Advertising injury coverage may exist even when gravamen of underlying complaint is TM

Vitamin Energy, LLC v. Evanston Ins. Co., -- F.4^th ---, 2022 WL 39839, No. 20-3461 (3d Cir. Jan. 5, 2022)

The court finds that, contrary to the district court’s holding, at least some of the underlying lawsuit’s allegations claimed that Vitamin Energy made disparaging statements about 5-hour Energy, thus triggering the insurer’s duty to defend under its “advertising injury” policy.

“Pennsylvania law imposes on insurers a broad duty to defend lawsuits brought against those they insure.” 5-hour Energy [a frequent litigant in this space] sued mainly over trademark infringement, but also alleged false advertising (and trademark dilution). “Read liberally in favor of coverage, as is required, the 5-hour Energy complaint and the insurance policy impose on Evanston a duty to defend Vitamin Energy in the underlying suit, at least until there is no possibility that 5-hour Energy could prevail against Vitamin Energy on a claim covered by the policy.”

5-hour Energy alleged “false and misleading comparative advertising” about the benefits of Vitamin Energy’s products relative to competing products, including 5-hour Energy’s, as shown in the following chart from the underlying complaint:

This is allegedly false/misleading in representing that 5-hour Energy’s products don’t have 100% of the recommended daily value of Vitamin B. There were other alleged falsehoods about Vitamin Energy’s own products.

Under Pennsylvania law, “[a]n insurer’s duty to defend is broader than its duty to indemnify,” and potential coverage is determined “by comparing the four corners of the insurance contract to the four corners of the [underlying] complaint.” The Policy here defines Advertising Injury as an injury “arising out of oral or written publication of material that libels or slanders ... a person’s or organization’s products, goods or operations or other defamatory or disparaging material, occurring in the course of the Named Insured’s Advertisement.” This includes, at a minimum, an injurious false statement about another’s goods.

Even if all the other allegations in 5-hour Energy’s complaint pertain only to Vitamin Energy’s own products, the relevant allegations about the ad at issue “are best read as saying not only that Vitamin Energy’s own products contain 100% of the daily recommended value of vitamin B, but also that 5-hour Energy’s products do not. That latter representation is clearly about 5-hour Energy’s products, not Vitamin Energy’s, and 5-hour Energy asserts that it is false.” The underlying complaint need only contain “at least one allegation that falls within the scope of the policy’s coverage [for] the duty to defend [to be] triggered[.]” This is true even if the “gravamen” of the complaint is that the slogan promoting “up to 7 HOURS of Energy” is trademark infringement. The relevant question is “whether a claim against an insured is potentially covered[,]” “not whether the most salient claim is potentially covered.”

image illustrating the TM claim

The duty to defend “is not limited to meritorious actions; it even extends to actions that are groundless, false, or fraudulent as long as there exists the possibility that the allegations implicate coverage.”

Likewise, the exclusions were construed in favor of coverage. The IP exclusion for “Personal Injury or Advertising Injury arising out of piracy, unfair competition, the infringement of copyright, title, trade dress, slogan, service mark, service name or trademark, trade name, patent, trade secret or other intellectual property right,” was likewise inapplicable to the Vitamin B comparative advertising allegation. Although the exclusion listed “unfair competition,” that term “does not have a singular, unambiguous meaning.” In context, the other terms “refer narrowly and consistently to intellectual property rights, and so should ‘unfair competition.’” The court pointed out: “[I]f the exclusion did bar coverage because of allegations supporting a potential disparagement claim, it would arguably render the Policy’s coverage of injury from ‘disparaging material’ a nullity, which we doubt the parties intended.”

So too with the exclusions for the insured’s incorrect description/failure to conform with its own representations about its products’ own characteristics. And the exclusions for “knowing” personal/advertising injury didn’t apply because the complaint alleged knowing trademark infringement, not knowing disparagement.

In a footnote, the court said something that puzzled me: “Of course, had Vitamin Energy cabined its comparative advertising efforts to simple puffery, claims of relative superiority over other competitors, or claims about competitors that its competitors did not allege were false or misleading, then no duty to defend would arise because it is well established that such claims are not actionable.” It seems to me that until a court in the underlying action agrees that the comparative advertising is puffery, there’s still a duty to defend, because otherwise one court could say it’s not puffery and thus there is Lanham Act/disparagement exposure and another could say nonetheless there’s no duty to defend or indemnify, which seems wrong.