Granite State v. AAMCO

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
6-9-1995
Granite State v AAMCO
Precedential or Non-Precedential:
Docket 94-2036
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"Granite State v AAMCO" (1995). 1995 Decisions. Paper 161.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-2036
GRANITE STATE INSURANCE COMPANY
v.
AAMCO TRANSMISSIONS, INC.,
MORGAN INDUSTRIES, INC.
Aamco Transmissions, Inc.,
Appellant
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 93-05094)
Submitted under Third Circuit LAR 34.1(a)
May 22, 1995
BEFORE: GREENBERG, ROTH, and ALDISERT, Circuit Judges
(Filed: June 9, 1995)
Allan C. Molotsky
John W. Potkai
Post & Schell
1800 JFK Boulevard
19th Floor
Philadelphia, Pa. 19103
Attorneys for Appellee
Karen A. VonDreusche
Aamco Transmissions
One Presidential Boulevard
Bala Cynwyd, Pa. 19004
Attorneys for Appellant
OPINION OF THE COURT
GREENBERG, Circuit Judge.
Aamco Transmissions, Inc., appeals from an order
entered on September 20, 1994, granting the appellee Granite
State Insurance Company judgment on the pleadings on both
Granite's complaint and Aamco's counterclaim in this diversity of
citizenship insurance coverage declaratory judgment action. The
parties have briefed this case under Pennsylvania law and thus we
will decide this case the way we believe the Supreme Court of
Pennsylvania would decide it. As might be expected from the
procedural posture of the case, the facts are not in dispute.
I.
FACTUAL AND PROCEDURAL HISTORY
This case arose out of a class action commenced in
October 1990 in the Court of Common Pleas of Philadelphia County
by Joseph R. Tracy and Joseph P. Tracy against Aamco. The Tracys
asserted that Aamco operated a nationwide network of automobile
transmission repair shops at about 800 franchised outlets. They
claimed to have purchased "Lifetime Rebuilt Transmission
Services" from Aamco franchisees. According to the Tracys, Aamco
used deceptive advertising which did not describe its services
accurately and which lured purchasers of transmission services
into paying more than they should have paid and induced them to
pay for unnecessary repairs.
The Tracys brought the action, with exclusions not
material here, on behalf of themselves and all Pennsylvania
residents who had purchased reconditioned, rebuilt or reassembled
automatic transmission services from Pennsylvania Aamco
franchisees during the six years before they started their
action.1 The Tracys asserted that Aamco was liable under the
Pennsylvania Unfair Trade Practices and Consumer Protection Law,
Pa. Stat. Ann. tit. 73, § 201-3 (1993), which provides a remedy
for various unfair methods of competition and trade practices.
At the time the Tracys brought their action and during
the six previous years, Granite insured Aamco under a
comprehensive general liability insurance policy for "personal
injury or advertising injury . . . arising out of the conduct of"
Aamco's business. The policy defined "advertising injury" as an
"injury arising . . . in the course of [Aamco's] advertising
activities, if such injury arises out of libel, slander,
defamation, violation of right of privacy, piracy, unfair
competition, or infringement of copyright, title or slogan."
Relying on the policy, Aamco demanded that Granite defend and
indemnify it in the Tracy case, claiming that it had coverage
under the "unfair competition" category of the "advertising
injury" coverage. Granite, however, declined to cover Aamco, and
1
. Morgan Industries, Inc., which is or was the parent of Aamco,
was also a defendant in the Tracy action and is a defendant in
this case but as it is not an appellant we make no further
reference to it. We have not described the Tracys' allegations
in detail because for our purposes that case is relevant only for
the fact that it was brought by purchasers of Aamco's services
rather than by a competitor of Aamco.
Aamco then settled the Tracy action itself. Granite subsequently
brought this action seeking a declaratory judgment that it was
not obligated to provide coverage to Aamco for the claims in the
Tracy action. Aamco counterclaimed for its expenses in defending
and settling the Tracy case.
Subsequently Granite made a motion for judgment on the
pleadings which the district court granted in a memorandum
opinion. At the outset the court set forth familiar general
principles of insurance law. It explained that under
Pennsylvania law when the facts are not in dispute the court
interprets an insurance policy as a matter of law. See Pacific
Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985). It then
indicated that it would review the terms of the Granite policy to
determine the parties' intent and in doing so would 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, No. 94-1897, F.3d (3d Cir.
May 12, 1995) (table). The court said that if the policy
language is clear it must be given effect according to its plain
meaning but if the language is ambiguous all doubts as to its
meaning should be resolved in favor of the insured. See St. Paul
Fire & Marine Ins. Co. v. Lewis, 935 F.2d 1428, 1430 (3d Cir.
1991).
The court then addressed the particular issue at hand.
It noted that inasmuch as the policy did not define "unfair
competition," it would construe that term "in the context of
insurance coverage according to case law," resolving all
ambiguities in Aamco's favor. Although Aamco argued that the
policy covered claims for all violations of Pennsylvania's
business fraud statute, the court followed Atlantic Mutual and
held that the term "unfair competition" in the Granite policy
"does not include claims based on state or federal statute." See
Atlantic Mutual, 857 F. Supp. at 428. Thus, as the Tracys
predicated their claims solely on the Pennsylvania Unfair Trade
Practices and Consumer Protection Law, the court held that
Granite's policy did not cover the claims. The court further
held that the term "unfair competition" was not ambiguous and
that Aamco could not have had a reasonable expectation that the
Tracys' claims were covered. In view of those conclusions the
court did not address Granite's alternative contention that the
policy confines coverage for an advertising injury to claims by
the insured's business competitors and does not cover claims by
its customers. Aamco then appealed. We have jurisdiction under
28 U.S.C. § 1291.
II.
DISCUSSION
We will affirm, though we do not ground our result on
the district court's reasoning as we do not agree with its
conclusion that the phrase "unfair competition" unambiguously
refers only to the traditional common law tort of that name.2
2
. We exercise plenary review. See Electric Ins. Co. v. Rubin,
32 F.3d 814, 815 (3d Cir. 1994).
For one thing, the courts are not uniform in describing the tort
of unfair competition. "The tort developed as an equitable
remedy against the wrongful exploitation of trade names and
common law trademarks that were not otherwise entitled to legal
protection." Bank of the West v. Superior Court, 833 P.2d 545,
551 (Cal. 1992). See also AT & T v. Winback and Conserve
Program, Inc., 42 F.3d 1421, 1428 & n.9 (3d Cir. 1994)
(describing cause of action for unfair competition under Lanham
Act), cert. denied, 115 S. Ct. 1838 (1995). Thus, in Bank of the
West the court indicated that "[t]he common law tort of unfair
competition is generally thought to be synonymous with the act of
'passing off' one's goods as those of another." Nevertheless the
Supreme Court of Pennsylvania has held that other types of
conduct can constitute unfair competition actionable at common
law. See Carl A. Colteryahn Dairy, Inc. v. Schneider Dairy, 203
A.2d 469, 473 (Pa. 1964) (finding it illegal to make false or
misleading statements about the circumstances under which an
employee left an employer). Therefore, it is not so easy to
conclude that there is one narrow and clear category of the
common law tort.
Furthermore, regardless of the scope of the common law
tort of unfair competition, a person reading the term "unfair
competition" as a category of "advertising injury" within an
insurance policy would not necessarily understand the term to be
limited to a common law definition. A broader interpretation of
the term than in Bank of the West would be particularly
reasonable in Pennsylvania as that state's legislature has
defined "[u]nfair methods of competition" to include a host of
activities in addition to passing off goods or services as those
of another. Pa. Stat. Ann. tit. 73, § 201-2(4) (1993). In
short, we see no valid reason to exclude conduct described in the
statute simply because it might not be regarded as unfair
competition in a common law sense.
Yet even if the term "unfair competition" within an
insurance policy is construed broadly with respect to the
character of an insured's conduct, that construction does not
determine the class of persons who can present claims against the
insured which will be regarded as being claims for unfair
competition within the policy. Thus, in order for Aamco to
succeed, it must show that claims by its customers injured by its
own practices reasonably can be described as unfair competition
claims within the context of the insurance coverage. In this
endeavor it fails for, regardless of the nature of the insured's
conduct, a claim by a consumer of its products or services
arising from that conduct hardly can be characterized as a claim
for unfair competition. After all, "competition" connotes an
insured's relationship with other persons or entities supplying
similar goods or services.
In fact, the Pennsylvania legislature itself recognized
this point. The statute involved in the Tracy action is not
called the "Pennsylvania Unfair Competition Statute." Rather, it
is the "Pennsylvania Unfair Trade Practices and Consumer
Protection Law." (Emphasis added). It is a broad business fraud
statute that by its very title demonstrates that it encompasses
more than acts of unfair competition. Indeed, the statute
distinguishes explicitly between "unfair methods of competition"
and "unfair or deceptive acts or practices," though it lists them
together in one subsection. Pa. Stat. Ann. tit. 73, § 201-2(4)
(1993). The fact that the legislature deemed it expedient to
combine the remedies for unfair competition and consumer fraud in
one statute does not magically transform acts of "consumer fraud"
into acts of "unfair competition." Accordingly, we think that
the Supreme Court of Pennsylvania would hold that a competitor of
the insured, but not its customer, can assert a claim which may
be covered under the "unfair competition" category of the
"advertising injury" coverage.3 While we acknowledge, as did the
district court, that ambiguities in insurance policies should be
resolved in an insured's favor, the Granite policy is not
ambiguous with respect to the relationship required between a
plaintiff in an underlying action and an insured for that
plaintiff's claim to be considered unfair competition within the
Granite policy.
The result we reach is consistent with the overall
definition of "advertising injury" in the policy. As we have
3
. Under the statute, "[a] private cause of action . . . is
available only to consumers who have purchased goods or services
for personal, family, or household purposes." Merv Swing Agency,
Inc. v. Graham Co., 579 F. Supp. 429, 430 (E.D. Pa. 1983) (citing
statute). However, the statute protects business competitors
from unfair competition, as it authorizes the Attorney General
and district attorneys to bring actions in the name of the
Commonwealth of Pennsylvania against people they have reason to
belive are "using or about to use any method, act, or practice
declared by . . . this act to be unlawful." Pa. Stat. Ann. tit.
73, § 201-4 (1993).
indicated, the Granite policy defines "advertising injury" to
include injuries arising from "libel, slander, defamation,
violation of right of privacy, piracy . . . or infringement of
copyright, title or slogan" as well as unfair competition. While
we do not say that the Supreme Court of Pennsylvania would
conclude that none of these categories could provide coverage for
a claim by a customer against an insured vendor, as we have no
reason to reach that point, none of the categories suggests
claims which a customer is likely to assert against a vendor.
Rather, the categories all define claims which an insured's
competitor might assert against it. For example, a competitor
might base a libel action on an insured's negative advertising.
Thus, the definition of "advertising injury" lends support to our
conclusion that the word "competition" as used in "unfair
competition" limits coverage to claims by competitors of the
insured.
We also point out that if "unfair competition" includes
coverage for a claim by a customer against an insured, the
insured "would simply shift the loss to [its] insurer and, in
effect, retain the proceeds of [its] unlawful conduct." Bank of
the West, 833 F.2d at 553. In this case a finding of coverage
would mean that Granite would be obliged to reimburse Aamco for
the costs to defend and settle the Tracy case but that Aamco
could retain whatever funds it received by reason of the Tracy
plaintiffs having obtained transmission services from Aamco
franchisees.4 Our outcome avoids this untoward result.
While the parties have not brought to our attention any
opinion of the Pennsylvania Supreme Court or Superior Court
addressing the issue before us, opinions from other courts are
consistent with our result. Thus, in Ruder & Finn, Inc. v.
Seaboard Sur. Co., 422 N.E.2d 518, 522 (N.Y. 1981) (internal
quotation marks omitted), the court accepted the insurer's
argument that "the primary concern in unfair competition is the
protection of a business from another's misappropriation of the
business' organization or its expenditure of labor, skill and
money." In Boggs v. Whitaker, Lipp & Helea, Inc., 784 P.2d 1273,
1275 (Wash. Ct. App.), review denied, 791 P.2d 535 (Wash. 1990),
the court held that the term "unfair competition" in a policy
including coverage for advertising offenses did not apply to a
claim under the Washington Consumer Protection Act as "unfair
competition" referred "only to acts against competitors." In
Practice Management Assocs. v. Old Dominion Ins. Co., 601 So. 2d
587 (Fla. Dist. Ct. App.), review denied, 613 So. 2d 8 (Fla.
1992), the appellate court approved a trial court's opinion that
the term "unfair competition" within the definition of
advertising injury "refers unambiguously only to actions
affecting competitors."5
4
. We recognize that there was no finding of wrongdoing in the
Tracy action.
5
. Aamco in its brief recites that in O'Brien v. Westinghouse
Elec. Corp., 293 F.2d 1 (3d Cir. 1961), we held that "claims of
unfair competition do not relate exclusively to claims between
Moreover, we recently held, in interpreting section
43(a) of the Lanham Act, 15 U.S.C. § 1125(a), the federal unfair
competition statute, that "Congress . . . did not contemplate
that federal courts should entertain claims brought by
consumers." Serbin v. Ziebart Int'l Corp., 11 F.3d 1163, 1179
(3d Cir. 1993). Rather, the Lanham Act "is primarily intended to
protect commercial interests and . . . section 43(a) of the
statute provides a private remedy to a commercial plaintiff who
meets the burden of proving that its commercial interests have
been harmed by a competitor's false advertising." Id. at 1177
(citing Sandoz Pharmaceuticals Corp. v. Richardson-Vicks, Inc.,
902 F.2d 222, 230 (3d Cir. 1990) (internal alterations omitted)
(emphasis added)). We find Serbin's reasoning particularly
persuasive because "the Lanham Act is derived generally and
purposefully from the common law tort of unfair competition, and
its language parallels the protections afforded by state common
law and statutory torts" of that nature. AT&T v. Winback, 42
F.3d at 1433.
We have not overlooked Aamco's argument "that the
proper focus regarding issues of coverage under insurance
contracts is the reasonable expectation of the insured," as set
(..continued)
competitors and found that unfair competition could be
successfully claimed between an employee and his employer."
Brief at 22 n.2. But O'Brien is completely different from this
case as it did not involve a claim by a purchaser against a
vendor. Furthermore, we largely predicated our result on our
observation "that all persons are free to enter the trade at any
time and are therefore potential competitors." Id. at 13-14.
Therefore, O'Brien does not support Aamco's claim for coverage.
forth in St. Paul Mercury Ins. Co. v. Corbett, 630 A.2d 28, 30
(Pa. Super. Ct.), dismissed without op., 634 A.2d 221 (Pa. 1993).
Rather, we conclude that Aamco could not have expected to have
insurance coverage for the Tracys' claims under the portion of a
policy protecting it against claims of "unfair competition." As
we explained above, it would be expected that a claim arising
from "competition" would be forwarded by a competitor of an
insured. The Tracys and the class they represented were not
competitors of Aamco.
III.
CONCLUSION
For the foregoing reasons we will affirm the order of
September 20, 1994.