Advertising injury: No duty to defend in FDA proceeding

Pennfield Oil Co. v. American Feed Industry Insurance Company Risk Retention Group, Inc., 2007 WL 1290138 (D. Neb.)

Pennfield, the insured, was sued by Alpharma for Lanham Act and state-law false advertising claims based on Pennfield’s allegedly false advertising of one of its animal drug feed additives as approved for certain uses by the FDA. The underlying action continues, along with proceedings before the FDA in which FDA proposes to revoke Pennfield’s New Animal Drug Application for the additive; this litigation concerns the insurer’s duty to defend. The Eighth Circuit has ruled that the Lanham Act claim can proceed without final action by the FDA, given that whether the additive has been approved as safe and effective (the allegedly false claim) is different from whether it should be (the FDA’s jurisdiction).

Here, Pennfield sought a ruling that its insurance policy from defendant created a duty to defend the lawsuit and the FDA proceedings, based on its “advertising injury” coverage. Advertising injury was defined in the policy as, among other things, “injury arising out of ... 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” as well as misappropriation of advertising ideas or style of doing business. Only “suits” were covered, defined as civil proceedings, including arbitration proceedings. As is standard, the policy excluded knowingly false statements and willful violations of penal statutes.

Defendant argued that there was no coverage and no duty to defend. The court refused to grant summary judgment with respect to the underlying lawsuit, because the relevant ads “implicitly disparage Alpharma's product because Alpharma is the only other manufacturer of the product with FDA approval.” Moreover, Pennfield’s representation of FDA approval “is arguably a misappropriation of Alpharma's advertising ideas or style of doing business.”

The exclusions were no help to the insurer. The policy excluded advertising injury arising out the failure of goods to conform with advertised quality or performance, thus excluding false claims about the insured’s own products, but Alpharma’s claim of implicit disparagement goes beyond alleging mere failure to conform. Alpharma’s injuries – lost sales etc. – would not go away if Pennfield’s products conformed to advertised quality (though its legal claim would go away, so I’m not quite sure about this reasoning).

As usual, the insurer also argued that Alpharma’s allegations of knowing falsity triggered the policy exclusion. But there are disputed issues of fact about both intent and falsity. (Also, Alpharma’s legal claims can succeed on a strict liability basis – here the court didn’t go far enough, since the insurer should be required to defend as long as the false advertising claims could succeed without a finding of intent, as they obviously can.)

The insurer did succeed in separating out the FDA proceeding, which isn’t a civil action and which would be a necessary cost of doing business for Pennfield regardless of the civil suit, even if it’s intertwined in practice with Alpharma’s lawsuit.