The Frog v. Travelers Ins. Co.

• Citation: 193 F.3d 742
• Decision Date: 30 September 1999
• Docket Number: No. 98-7552 and 98-7553,CV-00758,CV-00643,98-7552 and 98-7553
• Parties: (3rd Cir. 1999) THE FROG, SWITCH & MANUFACTURING CO., INC., APPELLANT IN NO. 98-7552, v. THE TRAVELERS INSURANCE COMPANY (D.C. CIV. NO. 98-) THE FROG, SWITCH & MANUFACTURING CO., INC., APPELLANT IN NO. 98-7553, v. UNITED STATES FIRE INSURANCE COMPANY (D.C. CIV. NO. 98-) Fied
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 742

193 F.3d 742 (3rd Cir. 1999)

THE FROG, SWITCH & MANUFACTURING CO., INC., APPELLANT IN NO. 98-7552, v. THE TRAVELERS INSURANCE COMPANY (D.C. CIV. NO. 98-CV-00643)

THE FROG, SWITCH & MANUFACTURING CO., INC., APPELLANT IN NO. 98-7553, v. UNITED STATES FIRE INSURANCE COMPANY (D.C. CIV. NO. 98-CV-00758)

No. 98-7552 and 98-7553

U.S. Court of Appeals, Third Circuit

Fied September 30, 1999

Argued: July 13, 1999

On Appeal From the United States District Court For the Middle District of Pennsylvania District Judge: Honorable William W. Caldwell

[Copyrighted Material Omitted] R. James Reynolds, Jr., Esquire (argued) Thomas, Thomas, Armstrong & Niesen 212 Locust Street P.O. Box 9500 Harrisburg, PA 17108 Counsel for Appellant The Frog, Switch & Manufacturing Co.

William T. Corbett, Jr., Esquire (argued) Shanley & Fisher 131 Madison Avenue Morristown, NJ 07962-1979 Counsel for Appellee Travelers Insurance Co.

Francis J. Deasey, Esquire (argued) Deasey, Mahoney & Bender 1800 Jfk Boulevard, Suite 1300 Philadelphia, PA 19103-2978 Counsel for Appellee United States Fire Insurance Company

Before: Becker, Chief Judge, Roth and Rendell, Circuit Judges.

OPINION OF THE COURT

Becker, Chief Judge

This case requires us to interpret two insurance policies to determine whether the insurers had a duty to defend the insured against a lawsuit brought by a competitor for theft of trade secrets, unfair competition, and reverse passing off. The policies covered claims against the insured for "advertising injury." The definition of "advertising injury" in standard business insurance policies has troubled and in some cases confounded courts for years. This case involves allegations that the insured stole various ideas and then advertised the results of that theft; the question is whether the advertising converts the theft into "advertising injury." We conclude that it does not, and that, by the plain terms of the policies, the insurers had no duty to defend against such claims. We also rule that the insured cannot maintain actions for bad-faith denial of coverage against them. We therefore affirm the District Court's order granting summary judgment to the principal insurer, Travelers Indemnity Co. (named as "Travelers Insurance Co." in the caption) ("Travelers"), and its Fed. R. Civ. P. 12(b)(6) order dismissing the insured's complaint against the excess carrier, United States Fire Insurance Co. ("USFIC").

I. Facts and Procedural History

Plaintiff is The Frog, Switch & Manufacturing Co. ("Frog"), a manufacturer of industrial products. Defendants are Travelers and USFIC, which issued insurance policies to Frog that are identically worded in relevant part. Travelers issued a basic policy with an advertising injury limit of $1,000,000, and USFIC issued an excess policy that covered claims that exceeded the retained limit. Under the policies, the insurance companies agreed to pay sums that Frog became legally obligated to pay as damages for "advertising injury" "caused by an offense committed in the course of advertising your goods, products, and services." "Advertising injury" was defined as, inter alia, "injury that arises out of your advertising activity as a result of: . . . (3) misappropriation of advertising ideas or style of doing business." The policies further provided that the insurance companies had the right and duty to defend against any suit seeking damages covered by their policies.

On July 17, 1995, a Frog competitor, ESCO, filed suit against Frog and one of Frog's employees, John Olds. ESCO alleged that, in January 1995, it had acquired a dipper bucket product line from Amsco Cast Products, Inc. ("Amsco"), including Amsco's trade name, trademarks, and copyrights. The complaint (hereinafter "the underlying complaint") maintained that, prior to ESCO's acquisition of Amsco, Olds--who had been Amsco's chief engineer for the dipper bucket product line--misappropriated from Amsco trade secrets and confidential business information, including drawings and prints related to the dipper bucket product line and delivered that information to his new employer, Frog.

ESCO also alleged that Frog then entered the dipper bucket product market, using Amsco's proprietary trade secrets, confidential business information, and technology misappropriated by Olds. The complaint asserted that Frog had engaged in unfair competition based on the misappropriated information. ESCO's Revised Second Amended Complaint also added two causes of action for false advertising and reverse passing off under the Lanham Act, 15 U.S.C. § 1125(a), which prohibits false or misleading descriptions of fact in commercial advertising and promotion.

The relevant paragraphs of Count Nine, "False Advertising Under Lanham Act," are as follows:

76. Shortly after Olds became employed by Frog commencing October 17, 1994, defendant Frog launched a promotional campaign to the market for all cast manganese dipper buckets. This campaign included widespread distribution of a product promotional brochure, publication in an industry trade journal, and verbal and written direct communication to customers. In this campaign, defendant Frog falsely represented that it had developed a new and "revolutionary" design for dipper bucket parts and components, and falsely depicted a dipper bucket with a "Frog, Switch" logo. 77. In fact, at the time of defendant Frog's campaign, it had done no design work whatsoever, and the parts and components Frog was offering for sale and was selling were made from engineering drawings unlawfully appropriated by Olds from Amsco and used by Frog. The market was falsely led to believe that products of the type contained in the Amsco line could readily be replicated, produced and sold by Frog. 78. Plaintiffs have been damaged by defendant Frog's actions in an amount to be proved at trial.

Count Ten, "Reverse Passing Off Under Lanham Act," alleged in relevant part:

81. The parts and components sold in commerce by defendant Frog as its own were really Amsco products made by use of the stolen drawings, a form of "reverse passing off."

82. Plaintiffs have been damaged by defendant Frog's actions in an amount to be proved at trial.

Frog timely gave Travelers and USFIC notice of the ESCO litigation and copies of the complaint and the amended complaint, and requested that the insurance companies defend the suit, on the grounds that the ESCO complaint alleged acts that were potentially covered by the insurance policies. Both Travelers and USFIC refused. On June 5, 1997, prior to trial, Frog and ESCO settled for $2,625,000.

Frog sued the insurance companies for breach of contract and for bad faith in failing to honor the insurance policy under 42 Pa. Stat. Ann. § 8371. The District Court granted summary judgment to Travelers and granted USFIC's 12(b)(6) motion to dismiss.¹

II. The Duty to Defend

A. General Principles

The parties agree that the insurance contracts are governed by Pennsylvania law. The policy was issued by a Pennsylvania agent to a Pennsylvania corporation. See Travelers Indem. Co. v. Fantozzi ex rel. Fantozzi, 825 F. Supp. 80, 84 (E.D. Pa. 1993) (Pennsylvania conflict of laws principles dictate that an insurance contract is guided by the law of the state in which it is delivered).

General rules of insurance contract construction require us to read the policy as a whole and construe it according to its plain meaning. See Atlantic Mut. Ins. Co. v. Brotech Corp., 857 F. Supp. 423, 427 (E.D. Pa. 1994), aff'd, 60 F.3d 813 (3d Cir. 1995). Ambiguities must be construed in favor of the insured because the insurer writes the contract, but a provision is ambiguous only if reasonable people could, in the context of the entire policy, fairly ascribe differing meanings to it. See id.

We need only examine the insurer's duty to defend to resolve this appeal. An insurer's duty to defend an insured in litigation is broader than the duty to indemnify, in that the former duty arises whenever an underlying complaint may "potentially" come within the insurance coverage. See Erie Ins. Exch. v. Claypoole, 673 A.2d 348, 355 (Pa. Super. Ct. 1996). Furthermore, if a single claim in a multiclaim lawsuit is potentially covered, the insurer must defend all claims until there is no possibility that the underlying plaintiff could recover on a covered claim. See Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363, 1368 (Pa. 1987). It follows that there may be a duty to defend without a duty to indemnify. See Aetna Life & Cas. Co. v. Barthelmy, 836 F. Supp. 231 (M.D. Pa. 1993), rev'd on other grounds, 33 F.3d 189 (3d Cir. 1994). In determining the existence of a duty to defend, the factual allegations of the underlying complaint against the insured are to be taken as true and liberally construed in favor of the insured. See Biborosch v. Transamerica Ins. Co., 603 A.2d 1050, 1052 (Pa. Super. Ct. 1992).

Relying on Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F. Supp. 324, 330 (E.D. 1991), Frog argues that the duty to defend also arises if the underlying complaint could reasonably be amended to state a claim under the policy. Safeguard Scientific's formulation of the duty to defend applies in a particular situation--when the underlying complaint alleges intentional action, but negligent or reckless action would suffice to make the insured's conduct actionable--and is merely a way of saying that such a complaint "potentially" comes within the insurance coverage.² At all events, Frog argues that the ESCO complaint, either initially or in amended form, did in fact allege injury covered by the policy.

B. Covered Advertising Injuries

The policies at issue here define advertising injury to cover four specific categories: (1) slander, libel, or disparagement of goods, products, or services; (2) violation of a right of privacy; (3) misappropriation of advertising ideas or style of doing business; and (4) infringement of copyright, title, or slogan....