CGS Indus., Inc. v. Charter Oak Fire Ins. Co.

• Decision Date: 11 June 2013
• Docket Number: Docket No. 11–2647–cv.
• Citation: 720 F.3d 71
• Parties: CGS INDUSTRIES, INCORPORATED, a Florida Corporation, Plaintiff–Appellee, v. CHARTER OAK FIRE INSURANCE COMPANY, a Connecticut Corporation, Defendant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

720 F.3d 71

CGS INDUSTRIES, INCORPORATED, a Florida Corporation, Plaintiff–Appellee,

v.CHARTER OAK FIRE INSURANCE COMPANY, a Connecticut Corporation, Defendant–Appellant.

Docket No. 11–2647–cv.

United States Court of Appeals, Second Circuit.

Argued: Oct. 1, 2012.

Decided: June 11, 2013.

David A. Gauntlett (Andrew M. Sussman, on the brief), Gauntlett & Associates, Irvine, CA, for Plaintiff–Appellee.

William Thomas Corbett, Jr. (Laura A. Brady, on the brief), Drinker Biddle & Reath LLP, Florham Park, NJ, and Stuart M. Bodoff, Cheryl F. Korman, and Celeste M. Butera, Rivkin Radler, LLP, Uniondale, NY, for Defendant–Appellant.

Before NEWMAN, LYNCH and LOHIER, Circuit Judges.

GERARD E. LYNCH, Circuit Judge:

This case requires us to revisit the world of “advertising injury” insurance coverage. Defendant-appellant Charter Oak Fire Insurance Company (“Charter”) appeals from a judgment of the United States District Court for the Eastern District of New York (Jack B. Weinstein, Judge), holding it liable to plaintiff-appellee CGS Industries, Inc. (“CGS”) for its expenses in defending and settling a trademark infringement suit. CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 777 F.Supp.2d 454 (E.D.N.Y.2011). We conclude that the relevant insurance policy did not cover the liability alleged in the trademark action, and that Charter is therefore not liable for the settlement amount. We also conclude, however, that at the time CGS asked Charter to defend the trademark lawsuit, there was sufficient legal uncertainty about the coverage issue to oblige Charter to defend the action. We therefore affirm the district court's ruling insofar as it holds Charter liable for defense costs, but reverse insofar as it holds Charter liable for the settlement. We accordingly vacate the judgment of the district court and remand for further proceedings consistent with this opinion.

BACKGROUND

I. Facts

On December 23, 2009, Five Four Clothing, Inc. (“Five Four”) sued Wal–Mart Stores, Inc. (“Walmart”) for trademark infringement based on CGS's use of Five Four's distinctive rear pocket stitching design (the “FF stitching”) on jeans that CGS supplied to Walmart, which Walmart then sold.¹ CGS was later added as a named defendant. CGS asked Charter to defend it pursuant to its liability insurance policy (the “Policy”). Charter refused, claiming that the Underlying Action was not covered by the Policy. Eventually, CGS settled the Underlying Action by agreeing to pay $250,000 to Five Four on behalf of both CGS and Walmart.²

The Policy, effective from August 31, 2009 to August 31, 2010, provides, in relevant part, that Charter:

will pay those sums that the insured becomes legally obligated to pay as damages because of ... “advertising injury” ... to which this insurance applies. [Charter] will have the right and the duty to defend the insured against any “suit” seeking those damages, even if the allegations of the “suit” are groundless, false or fraudulent. However, [Charter] will have no duty to defend the insured against any “suit” seeking damages ... to which this insurance does not apply.

Joint App'x 164. The Policy covers “ ‘[a]dvertising injury’ caused by an offense committed in the course of advertising your goods, products or services.” Id. It defines “advertising injury” as injury arising out of one or more specifically listed offenses, including “[i]nfringement of copyright, title or slogan.” Id. at 167. The Policy excludes coverage for advertising injury: (1) “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ... ‘advertising injury’ ”; or (2) “arising out of oral, written or electronic publication of material, if done by or at the direction of the insured with knowledgeof its falsity.” Id. at 164. It also excludes advertising injury “for which the insured has assumed liability in a contract or agreement.” Id. at 165. That exclusion, however, does not apply to advertising injury liability “that the insured would have in the absence of the contract or agreement.” Id.

II. Procedural History

On July 13, 2010, CGS sued Charter for breach of its duty to defend. The parties cross-moved for summary judgment.³ On November 16, 2010, the district court granted CGS's motion for partial summary judgment and denied Charter's cross-motion, finding that Charter had breached its duty to defend CGS in the Underlying Action. CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 751 F.Supp.2d 444, 453 (E.D.N.Y.2010). After further discovery, Charter moved for partial summary judgment, seeking a declaration that CGS was not entitled to indemnification for Walmart's defense costs or for the portion of the settlement that resolved Walmart's liability. On April 15, 2011, the district court granted the motion in part and denied it in part, holding that Charter was not obliged to reimburse CGS for Walmart's defense costs, but was obliged to indemnify CGS for damages. CGS Indus., 777 F.Supp.2d at 456–57, 462.

On June 3, 2011, rather than go to trial to determine the amount of damages, the parties stipulated that damages were $396,342.53, calculated as the $250,000 settlement plus CGS's defense costs in the Underlying Action. In the stipulation, Charter reserved its rights to appeal all issues except the reasonableness of the defense costs and settlement amount. The district court entered judgment for CGS in the amount of $396,342.53 on June 8, 2011.

Charter now appeals the judgment and seeks review of the district court's rulings on the various motions for summary judgment, arguing that it did not have a duty to defend CGS under the policy because: (1) CGS's copying of the FF stitching did not constitute an infringement of “slogan” or “title” within the meaning of the Policy; (2) the Underlying Action did not allege that CGS committed a covered offense in the course of advertising; and (3) the Policy's “knowledge of falsity” and “knowing violation” exclusions precluded coverage for the Underlying Action. In the alternative, Charter argues that it is not liable for the underlying settlement amount as damages for its purported breach of its duty to defend, as it did not have a duty to indemnify. Last, Charter argues that the Policy's exclusion of liability assumed in contract barred coverage for the portion of the underlying settlement that CGS paid to settle Walmart's liability.

DISCUSSION

The parties do not dispute the material facts underlying the claim, but instead contest only the district court's interpretation of the Policy. “Because interpretation of an insurance agreement is a question of law, we review the district court's construction of the Policy de novo.” VAM Check Cashing Corp. v. Fed. Ins. Co., 699 F.3d 727, 729 (2d Cir.2012).

The parties agree that New York law governs this action. As we explained in Hugo Boss Fashions, Inc. v. Federal Insurance Co., New York law distinguishes between the duty to indemnify and the duty to defend, applying “very different presumptions” to each. 252 F.3d 608, 615 (2d Cir.2001). In deciding whether an insurance policy requires an insurer to indemnify an insured's loss, we must first examine whether there is a “reasonable basis for a difference of opinion as to the meaning of the policy.” Fed. Ins. Co. v. Int'l Bus. Machs. Corp., 18 N.Y.3d 642, 646, 942 N.Y.S.2d 432, 965 N.E.2d 934 (2012) (internal quotation marks omitted). If there is, “the language at issue would be deemed to be ambiguous and thus interpreted in favor of the insured.” Id. This is because “New York follows the maxim of contra proferentem in insurance cases: where the plain language of a policy permits more than one reasonable reading, a court must adopt the reading upholding coverage.” VAM Check Cashing, 699 F.3d at 732.

The duty to defend is broader than the duty to indemnify and an “even stronger presumption in favor of coverage” applies. Hugo Boss, 252 F.3d at 615;see also Hanover Ins. Co. v. Cowan, 172 A.D.2d 490, 568 N.Y.S.2d 115, 116 (2d Dep't 1991). Even where the insurer ultimately has no duty to indemnify due to policy exclusions, it may still be “obligated to defend the insured until the applicability of the exclusions [is] determined.” Hugo Boss, 252 F.3d at 615. To avoid the duty to defend, an insurer “must demonstrate that the allegations of an underlying complaint place that pleading solely and entirely within the exclusions of the policy and that the allegations are subject to no other interpretation.” Id., quoting Hanover Ins. Co., 568 N.Y.S.2d at 116.

In keeping with these principles, we now turn to Charter's various arguments.

I. Infringement of Title or Slogan

Charter argues that it had no duty to defend, still less to indemnify, CGS because the FF stitching is neither a “title” nor a “slogan” used in advertising, and that therefore the Underlying Action did not allege a covered “[i]nfringement of ... title or slogan.”

A. Infringement of Slogan

We first consider whether the FF stitching could be considered a “slogan.” Our decision in Hugo Boss provides the framework for analysis, and indeed gives authoritative guidance as to the meaning of the term.

“[W]e begin with the terms of the [Policy] itself to see if the intent of the parties can be gleaned without resort to extrinsic evidence.” Hugo Boss, 252 F.3d at 617. Here, as in Hugo Boss, the Policy fails to define “slogan” or to provide criteria for distinguishing slogans from non-slogans. Thus, the language of the Policy itself “is of no aid to us in deciding whether [the FF stitching] qualifies as a ... slogan within the meaning of the contract” of insurance. Id. (internal quotation marks omitted).

Next, we ask whether a body of law or an established custom fills in the gaps left by the drafters. We concluded in Hugo Boss that New York state law did not provide significant insight into the meaning of “slogan,” or any clear way to distinguish between slogans and non-slogans. That is still the case; ...