Thursday, March 10, 2011

Individualized sales pitches aren't advertising for insurance purposes

Santa's Best Craft, L.L.C. v. Zurich American Insurance Company, 941 N.E.2d 291 (Ill. Ct. App. 2010)

Santa’s Best was sued by a competitor for IP infringement and deceptive trade practices and tendered defense to its insurer Zurich. Due to a conflict of interest, Zurich agreed to reimburse plaintiffs for expenses incurred by independent legal counsel, but declined to pay the full amount billed. Santa’s Best sued. The court of appeals affirmed a verdict for Zurich. Zurich’s failure to immediately reimburse plaintiffs for all defense expenses was not a breach of duty, nor was Zurich obligated to reimburse plaintiffs for the amount of the settlement in the underlying lawsuit or the cost of defending a third party pursuant to a license agreement.

Santa’s Best makes Christmas lights sold to about 75-100 retailers. It doesn’t rely on mailers, fliers, or internet ads to sell. Rather, it invites retailers individually to its showrooms 18 months before the relevant Christmas season. At the appointments, retailers view prototypes and packages, and occasionally sales staff make presentations. In 2001, Santa’s Best made a brand called “Stay On,” which was supposed to remain lit even if one bulb burned out or was removed, in conjunction with GE, and agreed to indemnify GE from any claims arising out of the deal. Competitors JLJ and Inliten then sued alleging infringement of their “Stay Lit” trademark for lights along with false advertising, dilution, and related state torts.

The point of greater relevance here is that the court of appeals agreed that the allegedly infringing conduct didn’t arise out of an “advertisement,” because displaying the offending products and packaging in Santa’s Best’s showroom was not an advertisement. Under the policy, “advertisement” was defined as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers and supporters.” Addressing an issue of first impression, the court determined that an advertisement “must be widely disseminated to its intended audience, regardless of whether the audience is the general public or a specific market segment thereof.” With in-person promotion, and in the absence of wide dissemination, the insured is soliciting business, not engaging in advertising. This definition also helps preserve clarity and certainty in policy interpretation.

The court also found no coverage under the umbrella policy, which also covered advertising injury, defined in relevant part as “misappropriation of advertising ideas or styles of doing business” or “infringement of copyright, title or slogan." The umbrella policy didn’t require that advertising injury arise out of an “advertisement,” and Santa’s Best argued that, therefore, the policy should be strictly construed against Zurich to require coverage. The court disagreed. The policy was unambiguous: “the plain, ordinary meaning of an advertising injury requires that the injury result from an advertisement. … The advertisement is inherent in the nature of the injury; we cannot separate those concepts.”

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