Welch's claim against insurers squelched

Total Pom-advertising-related legal fees must be hitting eight figures, right?

Welch Foods, Inc. v. National Union Fire Insurance Co., 2010 WL 3928704 (D. Mass.)

Welch wanted its insurers to cover its defense against Pom over its “White Grape and Pomegranate” juice, whose label prominently pictures pomegranates when, in fact, the primary ingredients are white grape and apple juice. After Pom sued for false advertising, so did a putative class of consumers. Welch tendered the complaints to three of its insurers. Zurich American Insurance Company and National Union Fire Insurance Co. of Pittsburgh, PA denied coverage and declined to defend. Axis Surplus Insurance Company, denied coverage under two policies, but agreed to defend under a third while reserving its rights. (Maybe I am biased because I only read the litigated cases, but I’ve got to wonder: do insurers ever actually pay for a defense?)

Welch sued, seeking a determination of its rights. The insurer has a duty to defend when the allegations of the third party complaint are reasonably susceptible of an interpretation that they state a claim covered by the policy terms. The policyholder has the initial burden of proving coverage, at which point the burden shifts to the insurer to establish that an exclusion applies.

National Union covers loss arising from “a Claim ... for any actual of alleged Wrongful Act of [Welch]." It defines "[w]rongful act" as "any breach of duty, neglect, error, misstatement, misleading statement, omission or act by [or on behalf of the Organization]." However, the Antitrust Exclusion excludes claims “alleging, arising out of, based upon or attributable to, or in any way involving either directly or indirectly, antitrust violations, price fixing, price discriminations, unfair competition, deceptive trade practices and/or monopolies, including actions, proceedings, claims or investigations related thereto ...." The question was whether Pom’s action for "unfair, unlawful, and fraudulent business practices" and deceptive statements and the consumers’ claim for "unfair competition" and untrue and deceptive statements fall under "unfair competition" or "deceptive trade practices" in the exclusion. The policy didn’t define either term.

Welch argued that the exclusion should be limited to antitrust claims, noting its header and appealing to noscitur a sociis; the surrounding words relate entirely to antitrust claims. However, the contract specifically states that "[t]he headings in this policy are there purely for the convenience of the parties and they form no part of the definition of the scope of the coverage provided." “Moreover, the plain language of the exclusion is broad enough to include a variety of anti-competitive behavior. Nothing in the text of the exclusion limits it solely to antitrust claims. To the contrary, the fact that it includes a range of anti-competitive conduct suggests that its scope is broader than antitrust claims.” National Union had no duty to defend.

Exercise for the reader: think of a misleading statement by a company that could not be pled or construed as a deceptive trade practice.

On to Zurich, which provided an advertising injury policy. This policy covered injury arising out of “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services” and “t]he use of another's advertising idea in your advertisement.”

Welch argued that both sets of plaintiffs alleged that Welch disparaged Pom’s product by falsely advertising that Welch’s product contained [a lot of] pomegranate juice, thereby damaging Pom’s reputation. However, the ads at issue here didn’t disparage Pom; they allegedly misrepresented Welch’s own product. This isn’t a false superiority or comparison case where there’s disparagement by implication.

What about use of another’s advertising idea? Pom’s complaint alleged that Welch attempted to "cash in on POM's idea of selling bottled pomegranate juice by marketing and selling to consumers products labeled as 'pomegranate juice' that in fact contain little or no actual pomegranate juice." However, "the phrase 'advertising idea' relates to the manner in which one advertises its goods"—Pom’s ideas about how to solicit business and customers—not to ad content. Zurich had no duty to defend.

Axis provided Welch with Media Wrongful Act Coverage and Professional Services Wrongful Act. A Media Wrongful Act covered wrongs “in connection with the creation or dissemination of the Covered Media, or in connection with the creation or dissemination of Advertising Material relating to the Covered Media, including but not limited to any of the following: [ ] disparagement, or any other form of defamation or harm to the character or reputation of any ... entity; misappropriation of ... information or ideas; error or omission in [c]ontent....” Covered Media is defined as the "[c]ontent of the publications, programs, films, broadcasts, internet sites ... including any electronic or digital versions...." "Content" is defined as "any communicative material" excluding several exceptions relating to the delivery of such content.

The court concluded that the underlying allegations do not arise from "errors or omissions in content ... in connection with the creation or dissemination of" covered media or advertising material. That is, the underlying complaints didn’t allege loss arising from the creation or dissemination of Welch's advertising material, only from the content thereof. (What, then, did the insurance cover? How could the creation or dissemination of ads ever have an error or omission in content, or for that matter constitute disparagement, separate from the content of those ads? I get the rest of the analysis, but shouldn’t an insurance contract be interpreted to provide coverage at least in some plausible scenarios?) Moreover, the underlying complaints didn’t claim disparagement etc. or misappropriation, as noted above.

The Axis policy defined a Professional Services Wrongful Act as “any actual or alleged negligent act, error or omission committed or attempted solely in the performance of or failure to perform Professional Services by any Insured in his, her or its capacity as such....,” and Professional Services was defined as "promotional and marketing services," including electronic and internet advertising.

The false advertising claims here didn’t fall under the definition. This provision is “usually intended to provide liability protection for insureds whose clients hire them to provide professional services.” Moreover, professional services coverage is not intended to cover claims by competitors. “Such claims pertain to how the insured does business rather than breach of professional duties.” So Axis prevailed as well.