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.
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