Insurer has duty to defend in alleged trademark counterfeiting case

Travelers Indem. Co. of Connecticut v. Sterling Wholesale, LLC, 2013 WL 3816736 (E.D. Va. July 19, 2013)

Travelers brought a declaratory judgment so that it wouldn’t have to defend Sterling in underlying litigation; it lost.  Sterling is a small import/export company that supplies, among other things, OTC medical supplies such as blood glucose monitoring strips. The underlying litigation brought by J&J alleges a scheme involving a number of co-conspirators who acquired genuine OneTouch blood glucose test strips manufactured for sale in foreign markets, removed the original foreign-language labels, repackaged the products with English-language labels bearing counterfeit lot numbers and expiration dates, and then imported them into the United States.  Sterling and its principal Littman weren’t named as active coconspirators, but the complaint describes Sterling as a financial middleman, partnering with another distributor to import the test strips from South Africa.  There was no express allegation that Sterling knew that the strips were repackaged or otherwise counterfeit.  J&J sued Sterling and Littman for infringement, dilution, and related claims, including §43(a)(1)(B) false advertising.

Sterling’s policy defined “advertising injury” to include “Infringement of copyright, title or slogan.”  The analysis looks at the four corners of the policy and the four corners of the underlying complaint.  If coverage is in doubt, the insurer must defend.  The nature of the conduct alleged trumps the form of the action pleaded.

The underlying complaint alleged that genuine test strips had their labels removed and replaced with counterfeit labels, then were repackaged in counterfeit boxes, using a number of J&J registered trademarks. Sterling allegedly was part of buying over 20,000 boxes of the strips over an eight-month period that were then sold to wholesalers.  The complaint alleged generally that the defendants, including Sterling, used J&J’s marks in commercial advertising or promotion.  This fell within the scope of “infringement of copyright, title, or slogan.”  In the only state court decision on point, a Virginia circuit court considering identical language found the phrase broad enough to encompass trademark infringement.  Plus, though the only detailed description of the packaging at issue was a list of registered marks, a trademark may in some circumstances also constitute a slogan.  “The two terms--slogan and trademark--are neither coextensive nor mutually exclusive, and they may sometimes overlap.”  Plus, it was clear from the allegations of the underlying complaint that the counterfeit packaging at issue was modeled directly on genuine packaging.  “Notwithstanding the LifeScan complaint’s limited description of the contents of the counterfeit packaging, it is reasonable to infer that this counterfeit packaging also included any slogans or copyrighted material that may have been displayed on the genuine article.”

That hurdle jumped, the next question was whether the “advertising injury” arose from an “offense committed in the course of advertising [the policyholder’s] goods, products or services.” “Advertising” is an unambiguous term with a natural and ordinary meaning in the business world: “the widespread promotion of goods or services to the public at large, or to the company’s customer base.”  A prior case held that allegations of the sale of infringing items, without allegation of any facts about advertising or promotion, didn’t allege “advertising” for these purposes.  Likewise, solicitation of a formal written proposal tailored to a single customer isn’t “advertising.”  However, where a promotional communication is addressed to a small audience that nonetheless comprises all or a significant number of the speaker’s client base, that’s advertising.

The underlying complaint didn’t specifically allege advertising activity by Sterling, but it did allege a partnership in which Sterling contributed its importing expertise and contacts to the importation and sale of over 20,000 boxes, which were sold to at least four wholesale distributors.  The complaint didn’t detail promotional activities, but “expressly, albeit summarily, alleges that the … defendants, including Sterling Wholesale and Littman, engaged ‘in commercial advertising or promotion.’” There was nothing in the underlying complaint to suggest that Sterling’s sales to multiple customers were obtained exclusively by direct, one-by-one solicitation, nor that these distributors did not constitute a significant portion of the joint venture’s customer base. Thus, the alleged conduct was potentially an offense committed in the course of advertising.

Finally, coverage requires that the insured’s advertising activities cause the injury alleged, not merely expose it.  A patent infringement claim doesn’t trigger coverage even though the insured advertises the infringing product if the infringement claim is based on sale or importation rather than advertisement.  But here, the underlying complaint explicitly alleged commercial advertising activity, and the facts alleged implicated potential advertising activity by Sterling in promoting the sale of counterfeit products to multiple distributors.  “[L]ogic compels the conclusion that these alleged advertising activities are, at a minimum, the potential cause of injury” to J&J.