Aloha Pacific, Inc. v. Ciga

• Decision Date: 28 February 2000
• Docket Number: No. B130555.,B130555.
• Citation: 79 Cal.App.4th 297,93 Cal.Rptr.2d 148
• Court: California Court of Appeals Court of Appeals
• Parties: ALOHA PACIFIC, INC., et al., Plaintiffs and Appellants, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent.

93 Cal.Rptr.2d 148

79 Cal.App.4th 297

ALOHA PACIFIC, INC., et al., Plaintiffs and Appellants, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent.

No. B130555.

Court of Appeal, Second District, Division 4.

February 28, 2000.

As Modified on Denial of Rehearing March 28, 2000.

Review Denied June 2, 2000.

Pircher, Nichols & Meeks and James L. Goldman, Los Angeles, for Plaintiffs and Appellants.

Black, Compean & Hall, Frederick G. Hall, Los Angeles, and Daniel Eli, for Defendant and Respondent.

DAU, J.^*

In this case we consider whether California Insurance Guarantee Association (CIGA) is barred from contesting whether a claim is "within the coverage of an insurance policy of [an] insolvent insurer," as used in Insurance Code section 1063.1, subdivision (c)(1), where a third-party claimant has obtained a judgment declaring that the insurer (now insolvent) had no basis to deny coverage for the claim. Interpreting the statute so as to leave no part of it useless or deprived of meaning, we hold that the statute permits CIGA to contest whether the claim is within policy coverage, and CIGA is not bound by the prior judgment against the insolvent insurer. We then interpret the policy in question, which covers "injury arising out of ... piracy, unfair competition, or infringment [sic] of copyright, title or slogan," but which does not apply to "injury arising out of ... infringement of trademark, service mark or trade name, other than titles or slogans...." We conclude that this policy language does not cover the claims at issue in this case, which are for trademark infringement and false designation of origin brought under the Lanham Act (15 U.S.C. §§ 1114(1)(a), 1125(a)), and for unfair competition under section 17200 of the California Business and Professions Code.

I. FACTUAL AND PROCEDURAL BACKGROUND

Appellant Rusty's Island Chip Co. (Rusty's) is a partnership comprised of Rusty Vasterling II and Carol Mersch. The partnership owns the federally registered trademark "Rusty's Island Chips," the trademark "Island Chips," and the trade dress associated with those marks (together, the "marks"). Before 1989 Rusty's used the marks in connection with the manufacture, marketing, distribution and sale of "Maui style" potato chips. In October 1989 Rusty's licensed the marks to appellant Aloha Pacific, Inc. (Aloha), which began marketing chips in packaging using the marks in various parts of the United States, including Southern California. In November 1989 appellants sued Island Industries Inc. (Island) for trademark infringement in federal district court, in an action entitled Rusty's Island Chip Co. v. Island Industries, Inc., (U.S.Dist. Ct., CD. Cal. (1989) Civ. No. 89 6679 JMI) (the federal action ), seeking preliminary and permanent injunctions.

Island was insured by Canadian Insurance Company of California (Canadian), which initially declined to defend Island in the federal action on the ground that no money damages were sought.

In February 1990 the federal court enjoined Island from using the marks pending the outcome of the case. Appellants amended their complaint in April 1990 to add Island's principals, Jay Feinberg and Gary Quick (collectively, Feinberg), as defendants and to include a claim for money damages and a cause of action for unfair competition. As amended, appellants' complaint alleged Rusty's ownership of the federally registered trademark "Rusty's Island Chips" and the trademark "Island Chips" and the trade dress associated with the marks, that defendants used the marks "with knowledge ... of Rusty's right, title, and interest" in the marks, and that the use "ha[d] caused confusion, mistake and deception in violation or section 1114 of Title 15, United States Code.¹ The complaint also alleged causes of action for false designation of origin under section 1125(a) of Title 15, United States Code² and for unfair competition under section 17200 of the California Business and Professions Code.³

After appellants amended their complaint, Canadian accepted Island's tender of the defense, subject to a reservation of specified rights, including that coverage would not be afforded for punitive or trebled damages "where the enhancement is for purposes of punishment." Canadian did not expressly reserve any rights based on Island's willful misconduct or the policy's exclusion for injury arising out of trademark infringement.⁴

Island became insolvent, declared bankruptcy, and was liquidated in 1990. Appellants agreed with the trustee in bankruptcy that they would look solely to the Canadian policy to satisfy any judgment, and they dismissed their claim against Feinberg. In return, the trustee allowed appellants to pursue their federal action.

Appellants obtained a federal court judgment in August 1992, entitling them to recover, on the federal claims, their actual damages according to proof, prejudgment interest, treble damages, reasonable attorneys' fees, and costs, and on their unfair competition claim, Island's profits as restitution according to proof, prejudgment interest, and costs.

In connection with this judgment, the federal court made findings of fact, which are summarized here. In May 1989 Rusty's suspended operations due to financial problems but did not abandon the marks. Around that time Feinberg made an offer to purchase Rusty's, which was rejected. Feinberg formed Island Industries, Inc. (Island) and attempted unsuccessfully to make Vasterling a part owner and to get Rusty's to assign the marks to Island. As a result of the inability to purchase Rusty's or get the assignment, Feinberg implemented a scheme to misappropriate the goodwill associated with the marks and transfer it to his own designations through a series of gradual changes in the marks. Island began using the marks on potato chips in June 1989, principally in California, and this use was willful and with actual knowledge on the part of Island's owners of Rusty's right, title and interest in the marks. Appellants sent letters asking Island to stop using the marks. From June 1989 until a preliminary injunction was issued in February 1990 Island used designations and trade dress which were identical or essentially identical to, and confusingly similar with, the marks. Island used the marks with the intent to misappropriate the goodwill associated with them, caused confusion, mistake, and deception, and caused appellants to suffer actual damages.

The federal court recommended that the parties obtain a coverage determination before expending resources on proving damages.

Canadian filed an action in the California superior court in November 1992 seeking a declaration that it "ha[d] no obligation under [its] policy ... to pay any judgment that [appellants] might receive in the [federal] action," and appellants cross-complained for the obverse declaration. In Canadian Ins. Co. v. Rusty's Island Chip Co. (1995) 36 Cal.App.4th 491, 42 Cal.Rptr.2d 505 (Canadian v. Rusty's), Division One of this district held that Canadian "ha[d] no present basis for denying coverage" and that its "failure to reserve its right to contest coverage under the policy's exclusions of coverage for willful acts or trademark infringement waived its right to assert those exclusions as a basis for denying coverage in the federal action." (Id. at p. 498, 42 Cal.Rptr.2d 505.) The Court of Appeal explained its use of the phrase "present basis" as follows: "[T]he damage phase of the federal action has been deferred until this coverage dispute is concluded. If the final judgment rendered in the federal action includes punitive damages or treble damages within the meaning of the reservation of rights timely asserted by Canadian, those coverage issues (if disputed) will have to be determined at a later time...." (Id. at pp. 498-499, fn. 10, 42 Cal.Rptr.2d 505.) Division One remanded the matter to the trial court with directions to enter a judgment in favor of Rusty's and Aloha and against Canadian. (Id. at p. 499, 42 Cal. Rptr.2d 505.) A minute order in the superior court file, dated September 19, 1995, reads: "The judgment in this matter, entered April 28, 1994, is hereby set aside and vacated, and a new judgment is entered this day in favor of defendant Rusty's Island Chip Company and against Plaintiff Canadian Insurance Company."

Following that ruling, Canadian became insolvent. The Insurance Commissioner of the State of California (the Commissioner) became Canadian's liquidator in August 1995. Appellants filed a proof of loss claim with the Commissioner in September 1996.

On dates not reflected in the record, appellants moved the federal district court to award damages against Island. In August 1997 the federal court ruled that appellants were entitled to "compensatory damages resulting from the trademark infringement," as follows: appellants were entitled to recover $40,000 that had been expended to redesign Aloha's packaging, trebled to $120,000; appellants had failed to meet their burden to show Aloha had lost profits and Island had profited from sales of infringing products; and, inasmuch as the court had determined that Island's conduct was "intentional, willful, conscious and unfair," appellants were entitled to attorney's fees according to proof. In November 1997 the district court filed its judgment awarding damages (including attorney and expert witness fees, expenses, and prejudgment interest) of approximately $450,000 to appellants and against Island.

In February 1998 CIGA denied appellants' claim, and appellants filed this action. Their complaint alleges the litigation history, Island's liquidation, Canadian's insolvency, that the Canadian policy includes coverage for appellants' claim against Island for trademarks involving a title and obligated Canadian to indemnify Island for such claims, and that, after the federal judgment became final, CIGA denied the claim. Appellants' complaint seeks a declaration of their rights and a...