Unfair competition triggers advertising injury coverage

Granutec, Inc. v. St. Paul Fire & Marine Ins. Co., 2008 WL 312146 (E.D.N.C.)

Granutec sells generic OTC medicines. In 1989, it began making a version of the Tylenol Gelcap, thus triggering negotiations with Tylenol’s maker, McNeil. They agreed that Granutec would use a color scheme that differed from Tylenol’s, but in 1994, Granutec changed the colors to mimic the Tylenol Gelcap. McNeil sued, alleging trade dress infringement and false advertising under the Lanham Act, unfair competition and unfair trade practices under state law, and breach of contract.

The court granted a preliminary injunction, and the parties settled, with defense costs over half a million dollars. Granutec sought recovery under insurance polices from Aetna and St. Paul, both of which insured it during the relevant times. Aetna’s policy covered advertising injury including “[m]isappropriation of advertising ideas or style of doing business.” St. Paul’s policy covered advertising injury, including “unauthorized taking or use of any advertising material, slogan or title of others.” The St. Paul policy specifically excluded breach of contract and intellectual property infringement, including “actual or alleged infringement or violation of ... trade dress, trade name, trade secrets, trademarks [or] other intellectual property rights or laws.”

Under North Carolina law, the duty to defend is measured by the facts as alleged in the pleadings. If there’s an arguable fit between the words of the policy and the complaint, the insurer’s duty to defend is triggered.

The court ruled that Aetna’s policy at least arguably covered the state-law unfair competition claim. State law goes beyond covering mere intellectual property infringements, including “false advertising [and] simulation of well known products or trade names.” It goes beyond passing off to cover “selling products which have been ‘mimicked’ in order to exploit a competitor’s reputation in the market.” (Comment: If so, state law seems likely to be preempted under Sears/Compco.) As to its state-law claims, McNeil alleged that Granutec wrongfully took its advertising idea – portraying two Gelcaps on the front of the box in red and yellow; that Granutec traded on its goodwill; and that Granutec’s adoption of the same color scheme was likely to cause confusion. This is arguably within the meaning of “misappropriation of advertising ideas or style of doing business.”

Likewise, the St. Paul policy also arguably covered the state-law unfair competition claim, because it used the functionally equivalent words “unauthorized taking … of any advertising material.” The court didn’t analyze the exclusion for intellectual property violations, though I’m not quite sure why – all the unfair competition alleged here seems to be based on infringement of trade dress, as clearly disclosed by the pleaded facts. Perhaps, to the extent the state law is read to cover dilution, it isn’t within the exclusion, but I’m not so sure about that.

In any event, having refused to defend, the insurers were now liable for the full costs of Granutec’s defense. Lesson: broadly written state causes of action can trigger insurance coverage despite the insurer’s best attempts to avoid same. “Advertising injury” as a term of art just doesn’t seem to be all that helpful, at least for trademark-type cases.