GAF Sales & Service, Inc. v. Hastings Mut. Ins. Co.

• Decision Date: 20 June 1997
• Docket Number: Docket No. 187589
• Parties: , 1997 Copr.L.Dec. P 27,678 GAF SALES & SERVICE, INC., Glen Larrivee and Fred Forslund, Plaintiffs-Appellants, v. HASTINGS MUTUAL INSURANCE COMPANY, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 165

568 N.W.2d 165

224 Mich.App. 259, 1997 Copr.L.Dec. P 27,678

GAF SALES & SERVICE, INC., Glen Larrivee and Fred Forslund Plaintiffs-Appellants, v. HASTINGS MUTUAL INSURANCE COMPANY, Defendant-Appellee.

Docket No. 187589.

Court of Appeals of Michigan.

Submitted March 12, 1997, at Lansing.

Decided June 20, 1997, at 9:05 a.m.

Released for Publication Sept. 11, 1997.

Dinnin & Dunn, P.C. by Robert A. Dunn and Michael T. Raggio, Troy, for Plaintiffs-Appellants.

Kallas & Henk, P.C. by Constantine N. Kallas and Kathlyn M. Rasmussen, Bloomfield Hills, for Defendant-Appellee.

Before McDONALD, P.J., and RICHARD ALLEN GRIFFIN and BANDSTRA, JJ.

McDONALD, Presiding Judge.

Plaintiffs appeal by leave granted from a January 23, 1995, order granting defendant's motion for summary disposition in this action arising out of an insurance contract between the parties. We affirm.

The facts are not in dispute. The individual plaintiffs were originally employed by Cochlea Corporation. Cochlea manufactured sorting machines that inspect industrial fasteners to determine if they meet a predetermined quality standard. The machines rely on complex computer software. When Cochlea sold the machines, it did not sell the software that ran them. Instead, it granted the purchaser a license to use the software.

After Cochlea defaulted on some of its financial obligations, plaintiffs were laid off, and the rights to the software were assigned to the underlying plaintiff, CogniSense, Inc. After being laid off, the individual plaintiffs formed GAF Sales & Service, Inc., and began buying and reselling used Cochlea inspection equipment. CogniSense alleged this activity violated the software copyrights and sued plaintiffs in federal court. Plaintiffs asked defendant to defend them under an "advertising injury" clause in their commercial general liability policy. When defendant refused, plaintiffs filed the instant action. Plaintiffs now appeal from the trial court's grant of summary disposition in favor of defendant. ¹

The only question on appeal is whether the trial court properly found as a matter of law defendant had no duty to defend plaintiffs in federal court. It is well settled in Michigan that an insurer's duty to defend is broader than its duty to indemnify. To determine whether an insurer has a duty to defend its insured, this Court looks to the language of the insurance policy and construes its terms to find the scope of the coverage of the policy. An insurer has a duty to defend if the allegations of the underlying suit arguably fall within the coverage of the policy. Royce v. Citizens Ins. Co., 219 Mich.App. 537, 557 N.W.2d 144 (1996). In construing the language of the policy, this Court must give the policy language its plain meaning and resolve any ambiguities against the insurer and in favor of coverage. Id.

The policy at issue provides coverage for "those sums that the insured becomes legally obligated to pay as damages because of 'personal injury' or 'advertising injury'...." The insurer has "the right and duty to defend any 'suit' seeking those damages." The policy states the insurance applies to an " 'advertising injury' caused by an offense committed in the course of advertising.... goods, products or services." The definition section of the policy defines an "advertising injury" as including an injury arising out of the "misappropriation of advertising ideas or style of doing business" or the "infringement of copyright, title or slogan."

The policy coverage for "advertising injury" thus requires three elements: an "advertising injury" as defined in the policy; a "course of advertising" (not defined in the policy); and proof of a causal relationship between the first two elements. ²

The underlying complaint contains allegations of (1) copyright infringement, that plaintiffs copied software, installed it in a refurbished inspector, and distributed it to third parties; (2) misappropriation of trade secrets through plaintiffs' retention of copies of drawings and software for the machine, and utilization of CogniSense's customer lists to obtain old inspectors and software; and (3) interference with contractual relations by inducing "various customers into breaching the License by creating the only market for the used Inspectors."

Applying the elements of coverage to the allegations in the underlying complaint, we must determine whether any of the counts arguably allege an "advertising injury" as defined in the policy. Defendant does not dispute the underlying suit contained allegations of copyright infringement and that copyright infringement is one of the listed offenses under the advertising-injury definition. Although the remaining counts do not fall directly within the definition in the policy, plaintiffs argue the counts arguably fall within the "misappropriation of advertising ideas or style of doing business" language of the policy. We disagree.

The trade secret count alleges plaintiffs improperly retained drawings and software and utilized customer lists to obtain and transfer software and used machines. We do not believe any of these activities constitute a misappropriation of advertising ideas or style of business. ³ Similarly, the counts of interference with contractual relations are devoid of any allegations of misappropriation of advertising ideas or style of business, or of any infringement of title or slogan. Nonetheless, because if any theory falls within the policy, the insurer owes a duty to defend the suit, Reurink Bros. Star Silo, Inc. v. Maryland Casualty Co., 131 Mich.App. 139, 345 N.W.2d 659 (1983), we must address the next questions, whether the actions alleged in the complaint constitute "advertising" and whether there is a causal connection between the advertising and the injury.

The term "advertising" is not defined in the policy. Not surprisingly, the parties propose divergent definitions. Defendant proposes a definition that would limit advertising to those "widespread...