered claim, while the duty to indemnify is based on whether the alleged
facts are actually established. Id.; see also GuideOne Elite Ins. Co. v. Fielder Rd. Baptist
Church, 197 S.W.3d 305, 310 (Tex. 2006); Heyden Newport Chem. Corp. v. S. Gen. Ins. Co.,
387 S.W.2d 22, 26 (Tex. 1965) (“‘Where the complaint does not state facts sufficient to clearly
bring the case within or without the coverage, the general rule is that the insurer is obligated to
defend if there is, potentially, a case under the complaint within the coverage of the policy.’”
(quotation omitted)). An “insurer is obligated to defend a suit if the facts alleged in the pleadings
would give rise to any claim within the coverage of the policy.” Utica Nat’l Ins. Co. of Tex. v.
Am. Indem. Co., 141 S.W.3d 198, 201 (Tex. 2004); St. Paul Ins. v. Tex. Dep’t of Transp., 999
S.W.2d 881, 884 (Tex. App.—Austin 1999, pet. denied) (reiterating that if an insurer owes a
duty to defend any portion of the suit, the insurer must defend the entire suit).
The eight-corners rule takes its name from the fact that only two documents are ordinarily
relevant to the determination of the duty to defend: the policy and the pleadings of the third-party
claimant. GuideOne, 197 S.W.3d at 308. The eight-corners rule requires the court to compare
the allegations in the petition filed against the insured with the coverage afforded by the
insurance policy. King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002). Facts outside
the pleadings, even those easily ascertained, are not material to the court’s determination. Nat’l
Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).
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When applying the eight-corners rule, an appellate court gives a liberal interpretation to
the allegations in the petition and any doubt regarding the duty to defend is resolved in favor of
the duty. Dallas Fire Ins., 85 S.W.3d at 187; Nat’l Union Fire Ins., 939 S.W.2d at 141. The
truth or falsity of the allegations in the pleadings is not a factor; similarly, what the parties know
or believe to be the true facts is not a factor. Zurich, 268 S.W.3d at 491; GuideOne, 197 S.W.3d
at 311.
The insured need only show that a reasonable reading of the plaintiff’s allegations would
allow evidence of a claim that is covered by the policy, not that the claim itself be clearly
enunciated within the pleadings. Terra Int’l, Inc. v. Commonwealth Lloyd’s Ins. Co., 829
S.W.2d 270, 271 (Tex. App.—Dallas 1992, writ denied). Moreover, the pleadings are read in
light of the insurance policy’s provisions and an appellate review focuses on the petition’s
factual “‘allegations that show the origin of the damages rather than on the legal theories
alleged.’” Nat’l Union Fire Ins., 939 S.W.2d at 141 (quotation omitted); see also Adamo v. State
Farm Lloyds Co., 853 S.W.2d 673, 676 (Tex. App.—Houston [14th Dist.] 1993, writ denied) (“It
is not the cause of action alleged which determines coverage but the facts giving rise to the
alleged actionable conduct.”).
In accordance with the eight-corners rule, we first examine the pertinent insurance
policies and then review the Hi-Tech complaint.
B. The Policies
1. CNA Policies
The CNA policies 4 at issue in this case are as follows:
(1) general commercial liability insurance policy issued for the periods September 30,
2000 to September 30, 2001 (the 2001 CNA Policy);
4
Although we refer to these policies collectively as the “CNA policies,” they were actually issued by Continental
Casualty Company and National Fire Insurance Company.
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(2) general commercial liability insurance policy issued for the periods September 30,
2001 to September 30, 2002 (the 2002 CNA Policy);
(3) general commercial liability insurance policy issued for the periods September
30, 2002 to September 30, 2003 (the 2003 CNA Policy);
(4) general commercial liability insurance policy issued for the periods September 30,
2003 to September 30, 2004 (the 2004 CNA Policy); and
(5) an umbrella policy issued for the period September 30, 2000 to September 30, 2001
(the 2001 CNA Umbrella Policy).
a. The 2001 CNA Policy
The 2001 CNA Policy is slightly different from the later policies and provides that CNA
has the duty to defend KLN against any suit seeking damages because of “personal injury” or
“advertising injury” as defined in the policy. The policy covers:
(1) “Personal injury” caused by an offense arising out of your business, excluding
advertising, publishing, broadcasting or telecasting done by or for you;
(2) “Advertising injury” caused by an offense committed in the course of advertising
your goods, products, or services . . . .
The policy definitions include:
1. “Advertising injury” means injury arising out of one or more of the following
offenses:
(a) Oral or written publication of material that slanders or libels a person or
organization or disparages a person’s or organization’s goods, products or
services.
....
13. “Personal injury” means injury, other than “bodily injury,” arising out of one
or more of the following offenses:
....
(d) Oral or written publication of material that slanders or libels a person or
organization or disparages a person’s or organization’s goods, products or
services.
(emphasis added).
b. The Remaining CNA Policies
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The remaining 2002-2004 CNA Policies provide that CNA has the duty to defend KLN
against any suit seeking damages for “personal and advertising injury” caused by an offense
arising out of KLN’s business if the offense was committed in the coverage territory during the
policy period. The policies provide the following relevant definitions:
1. “Advertisement” means a notice that is broadcast or published to the general
public or specific market segments about your goods, products or services for
the purpose of attracting customers or supporters. 5
14. “Personal and advertising injury” means injury, including consequential
“bodily injury,” arising out of one or more of the following offenses:
...
d. Oral or written publication [in any manner] 6 of material that slanders or
libels a person or organization or disparages a person’s or organization’s
goods, products or services;
...
g. Infringing upon another’s copyright, trade dress or slogan in your
“advertisement.”
2. The AGLIC Policies
KLN obtained two commercial umbrella policies from AGLIC: (1) from December 31,
2000 to December 31, 2002; and (2) December 31, 2002 to December 31, 2004.
Coverage A provides excess follows-form liability insurance, which commits AGLIC to
pay covered damages in excess of the limits of the underlying CNA policy, and specifically
incorporates the terms and conditions of the CNA policy. Thus, AGLIC’s duty to defend under
Coverage A is triggered upon exhaustion of the underlying insurance by payment of claims.
According to AGLIC, Coverage B provides almost identical coverage.
5
The 2003 and 2004 CNA Policies also provide that (1) “notices that are published include material placed in the
[I]nternet or a similar electronic means of communication; and (b) regarding websites, only that part of the website
that is about your goods, products or services for the purposes of attracting customers or supporters is considered an
advertisement.”
6
This language was not included in the 2002 CNA policy.
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Coverage B provides separate umbrella liability insurance due to bodily injury, property
damage or “personal and advertising injury,” provided the injury, damage or offense took place
during the policy period and “is caused by an occurrence happening anywhere.”
“Advertisement” and “personal and advertising injury” are defined in equivalent language as that
used in the CNA policies. Occurrence is further defined as “a covered offense.” Coverage B
does not apply to a suit “for which insurance is afforded under underlying insurance or would
have been afforded except for the exhaustion of the limits of insurance of underlying insurance.”
C. Timeliness of Conduct
We first address CNA’s contention that the allegations of the complaint affirmatively
establish that the allegedly covered claims did not arise within the coverage period of the 2000 7
or 2001 CNA Policies. CNA asserts the trial court erred in denying its request for a declaration
of no coverage under the 2000 general commercial liability and umbrella policies because there
is no conduct alleged to have occurred during the policy period of September 1999 to September
2000. KLN did not respond to this issue in its brief; and we find no allegation in the complaint
concerning KLN’s conduct arising prior to “the latter part of 2001.” Consequently, the trial
court erred in failing to grant CNA summary judgment on this issue. We hold CNA is entitled to
a declaration, as a matter of law, that no duty to defend or indemnify arises from the 2000 CNA
Policy.
CNA next asserts that the Hi-Tech complaint does not allege any covered offense
occurred between September 30, 2000 and September 30, 2001 and, therefore, KLN is not
entitled to a defense under the 2001 CNA Policy because the offense or incident must be
committed during the applicable policy period. KLN argues the alleged personal injury and
7
The general commercial liability insurance policies issued by CNA for the period September 30, 1999 to
September 30, 2000 are referred to as “the 2000 CNA Policy.”
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advertising injury offense of disparagement initially occurred between the “latter part of 2001”
(when the first request for proposal was issued) and late 2002 (when the second request for
proposal was issued). As such, the “latter part of 2001,” interpreted liberally, could include a
period before September 30, 2001, and thus fall within the relevant policy. CNA counters that a
plain reading of the complaint shows that the earliest misconduct could not have occurred prior
to September 30, 2001.
An analysis of the complaint does not completely clarify this issue. The sequence of
events is unclear. The complaint alleges that between 1999 and the latter part of 2001, Hi-Tech
placed the original version of the SB-200 at the Navy training center. The request for proposal
for beds at the training center was issued “during the latter part of the year 2001 and early 2002.”
In general, the complaint provides that “KLN then used its influence and special relationship to
improperly gain access” to Hi-Tech’s bed to obtain confidential information, produce an
equivalent bed and publish the alleged disparaging comments. (emphasis added). Yet, the
complaint lacks any time period within which these events occurred. Being mindful that the
pleadings must be read favorable to coverage, we interpret the “latter part” as any time in the
second half of 2001. Accordingly, because KLN’s response to the request for proposal,
including the alleged disparagement, could have occurred prior to September 30, 2001, we
overrule CNA’s contention that KLN’s actions did not fall within the 2001 CNA Policy period.
D. Publication of Disparaging Material
KLN asserts that CNA’s and AGLIC’s duty to defend arises under the 2001 CNA Policy
and Umbrella Policy because these policies cover claims for personal injury and advertising
injury arising from the publication of material disparaging an organization’s goods, products, or
services. Likewise KLN claims a duty to defend arises under the remaining CNA and AGLIC
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policies because these policies cover claims for “personal and advertising injury” arising from
the publication of material disparaging an organization’s goods, products, or services.
CNA and AGLIC dispute both KLN’s interpretation of “advertising injury” as defined in
the policies, as well as KLN’s assertion that the Hi-Tech complaint sets forth claims that fall
within the coverage of the policies. CNA asserts that the coverage extended to injury arising
from the publication of material disparaging an organization’s goods, products, or services,
pertains to the tort of business disparagement, the elements of which the Hi-Tech complaint does
not contain. Because disparagement is not defined within the policies, KLN argues that CNA
cannot apply the definition of a business disparagement tort to its policies. 8 See Bay Elec.
Supply, Inc. v. Travelers Lloyds Ins. Co., 61 F. Supp. 2d 611, 617 (S.D. Tex. 1999) (“[T]he Court
is to look to the understanding of the average insured, and . . . the average insured is [not]
required to know the obscure distinctions between common law business torts; instead the
burden to identify such distinctions and incorporate them into the policy should fall upon the
insurer.”).
1. “Disparage”
We agree with KLN that the policies do not incorporate the elements of the business tort
of disparagement. When a term is not defined in an insurance policy, it must be given its plain,
ordinary, and generally accepted meaning, unless the policy indicates the term was used in a
technical or different sense. Tri County Serv. Co., Inc. v. Nationwide Mut. Ins. Co., 873 S.W.2d
719, 721 (Tex. App.—San Antonio 1993, writ denied). The Merriam-Webster Dictionary
8
KLN acknowledges Hi-Tech’s complaint does not state a business disparagement claim, which requires proof of
four elements: (1) the defendant published a false, defamatory statement of fact about the plaintiff, (2) with malice,
(3) without privilege, (4) that resulted in special damages to the plaintiff. See Forbes Inc. v. Granada Biosciences,
Inc., 124 S.W.3d 167, 170 (Tex. 2003).
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defines “disparage” as “to lower in rank or reputation; DEGRADE” or “speak slightingly about.”
MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 360 (11th ed. 2003).
2. Allegations of KLN’s Publication of Disparaging Material
Having determined the plain meaning of disparage under the policies, we now turn to the
pleadings. As a basis for disparagement, KLN first points to Hi-Tech’s allegation that KLN
convinced the Navy to have its unauthorized copy of the SB-200 installed in the Naval Base
Museum at the training center, and represented that it was the developer of the bed: “KLN
wrongfully represented that it was the developer of the SB-200, and that its bed was accepted by
the Navy as the new standard for beds to be used at the Great Lakes Recruit Training Center.”
KLN asserts that a liberal reading of this allegation is that KLN belittled or disparaged Hi-Tech’s
SB-200 beds by representing that Hi-Tech’s beds were not original designs, but simply copies of
KLN’s design. As a second basis for disparagement, KLN points to the complaint’s allegation
that KLN offered to provide the SB-200 equivalent at “a substantially lower price than could be
sold by [Hi-Tech].” KLN asserts this allegation connotes a claim of disparagement of Hi-Tech’s
goods or products by implying that (1) the Hi-Tech beds are overpriced and (2) Hi-Tech cannot
offer its beds at competitive prices. Finally, KLN asserts Hi-Tech’s complaint alleges violations
of the Illinois Deceptive Business Practices Act which prohibits a party from “disparag[ing] the
goods, services, or business of another by false or misleading representation of fact.” 815 ILL.
COMP. STAT. ANN. § 510/2(a)(8) (West 2001). KLN argues the allegations in the complaint
outlined above allege facts sufficient to support disparagement under the Illinois Deceptive
Business Practices Act. See id.
CNA responds that KLN is trying to create a disparagement claim where none exists.
CNA acknowledges that, in general, product disparagement may provide a basis for a claim
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under the Illinois Deceptive Business Practices Act, but argues that the Hi-Tech complaint does
not support such a claim. AGLIC emphasizes that Hi-Tech’s complaint does not allege a single
negative statement that KLN made regarding Hi-Tech or its goods or products.
3. Analysis
We are bound by the eight-corners rule and although we “liberally construe the
allegations in the petition in determining the duty to defend, resolving any doubt in favor of the
insured, we will not read facts into the pleadings for that purpose.” Trinity Universal Ins. v.
Cowan, 945 S.W.2d 819, 825 (Tex. 1997) (citations omitted). The factual allegations must be
pled in the complaint. Id. According to the relevant policies, the disparagement must be
directed to “goods, products or services.” According to the Illinois Deceptive Business Practices
Act, the disparagement must be of “the goods, services, or business of another.” 815 ILL. COMP.
STAT. ANN. § 510/2(a)(8) (West 2001). To invoke the duty to defend under the “personal injury”
provision of the 2001 CNA Policy and the “personal or advertising injury” provision of the
2001-2004 CNA Policies, publication of the disparaging material must arise from KLN’s
business. To invoke the duty to defend under the “advertising injury” provision of the 2001
CNA Policy, the disparagement must be committed in the course of KLN’s advertising.
Hi-Tech’s complaint alleges patent infringement, trade secret theft, unfair competition
and deceptive trade practices by KLN. It further alleges that KLN overstated its status as the
designer and developer of the SB-200 bed. However, the complaint does not allege that KLN
disparaged or published any negative remarks about the SB-200 bed or Hi-Tech. See Houston
Petroleum v. Highlands, Ins. Co., 830 S.W.2d 153, 156-57 (Tex. App.—Houston [1st Dist.]
1990, writ denied) (denying coverage, the court held the complaint alleging untrue statements
regarding the business was silent with regard to any allegation of “publication or utterance of a
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libel or slander or other defamatory or disparaging material”). KLN’s statement that it
developed the SB-200 bed does not disparage the bed or business of Hi-Tech. Although Hi-
Tech’s complaint states that KLN made misrepresentations about its bed and its source, those
misrepresentations were about its own products, not those of Hi-Tech. Thus, while the Hi-Tech
complaint alleges that KLN stole and copied Hi-Tech’s design, it does not allege that KLN
disparaged Hi-Tech’s goods or products. See Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d
1135, 1142 (9th Cir. 2003) (“It does not follow that because an entity imitated the design of a
product, it is, therefore, disparaging it.”). Likewise, under the Illinois Deceptive Business
Practices Act, “a person engages in a deceptive trade practice when . . . the person . . . disparages
the goods, services, or business of another.” 815 ILL. COMP. STAT. ANN. § 510/2(a)(8) (West
2001). There is simply no allegation in the complaint that KLN disparaged Hi-Tech or its goods,
services, or business.
Because we determine that Hi-Tech’s complaint does not contain any allegations
supporting the publication of disparaging material, we need not reach the issue of whether the
publication of disparaging material was committed in the course of KLN’s advertisement.
E. Trade Dress Infringement
KLN next argues that the 2001-2004 CNA Policies provide coverage for personal and
advertising injury arising out of “[i]nfringing upon another’s copyright, trade dress or slogan in
your ‘advertisement.”’ (emphasis added). Because “trade dress” is not defined within the
policy, KLN argues the plain meaning of “trade dress,” not the defined elements of trade dress
under the Lanham Act, should control. See 15 U.S.C. § 1125(a)(3) (2000); Tri County Serv., 873
S.W.2d at 721. According to KLN, trade dress includes a product’s design, size, and shape. Hi-
Tech’s complaint alleges that KLN stole Hi-Tech’s trade secrets and made an “equivalent” bed.
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This allegation, according to KLN, constitutes the infringement of Hi-Tech’s trade dress. KLN
additionally argues that the marketing of its copy of the Hi-Tech bed to the Navy, and other
military establishments, constitutes advertising. The policies define “advertisement” as “a notice
that is broadcast or published to the general public or specific market segments about your
goods, products or services for the purpose of attracting customers or supporters.”
CNA responds that KLN mischaracterizes Hi-Tech’s trade secret infringement claims as
“trade dress” in an attempt to secure coverage. Hi-Tech’s complaint does not use the term “trade
dress” or identify the overall image of Hi-Tech’s bed. Rather, it describes KLN’s theft and then
use of Hi-Tech’s trade secrets in fashioning KLN’s bed. Furthermore, even if the complaint
could be characterized as including trade dress infringement, CNA contends that the
infringement did not occur within an “advertisement.” Finally, CNA asserts that there is no
causal connection between the alleged advertising activity and the resulting harm to Hi-Tech.
1. The Meaning of Trade Dress Infringement
Trade dress infringement is a technical term arising from the law of unfair competition.
Blue Bell Bio-Medical v. Cin-Bad, Inc., 864 F.2d 1253, 1256 (5th Cir. 1989). KLN urges us to
give the terms “trade dress” and “infringement” their common and plain meaning, and to avoid
incorporating elements of the Lanham Act. See 15 U.S.C. § 1125(a) (2000). However, even the
definitions of trade dress advanced by KLN are based on cases interpreting the Lanham Act. 9
The purpose of the Lanham Act was to codify and unify the common law of unfair competition
and trademark protection. Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 861 n.2 (1982)
(White, J., joined by Marshall, J., concurring). Texas courts have acknowledged that the
common law elements of unfair competition including trademark “are no different than those
9
Blue Bell, 864 F.2d at 1256-57; Hassan v. Greater Houston Transp. Co., 237 S.W.3d 727, 729 (Tex. App.—
Houston [1st Dist.] 2007, pet. denied).
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under federal trademark law.” All Am. Builders, Inc. v. All Am. Siding of Dallas, Inc., 991
S.W.2d 484, 488 (Tex. App.—Ft. Worth 1999, no pet.); see also Zapata Corp. v. Zapata Trading
Int’l, Inc., 841 S.W.2d 45, 47 (Tex. App.—Houston [14th Dist.] 1992, no writ); Horseshoe Bay
Resort Sales Co. v. Lake Lyndon B. Johnson Improvement Corp., 53 S.W.3d 799, 806 (Tex.
App.—Austin 2001, pet. denied). Consequently, we look to the Lanham Act, and cases
thereunder, for the meaning of trade dress infringement.
“Trade dress . . . consists of the total image of a product or service, including product
features such as design, size, shape, color, packaging labels, [and] color combinations . . . .”
Hassan v. Greater Houston Transp. Co., 237 S.W.3d 727, 729 n.1 (Tex. App.—Houston [1st
Dist.] 2007, pet. denied). “‘Trade Dress’ is a term used to describe the ‘overall appearance and
image in the marketplace of a product or a commercial enterprise. For a product, trade dress
typically comprises packaging and labeling. . . . If a trade dress is distinctive and nonfunctional,
it may be protected under trademark law.’” I & JC Corp. v. Helen of Troy L.P., 164 S.W.3d 877,
882 n.1 (Tex. App.—El Paso 2005, pet. denied) (emphasis added) (quoting BLACK’S LAW
DICTIONARY 1500 (7th ed. 1999)). As described by the Supreme Court:
The design or packaging of a product may acquire a distinctiveness which serves to
identify the product with its manufacturer or source; and a design or package which
acquires this secondary meaning, assuming other requisites are met, is a trade dress
which may not be used in a manner likely to cause confusion as to the origin,
sponsorship, or approval of the goods. In these respects protection for trade dress
exists to promote competition.
TrafFix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23, 28 (2001).
In its discussion of trade dress, the Supreme Court cautioned that: “Trade dress protection
must subsist with the recognition that in many instances there is no prohibition against copying
goods and products. . . . As the Court has explained, copying is not always discouraged or
disfavored by the laws which preserve our competitive economy.” Id. at 29 (citation omitted).
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The Court also noted: “Allowing competitors to copy will have salutary effects in many
instances. ‘Reverse engineering of chemical and mechanical articles in the public domain often
leads to significant advances in technology.’” Id. (citing Bonito Boats, Inc. v. Thunder Craft
Boats, Inc., 489 U.S. 141, 160 (1989)). Clearly, then, copying a product is not equivalent to
infringing a product’s trade dress.
Trade dress infringement, in the context of design, is generally established by proving
two basic elements. First, the trade dress must be valid. To be valid, the public must recognize
the design as distinguishable from that of others and that the distinguishing design must be non-
functional. To be protected, trade dress must “extend[] only to incidental, arbitrary or
ornamental product features which identify the source of the product. If a product feature is
functional, it cannot be protected trade dress. Unless protected by patent or copyright, functional
product features may be copied freely by competitors in the market place.” Eppendorf-Netheler-
Hinz GMBH v. Ritter GMBH, 289 F.3d 351, 355 (5th Cir. 2002). The second basic element
requires the trade dress be infringed. Infringement means that the trade dress of the defendant’s
product is so similar to that of the plaintiff that it is likely to cause confusion as to the product’s
source. Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 775 (1992).
2. Allegations of Trade Dress Infringement in the Complaint
The term “trade dress” is not mentioned in the complaint, but that does not limit our
review. The facts contained in the complaint rather than the legal theories alleged control our
analysis. Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997).
Focusing on the section of the complaint entitled “Misappropriation of Trade Secrets,” KLN
contends Hi-Tech’s complaint alleges that KLN misappropriated the dimensions and other
design features of the SB-200 and its progeny including its counterbalance option which KLN
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used to build and offer its own equivalent products. By providing its copied bed to the Navy to
be displayed at the Naval Base Museum, and continuing to market its equivalent bed to the
military, KLN used Hi-Tech’s trade dress in its “advertisements” to Clark, the Navy, and the
military generally. 10 Thus, KLN asserts that Hi-Tech has clearly alleged facts that would support
a claim for trade dress infringement. We disagree. A liberal reading of the complaint fails to
reveal a potential claim for trade dress infringement.
As noted above, to be protectable trade dress the design must have a distinctiveness that
serves to identify the product with its manufacturer as well as be nonfunctional. The Supreme
Court has cautioned against the overuse of trade dress as “product design almost invariably
serves purposes other than source identification.” Wal-Mart Stores, Inc. v. Samara Bros., Inc.,
529 U.S. 205, 213 (2000). There is no feature or design of the Hi-Tech bed that is alleged to be
distinctive and nonfunctional. The only specific component of a Hi-Tech bed mentioned in Hi-
Tech’s complaint is the superior lift mechanism incorporated in the counterbalance bed. This
component is described by its function. Furthermore, even if the superior lift mechanism could
be regarded as trade dress, the complaint does not allege that KLN copied and supplied the
counterbalance bed to the Navy, but that KLN informed Clark and Navy personnel “of their
intention to develop and supply in the future a bed that uses Plaintiffs’ counterbalance option.”
A product that does not yet exist cannot infringe trade dress because it does not satisfy the
second element of trade dress infringement—that the similarity of the trade dress is likely to
cause confusion as to the product’s source.
KLN argues that the complaint’s allegation that KLN copied information including
“technical information, dimensions, and other design information” from Hi-Tech, and then used
10
KLN uses the definition of “advertisement” contained in the policies, which do not require such advertisements to
be written.
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the information to make an equivalent bed, is sufficient to support a trade dress infringement
claim because it encompasses the total image of Hi-Tech’s bed. We disagree. The complaint
contains no allegations of any distinctive nonfunctional feature copied by KLN. Copying the
total image of a product, without more, does not amount to trade dress infringement. Indeed, the
Supreme Court is clear in its acknowledgement that, in many instances, there is no prohibition
against copying goods and products unprotected by an intellectual property right. TrafFix, 532
U.S. at 29. We decline to accept KLN’s notion that copying a non-distinct product or feature is
equivalent to trade dress infringement. 11 We, therefore, hold that even under a liberal reading of
Hi-Tech’s complaint, the facts do not support a potential claim for trade dress infringement.
POLICY EXCLUSIONS
Because we have determined that the claims of disparagement and trade dress
infringement are insufficient to invoke coverage, we do not address whether the policy
exclusions would relieve CNA and AGLIC of a duty to defend.
AGLIC AS EXCESS CARRIER
In a separate point, AGLIC asserts that as the excess carrier, it does not owe a duty to
defend to KLN because AGLIC’s policy covers the same risks as provided by CNA’s policy
under Coverage A and, therefore, if CNA does not owe coverage to KLN, then neither does
AGLIC. Moreover, AGLIC coverage is triggered upon KLN’s exhausting the limits of the CNA
policy. Thus, even if the allegations were covered claims, because KLN has not exhausted its
coverage under the CNA policy, AGLIC’s coverage has not been triggered. In Emscor
Manufacturing, Inc. v. Alliance Insurance Group, 879 S.W.2d 894, 903 (Tex. App.—Houston
[14th Dist.] 1994, writ denied) (citing Union Indem. Ins. Co. of N.Y. v. Certain Underwriters at
11
Generally, utility patent protection and trade dress protection are mutually exclusive in that a utility patent covers
functional features and trade dress covers non-functional features or marks. TrafFix Devices, Inc. v. Mktg. Displays,
Inc., 532 U.S. 23, 29-30 (2001); Blue Bell Bio-Medical v. Cin-Bad, Inc., 864 F.2d 1253, 1256-57 (5th Cir. 1989).
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Lloyd’s, 614 F. Supp. 1015, 1017 (S.D. Tex. 1985)), the appellate court explained the difference
between a primary insurer and an excess carrier:
In a situation in which there are primary and excess insurance coverages, the
limits of the primary insurance must be exhausted before the primary carrier has
a right to require the excess carrier to contribute to a settlement. [citations
omitted] In such a situation, the various insurance companies are not covering the
same risk; rather, they are covering separate and clearly defined layers of risk.
The remote position of an excess insurer [thus] greatly reduces its chance of
exposure to a loss. This reduced risk is generally reflected in the cost of the
excess policy.
Id. (first alteration in original); see also U.S. Fire Ins. Co. v. Scottsdale Ins. Co., 264 S.W.3d
160, 173 (Tex. App.—Dallas 2008, no pet.) (holding that duties to defend and indemnify were
not triggered until the self insured retention limits were exhausted).
The AGLIC policies provide coverage for excess follows form liability insurance under
Coverage A 12 and umbrella liability insurance under Coverage B. More specifically, the AGLIC
policy provides, in pertinent part:
Coverage A: Notwithstanding anything to the contrary contained above, if
underlying insurance does not cover damages, for reasons other than exhaustion
of applicable limits of insurance by payment of claims, then we will not cover
such damages.
Coverage B: Under Coverage B, we will pay on behalf of the insured, damages
the insured becomes legally obligated to pay by reason of . . . personal and
advertising injury covered by this insurance . . . in excess of the Retained Limit
. . . or the amount payable by other insurance, whichever is greater.
AGLIC argues that Coverage A covers the same risks as provided by the CNA policies and
because none of the allegations contained within the Hi-Tech complaint satisfy the CNA policy
agreement, it cannot satisfy the Coverage A insuring agreement. Additionally, because the
applicable limit of underlying insurance has not been exhausted, AGLIC owes no defense to
KLN under Coverage A. Moreover, because AGLIC’s Coverage B provides almost identical
12
A “follows form” policy covers all the same risks or “follows form” to the underlying primary policy.
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04-07-00830-CV
coverage to the claims covered under CNA, KLN cannot assert claims under the AGLIC policy
that are not covered under the CNA policies. We agree. Because the CNA policies and the
AGLIC policies include the same terms, conditions and exclusions, KLN has failed to establish
coverage under either Coverage A or Coverage B of the AGLIC policy. Accordingly, the trial
court erred in failing to grant the summary judgment in favor of AGLIC. Emscor, 879 S.W.2d at
903; see also BASF AG v. Great Am. Assur. Co., 522 F.3d 813, 823 (7th Cir. 2008) (deciding that
because the primary insurance policies and the umbrella policies utilized the same language and
definitions, the claims not insured by the primary policy were not insured by the umbrella
policy).
CONCLUSION
We affirm the portion of the trial court’s order denying summary judgment in favor of
KLN and reverse the portion of the trial court’s order denying summary judgment in favor of
CNA and AGLIC. We further render judgment that, as a matter of law, neither CNA nor AGLIC
owe a duty to defend KLN in connection with the Hi-Tech complaint.
Rebecca Simmons, Justice
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