no duty to defend despite allegations of label copying; but insurers can't recoup defense costs already spent

Continental Casualty Company v. Winder Laboratories, LLC, --- F.4th ----, 2023 WL 4504183, No. 21-11758 (11th Cir. Jul. 13, 2023)

Winder, a generic pharma manufacturer, sought insurance coverage for a false advertising lawsuit. The court of appeals affirmed the finding that there was no coverage, but also that Winder didn’t have to pay the insurers back for the representation they offered during the coverage dispute.

As relevant “personal and advertising injury” was defined to include an injury “arising out of” either “[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” or “[t]he use of another’s advertising idea in [the insureds’] ‘advertisement.’ ”1 The policies also had a “failure to conform” provision that excluded coverage for injuries “[a]rising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insureds’] ‘advertisement.’ ” Neither policy at issue included a reimbursement provision allowing the insurers to recoup defense costs.

The underlying lawsuit by Concordia asserted various claims under the Lanham Act and Georgia law, focusing on the allegation that Winder “falsely or misleadingly advertised their B-Donna product, and subsequently their Phenohytro product, as generic [equivalents] to [Concordia’s product] DONNATAL directly to the pharmaceutical industry, including to potential purchasers.”

The insurers agreed to defend, subject to a reservation of rights to disclaim coverage, but also included a “not-so-standard reimbursement provision”: “VFI specifically reserves its right to seek reimbursement of defense costs incurred on [the insureds’] behalf for all claims which are not potentially covered by the VFI Policy.” The insurers also sued for a declaratory judgment that they had no duty to defend or indemnify.  The district court held that Concordia’s allegations were “squarely” excluded by the “failure to conform” provision because the “operative complaint [was] based entirely upon allegations that [Winder] misrepresented the quality” of Winder’s products.

Winder argued that Concordia’s complaint alleged a “personal and advertising injury” because it included allegations that Winder copied Concordia’s DONNATAL label inserts. But did the false advertising claim hinge on the alleged label copying? If so, there would be coverage; if not, and the claim rested on allegations that Winder actively misrepresented its drugs, then the alleged injury arose from the “failure of goods ... to conform with any statement of quality or performance made in [the insureds’] ‘advertisement,’ ” and the insurers were protected by the “failure to conform” exclusion.

The court of appeals agreed with the latter approach. The copying allegations were clearly in service of the misrepresentation of equivalence claim—copying was merely one of the means by which the misrepresentation was allegedly carried out. This was not a “personal and advertising injury” stemming from “[t]he use of another’s advertising idea”—i.e., Concordia’s labels. The specific allegation that Winder made “false or misleading” representations and statements about its products by “marketing the products as ‘generics’ that are comparable to and/or substitutable for [Concordia’s] DONNATAL,” was a “textbook” of failure-to-conform.

Also, Winder argued that Concordia’s false advertising claim relied on statements made by non-party drug databases for which Winder wasn’t responsible; but Concordia clearly alleged that Winder’s initial alleged misrepresentations were the but for cause of its injuries. Winder further alleged that it only made true statements which couldn’t “fail ... to conform with any statement of quality or performance ....” However, the underlying complaint, which determined coverage, alleged misrepresentations.

At least Winder wasn’t required to reimburse the insurers. “[B]ecause insurers under Georgia law have a broad duty to defend when there is ‘even arguably’ a covered claim, the insurers had an active duty to defend up until the point when the district court ruled otherwise. Simply put, under the facts of this case, the insurers were under a duty to defend until the district court ruled that they were not.” No new contract was created by the insurers’ reservation of rights letter, and just asserting a right to reimbursement in a reservation of rights letter isn’t enough if the insurance contract did not contemplate a right to recoupment.

There was no consideration for the reimbursement provision. Importantly, “a promise to perform a preexisting contractual obligation does not constitute consideration for a new agreement.” The parties’ contracts already required a defense against certain third-party lawsuits, so the letters were no more than a promise to perform an existing obligation. Further, the underlying contract didn’t provide which party would select legal counsel, so offering Winder the option to choose counsel didn’t give up anything on the insurers’ side.

Nor was Winder unjustly enriched by retaining “the benefit of an expensive defense to which they knew they were not entitled.” Even assuming this argument didn’t immediately fail due to the existence of a written contract, there was nothing “unjust” about requiring the insurers to fulfill their contractual obligations. “[W]e cannot say that an insured is unjustly enriched when its insurer tenders a defense in order to protect its own interests, even if it is later determined that the insurer did not owe a defense.”

Georgia law wouldn’t require this, the court predicted. “The duty to defend is extremely broad under Georgia law.” There was no majority rule favoring recoupment nationwide; the current case law “appears to be more-or-less in equipoise with the recent trend favoring the ‘no recoupment’ rule.” More importantly, in Georgia, the broad duty to defend is “foundational.” But a rule allowing for broadscale reimbursement without any contractual provision securing that right would collapse the duty to defend into the duty to indemnify. “That is, if the duty to defend required insurers to mount a defense but the defense was widely reimbursable upon a court’s determination that no ongoing duty to defend exists, the duty to defend would simply become the duty to indemnify.” [This seems technically untrue—you could have a rule separating the duty to defend from the duty to indemnify as long as a court agreed that the allegations of the complaint created the duty to defend but an ultimate finding/narrowing of the case could avoid the duty to indemnify—but that kind of distinction does at least push against the breadth of the duty to defend.]