Amway Distributors Benefits Ass'n v. Federal Ins.

• Decision Date: 26 November 1997
• Docket Number: No. 1:96-CV-726.,1:96-CV-726.
• Citation: 990 F.Supp. 936
• Parties: AMWAY DISTRIBUTORS BENEFITS ASSOCIATION, et al., Plaintiffs, v. FEDERAL INSURANCE COMPANY, an Indiana corporation, Defendant.
• Court: U.S. District Court — Western District of Michigan

990 F.Supp. 936

AMWAY DISTRIBUTORS BENEFITS ASSOCIATION, et al., Plaintiffs, v. FEDERAL INSURANCE COMPANY, an Indiana corporation, Defendant.

No. 1:96-CV-726.

United States District Court, W.D. Michigan, Southern Division.

November 26, 1997.

COPYRIGHT MATERIAL OMITTED

Jasper A. Cragwall, Jr., Warner, Norcross & Judd, LLP, Grand Rapids, MI, Donald L. Payton, Kaufman & Payton, Farmington Hills, MI, for Plaintiffs.

Steven M. Hickey, Hickey & Cianciolo, PC, Detroit, MI, for Defendant.

OPINION

QUIST, District Judge.

In this action, Plaintiffs, Amway Distributor Benefits Association ("ADBA") and several distributor members of ADBA ("Distributor Plaintiffs"), seek a declaration that Defendant, Federal Insurance Company ("Federal"), is obligated to defend the Distributor Plaintiffs in an action pending in the United States District Court for the Middle District of Florida, captioned Arista Records, Inc., et al. v. Amway Corp., et al., Docket No. 96-175-CV-ORL-18, under certain comprehensive general liability policies of insurance issued by Federal to ADBA. Plaintiffs' first amended complaint asserts claims against Federal for breach of contract (Count I), fraud or negligent misrepresentation (Count II), unfair trade practices and fraud (Count III), and declaratory judgment regarding coverage (Count IV). Now before the Court are the parties' cross-motions for summary judgment on Count IV, and Federal's motion for summary judgment and/or dismissal on Counts I, II, and III of the first amended complaint.¹

Facts

The Distributor Plaintiffs are high-level distributors of Amway Products and members of ADBA. Amway Corporation ("Amway") is a multinational company which sells household products produced by Amway itself and by other companies. Amway distributes its products through a system commonly referred to as "network marketing," which consists of multiple layers of independent distributors. Under this system, distributors become successful by constantly recruiting new distributors, or "down-liners," who are encouraged to purchase and use Amway products themselves and to recruit their own new distributors. A distributor's success is thus dependent upon building a large base of downliners.

Distributors ascend the ranks by attaining "Direct" status and advancing to "Pearl," then "Ruby," then "Emerald," then "Diamond," and beyond, as their distributor base expands. Distributors who attain Diamond status are permitted to hold motivational rallies and conventions for their "downliners," the vast majority of whom are at the lowest level and comprise the majority of Amway's customer base.

Beginning in 1981 and continuing through 1995, ADBA purchased primary policies of liability insurance from Federal to provide liability coverage for ADBA's members. Each of the policies provided advertising injury coverage. Until 1992, the policy years commenced and ended on May 30. The policies for May 30, 1981, through May 30, 1987, defined "advertising injury" as follows:

injury arising out of an offense committed during the policy period occurring in the course of the named insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan.

(First Am.Compl.Ex. 1.)

The policy issued for May 30, 1987 - May 30, 1988, contained both the definition quoted above and a new definition, which provided:

ADVERTISING INJURY

means injury arising solely out of one or more of the following offenses committed in the course of advertising your goods, products or services:

1. 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;

2. oral or written publication of material that violates a person's right of privacy;

3. misappropriation of advertising ideas or style of doing business; or

4. infringement of copyrighted advertising materials, titles or slogans.

(First Am.Compl.Ex. 2.) At or about the time that Federal issued the 1987-1988 policy to ADBA, Federal provided a notice to ADBA which stated, "READ YOUR POLICY CAREFULLY to determine rights, duties, and what is and is not covered." (First Am.Compl.Ex. 4.) The policies issued after the 1987-88 policy contained only the latter definition of advertising injury. Federal also issued excess liability policies to ADBA covering the period of May 30, 1988, through December 31, 1996.

In February of 1996, several record companies filed a complaint against Amway and several of the Distributor Plaintiffs giving rise to the Arista Records action mentioned above. Additional Distributor Plaintiffs were later added as defendants. The Arista plaintiffs allege that from 1988 through 1994, the Distributor Plaintiffs produced and published videotapes which infringed upon the Arista plaintiffs' copyrights under federal and state law. The Arista plaintiffs also allege unfair competition and conversion. More specifically, the underlying second amended complaint alleges in part:

7. In addition to increased income, once a distributor reaches "Diamond" status, he or she is permitted to hold conventions and conferences for his or her downliners. These events take place all over the country and are attended by thousands and thousands of Amway distributors.

8. As more specifically set forth below, the Defendants produced videotapes, utilizing sound recordings as to which the Plaintiffs hold copyrights and ownership rights. The videotapes were used by the Amway distributor Defendants as motivational tools, as sales tools, to recruit new Distributors and to promote upcoming Amway Distributor conventions and conferences. The infringing videotapes were sold by the Amway distributor Defendants at the Amway conventions and conferences, through the mails, and otherwise.

* * *

11. Although the Amway distributors are ostensibly in the business of selling the products Amway offers for sale, the majority of the upper-echelon distributors' income is derived from the sale of motivational tools and from the motivational rallies and weekends. There is in fact more pressure exerted by the upper-echelon Amway distributors for their downliners to purchase large quantities of motivational tools for their own use and for resale to their own downliners, than there is to buy and sell Amway products.

12. The motivational tools, of which the infringing videos are one important aspect, contribute to the high-level Amway distributors' income in various ways: (1) the videos are products themselves; (2) the videos are commercials for the motivational rallies and conventions; (3) the videos are commercials for other profitable ventures, such as yacht charters; (4) the videos are used at the motivational rallies and conventions to encourage the distributors' downliners to recruit distributors and to buy and sell motivational tools; (5) the videos are used to lend excitement and contribute generally to the overall success of the motivational rallies and weekends; (6) the videos are used outside the context of the motivational rallies and weekends to recruit new distributors and to buy and sell motivational tools; and (7) the videos are used to sell Amway products.

(Arista's Second Am.Compl. ¶¶ 7, 8, 11, 12, attached as Ex. 10 to Pls.' First Am.Compl.) The Arista complaint asks the court to enjoin the defendants from infringing the Arista plaintiffs' copyrights permanently, to pay the Arista plaintiffs any profit made as a result of the infringement, and to return all infringing materials for destruction.

ADBA and the Distributor Plaintiffs tendered the defense of the underlying action to Federal. Federal denied coverage on the basis that the allegations of the underlying complaint do not trigger the duty to defend. Plaintiffs filed the instant action seeking a declaration that Federal is obligated to provide a defense in the underlying action.

Standards of Review

Under Rule 12(b)(6), an action may be dismissed if the complaint fails to state a claim upon which relief can be granted. Fed. R.Civ.P. 12(b)(6). The moving party has the burden of proving that no claim exists. Although a complaint is to be liberally construed, it is still necessary that the complaint contain more than bare assertions of legal conclusions. Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir.1993) (citing Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir.1988)). All factual allegations in the complaint must be presumed to be true, and reasonable inferences must be made in favor of the non-moving party. 2 James W. Moore, Moore's Federal Practice, ¶ 12.34[1][b] (3d ed.1997). The Court need not, however, accept unwarranted factual inferences. Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir.1987). Dismissal is proper "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)).

Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56. The rule requires that the disputed facts be material. Material facts are facts which are defined by substantive law and are necessary to apply the law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). A dispute over trivial facts which are not necessary in order to apply the substantive law does not prevent the granting of a motion for summary judgment. Id. at 248, 106 S.Ct. at 2510. The rule also requires the dispute to be genuine. A dispute is genuine if a reasonable jury could return judgment for the non-moving party. Id. This standard requires the...