Allied World Nat’l Assur. Co. v. NHC, Inc., 2025 WL 1852789,
No. 22-00469 MWJS-WRP (D. Haw. Jul. 3, 2025)
Nice to see good old-fashioned legal reasoning in these
times.
In the underlying lawsuit, class plaintiffs alleged that MNS
falsely advertised coffee products labeled as “Kona” that contained little to
nothing of the real thing, thus capturing a price premium. MNS ultimately
settled the lawsuit for $12 million and sought indemnification from its umbrella
insurers. Interpreting the relevant policy’s advertising injury coverage, the
court found that an exclusion barred coverage and granted summary judgment for
the insurers.
The underlying lawsuit asserted Lanham Act violations. MNS
and other named retailers sought the dismissal of the Lanham Act false
advertising claim against them to the extent they had acted purely in their
role as retailers. The court granted that motion, reasoning that a false
advertising claim requires “a false statement of fact by the defendant in a
commercial advertisement about its own or another’s product.” Although the
court recognized that “[t]here is limited case law on this subject” and that
“the Ninth Circuit has not weighed in on this issue,” it concluded that
retailers are not liable for false advertising under the Lanham Act “because
they do not make a false statement simply b[y] displaying or selling a product
that was falsely labeled by another.” However, it cautioned that “[i]f, for
example, a retailer controls or participates in the creation of the offending
label or creates additional marketing materials for a product that amplify the
manufacturer’s misrepresentations, imposition of liability for false
advertising may be appropriate.”
As the case headed for trial, other defendants settled and
MNS’s supplier filed for bankruptcy. Plaintiffs alleged that MNS was an active
partner with that supplier: “MNS regularly collaborated with Mulvadi in
developing marketing materials for Mulvadi coffee ... Mulvadi advertising
commonly featured MNS’s logo and slogan ... [And] MNS’s 30(b)(6) deponent
agreed that the company’s internal emails ‘demonstrat[ed] MNS’s involvement
with Mulvadi and Mulvadi promotion.’ ” Then they settled.
The settled claims were defined as “any and all actions,
claims, demands, rights, suits, or causes of action, whether asserted or not
asserted, that arise from or relate to the allegations made or conduct
described in” the last operative underlying complaint, “including but not
limited to allegations related to the labeling, packaging, advertising,
promotion, branding, marketing, manufacturing, design, formulation,
distribution or sale of coffee labeled as ‘Kona,’ regardless of the statute,
regulation, common law legal theory, or other legal basis on which the
allegations may be asserted.”
Ultimately, Allied World alleged that it had no defense or
indemnity coverage obligation under its policies because the settlement
liability did not arise out of the “use of another’s advertising idea in
[MNS’s] Advertisement” or “infringement upon another’s copyright, trade dress
or slogan in [MNS’s] Advertisement.” In addition, it invoked the exclusion for advertising
injury arising “out of the failure of goods, products or services to conform
with any statement of quality or performance made in [MNS’s] Advertisement.”
The insured bears the burden of establishing that the
coverage provisions apply, while the insurer bears the burden of establishing
that an exclusion applies. Hawai‘i state law governed. Insurance policies “must
be construed liberally in favor of the insured and [any] ambiguities [must be]
resolved against the insurer.”
The settlement constituted a legal obligation, and it plainly
covered the Lanham Act false advertising claims. Indemnification does not
require a finding of liability or a finding that there would have been
liability. “If insurance coverage in the settlement context were to turn on a
prediction about whether a defendant would have been held liable if a case had
gone to trial, the very uncertainty of that prediction—which is presumably one
of the factors that would otherwise induce parties to settle—would encourage
them instead to trudge on with the litigation.” True, the Hawai‘i Supreme
Court’s has stated that an insurer’s indemnity obligation “depends upon the
true state of facts surrounding the loss or injury.” But that case did not
involve a settlement. “And in cases that do not involve settlements, it makes
logical sense to say that an insurance company must defend the insured if there
is a possibility of covered liability, but that it need only indemnify the
insured if there actually is covered liability.” Settlements are different— “it
is no longer a question of possible or potential liability.” Thus, to determine
whether the legal liability created by settlement “flows from a covered claim,
a court must inquire not into what has been or would have been resolved on the
merits, but what claims the settlement has legitimately and reasonably been
designed to cover.”
That doesn’t mean that insureds can insert frivolous or
legally barred claims into a settlement just to get coverage; the court predicted
that state law would agree that “an insurance company has the right to present
evidence that some or all of a total settlement amount should be allocated to
the settlement value of non-covered claims.” But there was no such argument
here.
Allied World did argue that there was no possible liability
for ad-related Lanham Act claims as a matter of law. But it didn’t show that
the advertising-related Lanham Act claims were frivolous or meritless. The
underlying plaintiffs made clear in their motion for summary judgment that
their view of the evidence was that MNS did not merely act as a retailer, but
also participated actively in its supplier’s advertising and marketing efforts.
Moreover, the retailer-only liability claims were still appealable at the time
of settlement, and the court acknowledged that there was no binding circuit
precedent on the issue. Finally, joint and several liability for advertising
conduct was still on the table at the time of settlement.
The court turned to the relevant part of the “Advertising
Injury” provision, which defined it as an “injury arising out of your business
... arising out of one or more of the following offenses”: (i) “the use of
another’s advertising idea in your Advertisement,” or (ii) “infringement upon
another’s copyright, trade dress or slogan in your Advertisement.” The policies
further define “Advertisement” as “a notice that is broadcast or published to
the general public or specific market segments about your goods, products or
services for the purpose of attracting customers or supporters,” including any
“material placed on the internet or on similar electronic means of
communication.” But “only that part of a web-site that is about your goods,
products or services for the purposes of attracting customers or supporters is
considered an Advertisement.”
The court rejected Allied World’s claim that the phrase
“another’s advertising idea” should be understood narrowly as a “process or
invention used to market one’s goods.” “[N]o reasonable layperson would
anticipate such a stingy construction of the phrase. Instead, an “advertising
idea” is better understood as, and construed in favor of the insured as being,
“any idea or concept related to the promotion of a product to the public.” This
is similar to the California interpretation of the term as covering the “manner
or means” of advertising goods and services.
Allied World also argued that the word “another’s” in the
phrase “another’s advertising idea” means that the injury must arise from the
use of an “advertising idea” that another person owns or in which they hold a
proprietary interest of some sort. But the Kona farmers, it argued, did not
hold any legal property right in that term.
But nothing in the language of
Allied World’s policies requires that the Kona farmers have the exclusive legal
right to use an advertising idea. Indeed, nothing in the language of the
policies requires them to have any legal right or property ownership at all in
the advertising idea. The possessive term in the phrase “another’s advertising
idea” is readily understood to refer to the factual question of whether another
person uses something, rather than the legal question of whether they own it. …That
broader meaning accords with how language is ordinarily used. For example, when
trying to find a place to sit in a coffee shop, one might ask “is this your
seat?” When doing so, one is not literally asking if that other person owns the
seat. … In a similar vein, one would naturally say that Kona farmers—who
advertise their coffee as “Kona” precisely to signal the high quality and
special characteristics of their product—have hit on “Kona” as their
advertising idea. They use it, and it is theirs in that significant sense. And
it is theirs even though they have no property right in it.
While “some concepts are simply too common or too widely
used to be considered anyone’s advertising idea,” this was not one of them.
Allied World also argued that the injury from the use of
another’s advertising idea must come from that idea’s use in “your”—the
insured’s—“Advertisement,” and that the underlying lawsuit plaintiffs did not
challenge any of MNS’s own advertisements. But the underlying plaintiffs argued
that the ads at issue were legally attributable to MNS.
The court did agree that “Kona” was not a “slogan,” as
relevant to the separate definition of “Advertising Injury” as also covering
injury from infringement on a copyright, trade dress, or slogan. The court
agrees that “Kona” is not a “slogan,” that is, a “distinctive cry, phrase, or
motto of any party, group, manufacturer, or person; catchword or catch phrase.”
“Whether labeling products as ‘Kona’ might qualify as trade dress is a more
difficult question.” But it didn’t matter because initial coverage was already
established.
What about the exclusions? There, MNS faltered. The
failure-to-conform exclusion provided that Allied World’s policy “does not
provide coverage” for any “Advertising Injury ... arising out of the failure of
goods, products or services to conform with any statement of quality or
performance made in your Advertisement.” Although “exclusionary clauses are
interpreted narrowly against the insurer,” Allied World would meet even a
heightened standard for applying the exclusion.
When MNS settled claims that alleged MNS was making
statements about the quality of their coffee products when they labeled those
products as “Kona,” those claims amounted to a statement of quality for
purposes of the policy. The underlying lawsuit plainly alleged that Kona coffee
has a “distinctive flavor and aroma” resulting from its cultivation in the
“volcanic soil, the elevation, and the humidity” of the Kona District of
Hawai‘i island; that “Kona coffee is one of the rarest and most prized coffees
in the world” and that a vendor of same is “tell[ing] consumers that the coffee
has a distinctive flavor profile, and that the beans are of the highest
quality.” By selling commodity coffee that did not contain much, if any,
genuine Kona coffee, MNS allegedly sold a product that failed to conform with
that statement of quality. The underlying complaint alleged that defendants
damaged the goodwill and reputation of Kona coffee precisely because a
“consumer who tries that inferior product, thinking it is Kona coffee, will
conclude that Kona coffee is not worth a premium price” and “will be unwilling
to pay a premium price for Kona in the future.” The alleged injury to the Kona
coffee farmers “flowed directly and unambiguously from the alleged failure of
MNS’s coffee products to conform with the quality expected of Kona coffee.”
MNS argued that “Kona” was merely a statement about the
origin or source of the product, rather than a statement of quality. But the
cited out-of-circuit district court decisions simply found, “in their own
unique circumstances, that statements of source were predominantly about the
provenance of products, rather than their quality.” (Citing cases about Native American
origin claims and reasoning that “similar logic could be said to apply whenever
a product is labeled as ‘Buy American’ or ‘Buy Local.’”) Although previously
the court followed the logic of GIs, now it says: “When vendors label a wine as
‘Burgundy,’ they are not seeking to avail themselves of the peculiar interest
of customers in supporting a region in central France; they mean to say to the
customer that the wine will possess the features of a high-quality, and
therefore more expensive, strain of the product.” [I often talk in class about
casual empiricism in judicial reasoning; this is a good example.]
The underlying lawsuit didn’t just allege sales diversion,
or that customers had a peculiar interest in paying premium prices to support
Kona farmers. “Its allegations were that ‘Kona’ bespoke high quality, and by
selling a product that failed to meet that standard of quality, MNS …
undermined the premium market for Kona coffee by unfairly leading consumers to
conclude that genuine Kona coffee did not meet the quality standard.
Allegations of this nature are not predominantly about the source of a product;
they are about the statement of quality that a vendor makes when it calls its
coffee ‘Kona.’” [They are both?]
Nor need a statement use “express” representations about
quality or performance to be excluded. “While the court recognizes that
exclusions must be construed narrowly, it cannot adopt a construction at war
with the language of the exclusion. And nothing in the language of the
failure-to-conform exclusion would support an artificial ‘magic words’
approach.”
MNS argued that the underlying plaintiffs’ alleged injuries
would exist regardless of the coffee’s quality; at least some of that is true
because of the alleged driving down of prices for Kona-labeled coffee, but the
court concluded otherwise. “If MNS … had sold coffee that conformed to the
quality standards of Kona coffee—which, according to the allegations in the [underlying]
lawsuit, they could only have done by selling the real thing—there would have
been no injury at all.” Even if, at trial, the underlying plaintiffs wouldn’t
have been able to prove the higher quality of Kona coffee, MNS did not identify
anything in the record of the underlying lawsuit indicating that the plaintiffs
there had abandoned or lacked the ability to prove their allegations about the
superior quality of Kona coffee. Indeed, two expert reports in the underlying
lawsuit “affirm[ed] that the use of the term ‘Kona’ reflected a statement of
quality.” One specifically opined “on how the geographical location of
production of a product ... is intended to signal quality,” and further noted
that the Kona coffee “has historically carried a reputation for high quality.”
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