CGS Indus., Inc. v. Charter Oak Fire Ins. Co., No.
11-2647-cv (2d Cir. June 11, 2013)
Charter appealed from a judgment that it breached its duties
to defend and indemnify to its insured, CGS, under its advertising injury
policy. The court of appeals affirmed on the duty to defend and reversed on the
duty to indemnify, since there was sufficient legal uncertainty about coverage
to trigger the duty to defend. The
parties stipulated that damages were almost $400,000—the settlement plus CGS’s
defense costs; the court remanded for an award just of defense costs.
In the underlying lawsuit, Five Four Clothing sued Walmart
and CGS for trademark infringement based on CGS’s use of Five Four’s rear
pocket stitching design, known as FF stitching, on jeans it supplied to
Walmart. Eventually, CGS settled by
paying $250,000 on behalf of both parties (because of course Walmart required
CGS to indemnify it). Charter’s policy
covered advertising injury, defined as injury arising out of one or more
specifically listed offenses, including “[i]nfringement of copyright, title or
slogan.” It had the standard exclusion for
knowing violation of rights.
Under Hugo Boss Fashions, Inc. v. Federal Insurance Co., 252
F.3d 608 (2d Cir. 2001), New York law distinguishes between the duty to
indemnify and the duty to defend, applying “very different presumptions” to
each. If there’s a reasonable basis for
a difference of opinion as to the meaning of the policy, the language is
ambiguous and interpreted in favor of the insured. The duty to defend is
broader than the duty to indemnify and an “even stronger presumption in favor
of coverage” applies. To avoid that duty, an insurer “must demonstrate that the
allegations of an underlying complaint place that pleading solely and entirely
within the exclusions of the policy and that the allegations are subject to no
other interpretation.”
Charter argued that the FF stitching was neither a “title”
nor a “slogan” used in advertising. The
court of appeals agreed as to “slogan.”
The policy didn’t define slogan, but reference to “a body of law or an
established custom” can fill in the gaps.
Neither New York law nor industry custom provided insight into the
meaning of “slogan,” but the term could still be unambiguous if it had a clear
meaning in federal law, which it did.
Complete federal judicial unanimity isn’t required, as long as there is an
“overwhelming current of judicial opinion,” that is, a meaning used by “the
vast majority of federal courts.” Using that standard, the vast majority of federal
courts have defined “slogans” as “phrases used to promote or advertise a house
mark or product mark, in contradistinction to the house or product mark
itself.”
“To hold that the stitching design on a jeans pocket is a
‘slogan’ would stretch that definition beyond recognition, as the design is
clearly not a ‘phrase.’” A slogan must be something other than the house mark
or product mark itself; the FF stitching was in effect a house or product
mark. Here, too, there was no residual
ambiguity over meaning to trigger the duty to defend. Hugo
Boss settled the meaning of “slogan” in advertising injury policies, and
there had been no contrary developments in case law or commercial
understanding.
However, the interpretation of “title” was a bit
different. Again, the term wasn’t
defined in th epolicy, and neither New York law nor industry usage provided
significant insight. The “vast majority”
of federal cases held that, in this context—“that is, in a list that includes
‘copyright’ and ‘slogan,’ but conspicuously does not include coverage of
infringement of ‘trademarks’– ‘title’ means the name or appellation of a
product, and does not cover design elements such as pocket stitching that may
serve as a trademark designating the origin of the product.” A title need not contain words—the court
referred to the symbol of the artist currently known as Prince, also used as an
album title—“we have no difficulty in concluding that the stitching on the back
pocket of a pair of jeans cannot fairly be called the name or appellation of
that pair of jeans.” (The court found no
need to decide whether “title” was necessarily limited to literary or artistic
works.)
While this definition was clear enough to bar the duty to
indemnify, if there was any residual uncertainty about whether a court would
find the term unambiguous, then Charter still had a duty to defend. Insurers may refuse to defend only “cases in
which the policy is so clear that there is no uncertainty in fact or law.” So here: “while the vast majority of federal
cases unambiguously define ‘title’ to mean a word or phrase, a handful define
title in a way that could arguably include a design or symbol similar to the
pocket stitching at issue here.” One court defined “title” as “names and
related trademarks,” then noted that “trademark” is defined as a “‘word, name,
symbol, or device, or any combination thereof used by a person . . . to
identify and distinguish his or her goods.’” Another court held that
infringement of a stylized “D” logo fell under “infringement of title”; still
another found that “the language clearly suggests coverage of claims where
there are allegations of infringing a company’s mark or slogan.” These cases were mistaken to reason that,
because a trademark can be a title, and a symbol is a trademark, infringement
of the symbol is infringement of title.
But they created enough legal uncertainty to give rise to a duty to
defend, at least until the uncertainty around the term was resolved. Thus, Charter’s failure to defend breached
the policy. Charter should’ve begun
defense and immediately sought a declaratory judgment as to the meaning of
“title.”
Charter next argued that the injury alleged by Five Four
didn’t stem from “advertising.” But the
insurer must defend no matter how groundless the suit may be if the allegations
in the underlying complaint, liberally construed, are within the scope of the
policy. The underlying complaints
consistently alleged “wrongful acts, including advertising.” “If Charter believed that Five Four did not
intend to allege advertising by CGS or that CGS did not advertise the jeans,
Charter should have begun to defend and immediately sought a bill of
particulars to resolve any ambiguity in the pleadings.” To the extent that Charter argued that its
duty to defend terminated once discovery responses demonstrated that CGS and
Walmart never advertised the jeans, Charter had not so argued below and had
instead stipulated to damages, waiving this argument.
Nor did the knowing violation exclusion help Charter. Though
the underlying complaint alleged willful infringement, the Lanham Act claims
could succeed without such a showing. “Our inquiry ends there: as at least one
of the claims in the Underlying Action did not require intent, Charter was
required to defend the entire action.” The cases cited by Charter were
distinguishable—in one, the defendant “approached a local manufacturer to
produce a cheaper, low-quality knock-off product; marketed the counterfeit
product in packaging indicating it was a genuine creation manufactured in
Denmark, both blatantly false; and then fraudulently misled the plaintiff about
sales. In another, the plaintiff was a
serial infringer. “Here, the complaint
alleges merely that CGS sold jeans with similar pocket stitching to Five Four’s
jeans, not that CGS marketed the jeans as genuine Five Four jeans, or that it
was a serial infringer. From the facts alleged in the complaint … it is
possible that CGS unintentionally infringed on Five Four’s pocket design.”
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