Hugh Boss Fashions v. Fed'l Insurance Co.

• Decision Date: 01 August 2000
• Docket Number: DEFENDANT-APPELLANT-CROSS-APPELLEE,Docket No. 00-7824,PLAINTIFFS-APPELLEES-CROSS-APPELLANTS
• Citation: 252 F.3d 608
• Parties: (2nd Cir. 2001) HUGO BOSS FASHIONS, INC. & HUGO BOSS USA, INC.,, v. FEDERAL INSURANCE COMPANY,(L),, 00-7884(XAP),, 00-7826(CON)
• Court: U.S. Court of Appeals — Second Circuit

Page 608

252 F.3d 608 (2nd Cir. 2001)

HUGO BOSS FASHIONS, INC. & HUGO BOSS USA, INC., PLAINTIFFS-APPELLEES-CROSS-APPELLANTS, v. FEDERAL INSURANCE COMPANY, DEFENDANT-APPELLANT-CROSS-APPELLEE.

Docket No. 00-7824(L),, 00-7884(XAP),, 00-7826(CON)

August Term, 2000

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: February 7, 2001

Decided June 8, 2001

Appeal and cross-appeal arising out of defendant Federal Insurance Company's refusal to defend and indemnify plaintiffs with respect to a suit for trademark infringement. The district court (Baer, J.) awarded partial summary judgment to plaintiffs, finding that Federal had a duty to defend. A jury subsequently awarded plaintiffs $500,000 for costs incurred in defending the infringement suit, but denied any recovery for indemnification. The jury also found that defendant had breached its duty of good faith and fair dealing. Accordingly, the district court awarded plaintiffs approximately $644,000 in attorneys' fees and costs.

Affirmed in part, reversed in part, vacated in part. [Copyrighted Material Omitted] Joseph K. Powers, Sedgwick, Detert, Moran & Arnold, N.Y., N.Y. for Defendant-Appellant-Cross-Appellee.

Mark I. Levy, Howrey Simon Arnold & White, LLP, Washington, DC (John E. Heintz, and John F. Stanton on the brief) for Plaintiffs-Appellees-Cross-Appellants.

Before: Jacobs, Calabresi, and Sotomayor, Circuit Judges.

Calabresi, Circuit Judge

This is an insurance coverage action arising out of defendant Federal Insurance Company's ("Federal") refusal to indemnify plaintiffs Hugo Boss Fashions, Inc. and Hugo Boss USA (collectively "HB USA" or "plaintiffs") and to pay for defense costs with respect to a suit brought against HB USA, and its parent company, Hugo Boss Germany ("HB Germany") by the Boss Manufacturing Company ("BMC"). (HB Germany is not a party to this suit. The term "Hugo Boss" will be used to refer to Hugo Boss USA, Hugo Boss Fashions, and HB Germany collectively.) BMC alleged that Hugo Boss's use of the term "BOSS" on certain products constituted trademark infringement and breach of contract. Federal disclaimed coverage on the grounds (1) that the suit against Hugo Boss fell into an "intellectual property" exclusion in its insurance contract, and (2) that the suit against Hugo Boss arose out of a breach of contract and that it, therefore, fell into a "breach of contract" exclusion in the insurance policy.

The district court (Harold Baer Jr., J.) granted partial summary judgment to plaintiffs. It found that the term "BOSS" fit into an exception (covering "trademarked slogans") carved out of the intellectual property exclusion, and that no other policy exclusion applied as a matter of law, though at least one - a "prior acts" exclusion - might ultimately be shown to be valid on the facts. Finally, the court held that Federal had violated its duty to defend Hugo Boss in the suit brought against it by BMC ("the BMC Action" or "the infringement suit").

A jury subsequently awarded HB USA $500,000 for the defense costs associated with the BMC Action, but denied any recovery for indemnification. The jury also concluded that Federal's failure to defend in the infringement suit constituted a breach of Federal's duty of good faith. Accordingly, the district court awarded HB USA approximately $644,000 in attorneys' fees and costs incurred in pursuing this action against Federal ("the coverage action").

On appeal, Federal challenges (1) the district court's grant of summary judgment to plaintiffs on the duty to defend, (2) the jury's conclusion that it acted in bad faith, and (3) the size of the award of attorneys' fees related to the coverage action. HB USA cross-appeals, claiming (1) that the district court erroneously instructed the jury with respect to its claim for indemnification, and (2) that the jury award of $500,000 in fees and costs incurred during the infringement suit was inadequate as a matter of law.

We hold that the term "BOSS" cannot be deemed a "trademarked slogan," and, hence, that the "intellectual property" exclusion in the insurance contract applies. On this basis, we conclude that Federal had no duty to indemnify Hugo Boss. Because, however, at the time BMC's complaint against Hugo Boss was filed, there was uncertainty as to whether the exclusion would apply, a duty to defend existed. Finally, we hold that there was insufficient evidence of bad faith on Federal's part to support the jury's verdict against it on that count. Accordingly, the award of attorneys' fees and costs incurred by HB USA in pursuing the coverage action is vacated.

BACKGROUND

Plaintiff Hugo Boss USA is a group of U.S.-based, wholly-owned subsidiaries of Hugo Boss Germany, which is a designer and manufacturer of expensive men's clothing and accessories. Hugo Boss USA holds the U.S. license for HB Germany's trademarks that appear on Hugo Boss products.¹ The Boss Manufacturing Company is a manufacturer of industrial and outdoor clothing and accessories such as shoes, boots, garden gloves, and mittens. Both BMC and Hugo Boss sell items bearing the term "BOSS."

1. The Concurrent Use Agreement

In 1988, BMC became concerned that Hugo Boss was infringing on certain BMC trademarks. This concern led the parties, in 1990, to enter into a Concurrent Use Agreement ("the Agreement" or "the 1990 Agreement"), pursuant to which HB Germany agreed not to "sell or license others to sell gloves, mittens or boots with a mark that incorporates the word `BOSS.'" The parties also agreed to "cross-license their marks for certain products at designated price points... represent[ing] separate consumer markets." The purpose of this agreement was to establish guidelines that would prevent consumer confusion and would keep the parties from infringing each others' trademark rights.

2. The BMC Action

In 1997, BMC became suspicious that Hugo Boss was violating the Agreement. After confirming its suspicions by obtaining Hugo Boss gloves and boots with the term "BOSS" on them, BMC filed suit, in the United States District Court for the Southern District of New York, against HB Germany, Hugo Boss Fashions, and Hugo Boss USA. BMC brought claims (a) under the federal Trademark Act (Lanham Act), 15 U.S.C. §§ 1051 et seq., and under the common law, for trademark infringement and unfair competition, (b) under the Federal Trademark Dilution Act of 1995, 15 U.S.C. § 1125(c), and under New York General Business Law §§ 360 et seq., for dilution, and (c) under the common law, for breach of contract.

BMC's Complaint alleged that Hugo Boss knew of the "goodwill represented and symbolized by the `BOSS' mark," and that, Hugo Boss was "aware that the purchasing public recognizes and relies on this mark as identifying [BMC's] products, and distinguishing [BMC's] products from those of others." BMC contended that, in violation of the Agreement, Hugo Boss had "sold or licensed others to sell in the United States and its territories gloves, mittens, and boots which have a mark that incorporates the word `BOSS.'" The Complaint also alleged that Hugo Boss had sold socks, T-shirts, and sweatshirts at prices below those permitted under the cross-licensing provisions of the Agreement.²

3. HB USA Seeks Coverage - The Insurance Contract

About three months after the Complaint in the BMC Action was filed, HB USA notified Federal - its insurer - of the suit, requested that Federal defend it in the BMC Action, and stated that it "will look to Federal for reimbursement of any indemnity payments it may be required to make" as a result of the suit. Federal had, previously, issued to HB USA an insurance policy providing general liability insurance, including insurance for "advertising injury" liability. The policy states:

Subject to the applicable Limits Of Insurance, we will pay damages the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract for... advertising injury... caused by an offense committed during the policy period.

The policy defines "advertising injury" as injury "arising solely out of... infringement of copyrighted advertising materials or infringement of trademarked or service marked titles or slogans," and makes clear that Federal "will have the right and duty to defend any insured against a suit seeking damages for... advertising injury."

Of critical importance to this suit are a number of exclusions contained in the policy. First, an "intellectual property" exclusion states that:

This insurance does not apply to... advertising injury... arising out of [conduct]... which is claimed as an infringement, violation or defense of any of the following rights or laws: copyright, other than infringement of copyrighted advertising materials; patent; trade dress; trade secrets; or trademark or service mark or certification mark or collective mark or trade name, other than trademarked or service marked titles or slogans.

(emphasis added). Second, a "breach of contract" exclusion provides that: "This insurance does not apply to advertising injury arising out of breach of contract." Finally, a "prior acts" exclusion states: "This insurance does not apply to advertising injury... arising out of oral or written publication of material whose first publication took place before the beginning of the policy period."

4. Federal Denies Coverage

Within Federal, the matter was referred to Mary Tycon, a regional supervisor who worked on advertising injury claims. Tycon concluded that Federal was not required to defend or indemnify Hugo Boss with respect to the BMC Action. She testified at trial that she reached this conclusion on a variety of different grounds. First, she determined that because the suit was for trademark infringement and because, in her view, "BOSS" did not constitute a "slogan" within the meaning of the policy, it fell within the intellectual property exclusion. "[O]ur understanding of slogan," Tycon explained, "was that it...