JAR sued its insurer seeking a declaration of a duty to defend it in an underlying suit filed by its competitor TPU, which distributes Lidoderm, a pharmaceutical product. TPU claimed injury from allegedly false and misleading representations JAR made in promoting its own LidoPatch. Great American’s policies cover “advertising injury,” which is 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....” There is an exclusion for suits alleging infringement of intellectual property, defined as “personal and advertising injury”
arising out of any actual, alleged, or threatened misappropriation, infringement, or violation of any one or more of the following rights or laws: a) copyright; b) patent; c) trademark; d) trade name; e) trade secret; f) trade dress; g) service mark; h) slogan; i) service name; j) claim of authorship; k) other right to or law recognizing an interest in any expression, idea, likeness, name, style of doing business, symbol, or title; l) laws or regulations concerning piracy, unfair competition, unfair trade practices, or other similar practices; or m) any other intellectual property right or law.
The policy also excluded injury “arising out of the failure of goods, products, services to conform with any statement of quality or performance made in your ‘advertisement.’”
TPU sued JAR for false advertising under the Lanham Act. The underlying complaint alleged that JAR issued a press release stating that LidoPatch contained the same active ingredient as the leading prescription patch, would be ready to ship shortly, and was “poised to become a major product in the topical analgesic category. With its proven pain relieving active ingredients, lidocaine, LidoPatch® can provide relief for minor pain …. Like the prescription brand, LidoPatch® will provide relief for up to 24 hours.” Further, JAR’s website allegedly depicted the package and stated “PAIN RELIEF FOR WHERE IT HURTS!! LidoPatch, with lidocaine, for long lasting pain relief, and menthol to instantly soothe your discomfort. The result is a patch that offers real relief for those painful areas that nag you throughout the night and day. LidoPatch TM—Relief that lasts all day, without a prescription!”
TPU alleged that JAR was trying to mislead consumers into believing that LidoPatch was merely an OTC version of Lidoderm, and otherwise equivalent and interchangeable. However, TPU alleged, LidoPatch had a completely different formulation, and JAR didn’t have FDA approval or tests showing that LidoPatch was effective/fast acting. TPU alleged that it lost goodwill and profits due to reduced demand for Lidoderm. TPU ultimately amended its complaint to add causes of action under the deceptive trade practices/unfair competition/false advertising/consumer protection statutes of five states.
Insurance policies are construed in favor of the insured. An insurer can’t refuse a defense unless it’s clear from the face of the underlying complaint that the allegations fail to state facts bringing the case within or potentially within the policy coverage. The question here was whether the allegations in the underlying complaint potentially alleged disparagement of Lidoderm. Great American argued that, in Illinois, disparagement requires a false statement about the underlying plaintiff.
But on its face the underlying complaint alleged that JAR communicated false/misleading messages about Lidoderm—that LidoPatch and Lidoderm could be used to treat the same indication and that they were equally effective/interchangeable. “That plaintiff's statements did not identify Lidoderm by name is immaterial, a point underscored by TPU's allegations about plaintiff's ‘messages.’ Whatever words plaintiff used, TPU clearly understood (and alleges that ‘a substantial segment of consumers’ would likewise believe) that plaintiff's implicit ‘message’ was about Lidoderm.”
And JAR’s literal statements could reasonably be read to identify Lidoderm explicitly, if not by name, since references to “the prescription brand” had to be read in view of TPU’s allegations that Lidoderm was “one of the most frequently prescribed pharmaceuticals in the United States,” and “one of the best-selling pharmaceutical patches of all time in this country.”
The alleged statements also needed to portray Lidoderm in a negative light to qualify as disparagement. JAR argued that allegedly false equivalence claims met that standard, because disparagement can arise from comparison with something inferior. See Acme United Corp. v. St. Paul Fire & Marine Ins. Co., 214 Fed.App. 596, 2007 WL 186247 (7th Cir.2007) (“[d]isparage means ‘to discredit or bring reproach upon by comparing with something inferior.’”); McNeilab, Inc. v. American Home Products Corp., 848 F.2d 34, 38 (2d Cir.1988) (“a misleading comparison to a specific competing product necessarily diminishes that product's value in the minds of the consumer.”). Great American argued that Acme was about underlying ad claims that the insured’s product was superior, not just equivalent, but “a statement equating a competitor's product with an allegedly inferior one is logically indistinguishable from, and no less disparaging than, a statement describing one's own product as ‘superior’ to the competitors'.” In addition, TPU’s allegations of damage to goodwill and sales diversion bolstered the conclusion that the allegedly misleading statements disparaged Lidoderm.
Thus, the underlying complaint could reasonably be construed as falling within the scope of the policy, unless any exclusion applied. Great American’s IP theory was that, because the underlying complaint asserted Lanham Act claims and state law claims that “sound in theories of unfair competition and unfair or deceptive trade practices, or other similar practices,” the IP exclusion was triggered. “But this sweeping construction of the exclusion is not supported by the authorities defendant cites, and it flies in the face of both Illinois' policy and plaintiff's reasonable expectations about the scope of coverage.” Allegations of unfair competition, “however unmoored from any intellectual property right,” weren’t excluded by the IP exclusion; to so hold would ignore the context in which that phrase appeared. Read in context, the catchall provision excluding claims of “unfair competition, unfair trade practices, or other unfair similar practices” “bars coverage only of intellectual property claims based on such allegations.” Otherwise, the term IP in the exclusion’s heading and its text would have no meaning. The court wasn’t going to restrict coverage by deleting a limiting term from the caption of an exclusion. Also, the exclusion began with the most specific excluded claims and ended with the most generall. The very last exclusion, just before the ones on which Great American relied, was for “any other intellectual property right or law.”(Emphasis added). “The clear import of this final phrase is that the preceding subsections likewise referred to intellectual property rights or laws.”
The “quality of goods” exclusion also didn’t relieve Great American of its duty to defend. The fact that LidoPatch was never released for sale was relevant to this exclusion. TPU’s claims alleged injuries directly flowing from JAR’s ads, not from consumers’ discovery that the ads were false. Plus, the underlying complaint alleged misstatements about Lidoderm, not just misstatements about JAR’s own products.
The court also rejected Great American’s argument that an exclusion for prior publication barred coverage, given that there were allegations of specific actionable statements within the policy period and TPU’s allegations of statements outside the coverage period were general and didn’t necessarily match up with the statements made within the policy period.
So Great American had a duty to defend, though it didn’t act in a vexatious and unreasonable manner given that there was a bona fide dispute over coverage, and therefore sanctions and costs weren’t appropriate.