IDG Inc. & Johnson v. Continental Casualty Co. et al.

• Decision Date: 26 December 2001
• Docket Number: No. 01-5011,01-5011
• Citation: 275 F.3d 916
• Parties: (10th Cir. 2001) IDG, INC. and R. BRENT JOHNSON, Plaintiffs-Appellants v. CONTINENTAL CASUALTY COMPANY, TRANSPORTATION INSURANCE COMPANY, and VALLEY FORGE INSURANCE COMPANY, Defendants-Appellees
• Court: U.S. Court of Appeals — Tenth Circuit

Page 916

275 F.3d 916 (10th Cir. 2001)

IDG, INC. and R. BRENT JOHNSON, Plaintiffs-Appellants v. CONTINENTAL CASUALTY COMPANY, TRANSPORTATION INSURANCE COMPANY, and VALLEY FORGE INSURANCE COMPANY, Defendants-Appellees

No. 01-5011

UNITED STATES COURT OF APPEALS TENTH CIRCUIT

December 26, 2001

Appeal from the United States District Court for the Northern District of Oklahoma (D.C. No. 99-CV-111-B) Steven M. Harris (Michael D. Davis with him on the brief) of Doyle Harris Davis & Haughey, Tulsa, Oklahoma for Plaintiffs-Appellants.

Linda J. Burgess of Winstead, Sechrest & Minick, Austin, Texas (Frances E. Patton of Pierce, Couch, Henrickson, Baysinger & Green, L.L.P., Oklahoma City, Oklahoma with her on the brief) for Defendants-Appellees.

Before TACHA, Chief Judge, EBEL and GARTH,¹ Circuit Judges

GARTH, Circuit Judge

In the 1990s, plaintiffs-appellants IDG, Inc. and R. Brent Johnson, the majority stockholder and executive officer of IDG (together, "IDG"), purchased commercial insurance policies from defendants-appellees Continental Casual Company, Transportation Insurance Company and Valley Forge Insurance Company (collectively, "CNA"). Among other things, these policies provided liability and defense coverage in the event IDG was sued for "advertising injuries" by third-parties. In January 1999, IDG filed suit against CNA, claiming CNA was obligated to provide a legal defense under those policies for two lawsuits commenced against IDG by a former employee named Darrell Burson (the "Burson Lawsuits"). The district court granted summary judgment in favor of CNA, and IDG appealed. For the reasons discussed below, we will affirm.

I.

During the relevant time period, IDG was insured under the following insurance policies: (1) Valley Forge Insurance Company's commercial general liability ("CGL") policies, Policy Nos. P1 27819677 (effective September 1993 to September 1994) and B1 31455338 (effective September 1994 to September 1996); (2) Transportation Insurance Company's CGL policies, Policy No. B1 57115402 (effective September 1996 to September 1999); and (3) Continental Casualty Company's commercial umbrella policies, Policy No. B1 56852312 (effective September 1996 to September 1999).

The relevant portions of the CGL policies issued to IDG state the following:

COVERAGE B. PERSONAL AND ADVERTISING INJURY LIABILITY

1. Insuring Agreement.

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal injury" or "advertising injury" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages . . .

b. This insurance applies to: . . .

(2) "Advertising injury" caused by an offense committed in the course of advertising your goods, products or services; but only if the offense was committed in the "coverage territory" during the policy period. . . .

* * *

1. "Advertising injury" means injury arising out of one or more of the following offenses:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

b. Oral or written publication of material that violates a person's right to privacy;

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title or slogan.

The commercial umbrella policies issued to IDG provide that CNA will pay "all sums that the insured becomes legally obligated to pay as 'ultimate net loss' because of . . . 'advertising injury,' caused by an 'incident' which takes place during the policy period and in the policy territory." The definition of "advertising injury" under the umbrella policies is identical to that of the CGL policies.

II.

On March 11, 1994, Darrell Burson, a former employee of IDG, filed suit against IDG and Johnson in state court (the "State Lawsuit"). Among other claims, Burson sought royalty and ownership rights to a series of computer programs known as SuperVision. Essentially, Burson alleged that he owned part or all of SuperVision, and that Johnson and he "entered into an agreement [regarding] the division of gross process from the sale of . . . SuperVision" and that "Johnson breached [that] agreement by concealing information regarding sales of SuperVision and by withholding and causing IDG to withhold [Burson's] share of the proceeds from the sales." Burson's First Amended State Complaint at 5-6. In addition, Burson sought unpaid wages and unpaid royalties, alleging conversion of SuperVision, breach of fiduciary duty, fraud, and breach of a stockholder agreement.

IDG notified CNA of the State Lawsuit on March 28, 1994, two weeks after the suit was filed, seeking defense coverage under its insurance policies. On May 10, 1994, CNA declined to provide any defense or indemnity coverage of the suit on the ground that Burson's state action did not allege "advertising injuries" as covered by the policies. No additional information was sent to CNA until three years later in May 1997, when IDG requested that CNA re-evaluate coverage. On August 21, 1997, CNA denied IDG's request upon re-evaluation.

The state court eventually dismissed the ownership causes of action on the basis of federal preemption over copyright claims, and abated all the state law claims until the copyright related issues were resolved. The State Lawsuit was ultimately settled for approximately $50,000, but the copyright claims were decided in a federal lawsuit.

In September 1997, Burson filed suit in the United States District Court for the Northern District of Oklahoma alleging copyright infringement against IDG and others (the "Federal Lawsuit"). Burson contended that he was the author and owner of the copyrighted SuperVision program, and that IDG infringed his copyright by "cop[ying] some or all of the computer programs authored and copyrighted by Burson and . . . prepar[ing] unauthorized derivative software from Burson's computer programs." Federal Lawsuit Complaint at 3. IDG ultimately prevailed on the merits of this suit when the court pursuant to a bench trial agreed with IDG's "works made for hire" defense and found Burson to have no ownership interest in the copyrighted works.

On September 3, 1998, one year after the Federal Lawsuit was filed and six weeks after it was tried before a federal judge, IDG notified CNA of the Federal Lawsuit, seeking coverage under its insurance policies. This was the first time CNA was informed of the existence of the Federal Lawsuit. CNA denied coverage for the Federal Lawsuit on September 22, 1998 and again on November 18, 1998 (upon reconsideration). In its November 18, 1998 letter, CNA informed IDG that it did not believe that the Federal Lawsuit involved claims that fell within the ambit of an "advertising injury" as contemplated under the insurance policies.

IDG filed suit against CNA on January 15, 1999 in Oklahoma state court, alleging breach of insurance contract and bad faith for failing to provide a defense to both Burson lawsuits. According to IDG, it incurred legal expenses totaling over $270,000 in defending the lawsuits, as well as $50,000 in settling the State Lawsuit. In February 1999, CNA removed the action to the U.S. District Court in the Northern District of Oklahoma.

The parties cross-moved for summary judgment in July 1999. By Order on December 26, 2000, the District Court found in favor of CNA. In so ruling, the district court found that there was no "advertising injury" as contemplated under the insurance policies. In particular, the court held that the method of promotion utilized by IDG providing trial copies of SuperVision to potential customers for their evaluation was not an advertising activity because the product could not be an advertisement for itself. The district court also ruled that even if SuperVision could serve as an advertisement for itself, IDG failed to demonstrate the requisite causal nexus between Burson's alleged injuries and advertising activity.

III.

We review the district court's grant of summary judgment de novo, applying the same standard used by the court below. V-1 Oil Co. v. Means, 94 F.3d 1420, 1422 (10th Cir. 1996). "Summary judgment is appropriate only 'if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Novell, Inc. v. Federal Ins. Co., 141 F.3d 983, 985 (10th Cir. 1998) (quoting Fed. R. Civ. P. 56(c)). "We examine the factual record and reasonable inferences therefrom in the light most favorable to the nonmoving party." Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir. 1990). If there is no genuine issue of material fact in dispute, we must determine whether the district court correctly applied the law." Novell, 141 F.3d at 985.

IV.

In this diversity action, state law must be utilized in defining the terms of the insurance policies and in articulating the scope of CNA's duty to defend under those policies. See Novell, 141 F.3d at 985 (citing Barrett v. Tallon, 30 F.3d 1296, 1300 (10th Cir. 1994)). The parties do not dispute the application of Oklahoma law to this matter and, accordingly, Oklahoma law is controlling. See Mauldin v. Worldcom, Inc., 263 F.3d 1205, 1212 (10th Cir. 2001) (holding that parties may waive choice of law arguments by failing to adequately brief them); see also Gross v. Burggraf Constr. Co., 53 F.3d 1531, 1547 (10th Cir.1995).

The Supreme Court of Oklahoma has stated that while an insurer's duty to defend its insured is broader than its duty to indemnify, this duty "is not unlimited." First Bank of Turley v. Fidelity and Deposit Ins. Co. of Maryland, 928 P.2d 298, 303 (Ok. 1996) (footnote omitted). Rather, "the defense duty is measured by the nature and kinds of risks covered by...