Bay Elec. Supply, Inc. v. Travelers Lloyds Ins., CIV. A. G-98-134.

• Decision Date: 31 August 1999
• Docket Number: No. CIV. A. G-98-134.,CIV. A. G-98-134.
• Citation: 61 F.Supp.2d 611
• Parties: BAY ELECTRIC SUPPLY, INC., and FAE, Inc. v. THE TRAVELERS LLOYDS INSURANCE COMPANY.
• Court: U.S. District Court — Southern District of Texas

61 F.Supp.2d 611

BAY ELECTRIC SUPPLY, INC., and FAE, Inc. v. THE TRAVELERS LLOYDS INSURANCE COMPANY.

No. CIV. A. G-98-134.

United States District Court, S.D. Texas, Galveston Division.

August 31, 1999.

COPYRIGHT MATERIAL OMITTED

Stephen Paul Carrigan, Beckworth and Carrigan, Houston, TX, for Bay Electric Supply.

Stephen Paul Carrigan, Beckworth and Carrigan, Houston, TX, David A. Gauntlett, Gauntlett & Associates, Irvine, CA, for FAE Incorporated.

Michael Patrick Morris, Tekell Book Matthews and Limmer, Houston, TX, for Travelers Lloyds Insurance Company.

ORDER

KENT, District Judge.

In this action, Plaintiffs Bay Electric Supply, Inc. ("Bay"), and FAE, Inc. ("FAE"), sue Defendant The Travelers Lloyds Insurance Company ("Travelers") for breach of contract and a declaratory judgment that Travelers was obligated to defend them in a lawsuit that has now settled. This case is before the Court on Plaintiffs' Motion for Partial Summary Judgment Regarding Defendant's Duty of Defense, and Defendant's Motion for Summary Judgment. All parties seek a judicial determination as to whether Defendant had a duty, under the terms of certain insurance policies, to defend Plaintiffs in an underlying lawsuit asserting claims for trademark and trade dress infringement. For the reasons set forth below, Plaintiffs' Motion for Partial Summary Judgment is GRANTED and Defendant's Motion is DENIED.

I. FACTUAL BACKGROUND

FAE and Bay are Texas corporations that sell various electrical products and equipment, including but not limited to circuit breakers. In July 1997, Bay and FAE were sued by a competitor, American Circuit Breaker Corporation ("ACB"). ACB alleged Bay and FAE had violated federal and state laws prohibiting trademark and trade dress infringement, trademark dilution, and unfair competition. The allegations were based upon the sale by Bay and FAE of circuit breakers bearing trademarks and configurations allegedly identified with and owned by ACB.

Travelers had issued annual general liability insurance contracts, on a Commercial General Liability Coverage Form ("CGL"), covering Bay from the period of April 12, 1995, to April 12, 1998. FAE was added as a named insured effective September 13, 1995. On December 3, 1997, Bay and FAE's insurance broker notified Travelers of the ACB Complaint. Bay and FAE believed the claims against them were covered under provisions of the policy which covered "advertising injury" and "personal injury." Travelers disagreed and denied coverage on January 16, 1998. Counsel for Bay and FAE requested reconsideration of Travelers' decision on March 25, 1998, but Travelers again denied coverage. FAE and Bay subsequently settled the underlying lawsuit.

II. STANDARD OF ANALYSIS

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. Rule 56(e) requires that when a motion for summary judgment is made, the nonmoving party must set forth set forth specific facts showing that there is a genuine issue for trial. Id.; see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. Only disputes over facts that might affect the outcome of the lawsuit under governing law will preclude the entry of summary judgment. Anderson, 477 U.S. at 247-48, 106 S.Ct. at 2510. If the evidence is such that a reasonable fact-finder could find in favor of the nonmoving party, summary judgment should not be granted. Id.; see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).

The basis for this Court's jurisdiction is diversity of citizenship of the parties. The Court must therefore look to the substantive law of the State of Texas to determine the law applicable to this action. Texas Art. 21.42, titled "Texas Laws Govern Policies," states in relevant part that: "any contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby[.]" See American Home Assur. v. Safway Steel Prods., 743 S.W.2d 693, 697 (Tex.App. — Austin 1987, writ denied) (noting that "[w]e have little difficulty in concluding that Art. 21.42 requires us to apply Texas Law.") Bay and FAE are both Texas corporations with their principal places of business in Texas. It is therefore clear, and the parties do not dispute, that Texas law governs this action.

Under Texas law, an insurer's duty to defend is determined by the factual allegations in the pleadings and the language of the insurance policy. National Union Fire Ins. Co. of Pittsburgh v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997); Fidelity & Guar. Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787, 788 (Tex.1982). This rule is known as the "Complaint Allegation Rule" or the "Eight Corners Rule." If a petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured. National Union Fire Ins. Co. of Pittsburgh, 939 S.W.2d at 141. When the factual allegations of the underlying action are neither clearly within nor clearly without the scope of coverage, "the insurer is obligated to defend if there is potentially a case under the complaint within the coverage of the policy." Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th Cir.1983); Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965); State Farm Fire & Cas. Co. v. Wade, 827 S.W.2d 448, 451 (Tex.App. — Corpus Christi 1992, writ denied). An insurance company has a duty to defend the entire case so long as the underlying complaint alleges facts constituting at least one cause of action covered by the policy. See Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389, 398 (5th Cir.1995) (applying Texas law).

III. ANALYSIS

A. "Misappropriation of Advertising Ideas or Style of Doing Business" Encompasses Trademark and Trade Dress Infringement Claims

The primary issue in this case is whether the allegations in an underlying lawsuit constitute an "advertising injury" which would trigger a duty to defend under a commercial general liability policy. Specifically, whether claims of trademark and trade dress infringement constitute an "advertising injury" under Texas law. Only one Texas case, Industrial Molding Corp. v. American Mfrs. Mut. Ins. Co., 17 F.Supp.2d 633 (N.D.Tex.1998) squarely addresses this issue. That opinion was vacated, however, when the parties agreed to settle. This Court finds the reasoning of the Industrial Molding court to be highly persuasive, and, for the reasons stated below, agrees with that court's conclusion that trademark and trade dress infringement are claims covered under "advertising injury." The Court will therefore not reach Plaintiffs other alleged bases for coverage.

In relevant part, the Travelers policy provided coverage to Bay and FAE for: "`Advertising injury' caused by an offense committed in the course of advertising your goods, products or services[.]" "Advertising injury" is defined under the policy as an "injury arising out of one or more of the following offenses:

(a) Oral or written publication 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 material that violates a person's right of privacy;

(c) Misappropriation of advertising ideas or style of doing business; or

(d) Infringement of copyright, title or slogan."

In order for Bay and FAE to prove their case for coverage under the policy for an "advertising injury," the following three elements must be proved: (1) the allegations in the underlying complaint must raise a "potential" for liability under one of the covered offenses stated in the policy; (2) Bay and FAE must have engaged in "advertising activity" during the policy period when the alleged "advertising injury" occurred; and (3) there must be a causal connection between the alleged injury and the "advertising activity." See Sentex Sys., Inc. v. Hartford Accident & Indem. Co., 882 F.Supp. 930, 936 (C.D.Cal.1995) (citing New Hampshire Ins. Co. v. R.L. Chaides Constr. Co., 847 F.Supp. 1452, 1455 (N.D.Cal.1994); New Hampshire Ins. Co. v. Foxfire, Inc., 820 F.Supp. 489, 497-98 (N.D.Cal.1993)); see also Sentry Ins. v. R.J. Weber Co., Inc., 2 F.3d 554, 556-57 (5th Cir.1993).

1. Covered Offense

With respect to the first prong of the Sentex test, Bay and FAE argue that trademark and trade dress infringement are covered under the offense of "[m]isappropriation of advertising ideas or style of doing business." They contend that the physical appearance of a product — the ornamental features which serve to identify its source and distinguish it from similar products — can reasonably be construed as either an "advertising idea" or a "style of doing business." They contend that trademark and trade dress fit this definition and serve this function. Accordingly, they allege that ACB's allegations of infringement of its product's physical appearance, or trade dress¹ and trademark, were covered under the Travelers' policy which provided insurance coverage for "misappropriation of advertising ideas or a style of doing business." Numerous courts throughout the country have agreed with Plaintiffs that coverage for trademark and trade dress infringement claims is provided under the "advertising injury" offense of "misappropriation or style of doing business." See Massachusetts Bay Ins. Co. v. Penny Preville, Inc., 1996 WL 389266 (S.D.N.Y. July 10, 1996) (finding coverage where Plaintiff duplicated the ...