Int'l Chem. Corp. v. Nautilus Ins. Co.
| Decision Date | 30 December 2011 |
| Docket Number | 09-CV-359S |
| Parties | INTERNATIONAL CHEMICAL CORPORATION d/ba/ INNOVATIVE CHEMICAL CORPORATION, JAMES TIMLIN, and WOODRIDGE SPECIALTY PRODUCTS CORP., Plaintiffs, v. NAUTILUS INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Western District of New York |
Plaintiffs, International Chemical Corp. d/b/a Innovative Chemical Corp. ("ICC"), James Timlin, and Woodridge Speciality Products Corp. ("Woodridge"), commenced this suit in New York State Supreme Court, County of Erie on March 11, 2009. (Docket No.1.)1 Defendant, Nautilus Insurance Co. ("Nautilus"), with whom ICC had contracted to provide "litigation insurance," removed the action to this Court on April 16, 2009 on diversity grounds. ICC seeks a declaration that Nautilus was required to furnish them a defense, which it refused to do, in an underlying action in the United States District Court for the Northern District of Illinois.2 Each party presently seeks summary judgment as to theirrights and obligations under the insurance contract. (Docket Nos. 8, 17.)
The facts of this case correspond to the facts of the underlying action, Medallion Products, Inc. v. McAlister, No. 6 C 2597, 2008 WL 5046055 (N.D. Ill. Nov. 20, 2008), in which Plaintiffs in this action were defendants. Because the facts and allegations of the complaint in that case determine Nautilus' duty to furnish a defense, those allegations will be recited below in abbreviated form.
Medallion Products Inc. ("Medallion") is a business that designs and markets consumer products through televison infomercials. (Medallion Products, Inc. v. McAlister Fourth Amended Complaint, ¶ 5; docketed in this case at number 8-7.)3 Sometime in 2004 at the request of William McAlister, Medallion created a urine removal product aimed at eliminating pet stains and odors. (Id. ¶ 22.) The product is allegedly a proprietary formulation that contains a chemical which, with the help of a blacklight, allows viewers to see it remove stains. (Id. ¶ 24.) McAlister and Medallion eventually entered into a contract whereby Medallion would serve as the sole manufacturer and McAlister as sole distributor of the product. (Id. ¶¶ 33-36.) Thereafter, they worked together to develop a television infomercial praising the effectiveness of the product and demonstrating its capabilities. (Id.¶¶ 33, 43-50.) Medallion also played a role in developing the labeling for the new product. (Id. ¶ 42(b).)
Despite Medallion honoring its end of the agreement, McAlister eventually breached the agreement by conspiring with ICC to create a "knock-off" of the Medallion product. (Id. ¶¶ 69, 71.) McAlister provided ICC with a copy of a laboratory report that identified Medallion as the manufacturer of the product, a bottle of the product with labeling, samples of the Medallion solution, and access to the television commercial. (Id. ¶¶ 71-72.) At all times, ICC allegedly knew that McAlister had another supplier but still agreed to develop a similar product. (Id. ¶ 74.)
On June 7, 2005, ICC represented to McAlister that it had reverse engineered the Medallion formulation and that its product was even better than the original. (Id. ¶ 75.) But, in fact, according to Medallion the ICC product contained no special enzyme found in Medallion's product and, unlike the original, it did not make the urine glow under blacklight. (Id. ¶ 95.)
Later, using a template provided by McAlister, ICC created a new label and added the "AS SEEN ON TV" emblem. (Id. ¶ 77) Further, ICC approved a label listing ingredients that it knew its product did not contain. (Id. ¶¶ 78, 80.) In sum, according to Medallion, ICC created a deficient knock-off product and falsely represented to McAlister that it could act as a substitute for the Medallion product. (Id. ¶¶ 97-98.) Medallion alleges that this substitute ICC product was eventually sold fraudulently in place of its product. (Id. ¶¶ 107, 120.)
Relevant to this action is a portion of ICC's insurance policy that provides coveragefor "personal and advertising injury." It reads in part:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal and advertising injury" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "personal and advertising injury" to which this insurance does not apply.
(Insurance Policy4 ; Docket No. 1-3.)
It defines personal and adverting injury as "the use of another's advertising idea in your 'advertisement'; or [i]nfringing upon another's copyright, trade dress, or slogan in your advertisement." (Id.) Trade dress is defined as "the total appearance and image of a product, including features such as size, texture, shape, color or color combinations, graphics and particular advertising and/or marketing techniques used to promote its sale." (Id.)
It further defines advertisement as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters." (Id.)
The policy excludes acts "[c]aused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict 'personal and advertising injury.'" (Id.)
Rule 56 of the Federal Rules of Civil Procedure provides that "[t]he court shall grantsummary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." A fact is "material" only if it "might affect the outcome of the suit under governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). A "genuine" dispute exists "if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Id. In determining whether a genuine dispute regarding a material fact exists, the evidence and the inferences drawn from the evidence "must be viewed in the light most favorable to the party opposing the motion." Adickes v. S. H. Kress & Co., 398 U.S. 144, 158-59, 90 S. Ct.1598, 1609, 26 L. Ed. 2d 142 (1970) (internal quotations and citation omitted).
"Only when reasonable minds could not differ as to the import of evidence is summary judgment proper." Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir. 1991) (citation omitted). Indeed, "[i]f, as to the issue on which summary judgment is sought, there is any evidence in the record from which a reasonable inference could be drawn in favor of the opposing party, summary judgment is improper." Sec. Ins. Co. of Hartford v. Old Dominion Freight Line, Inc., 391 F.3d 77, 82-83 (2d Cir. 2004) (citations omitted). The function of the court is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249.
When the parties cross-move for summary judgment, "the standard is the same as that for individual motions for summary judgment." Natural Res. Def. Council v. Evans, 254 F. Supp. 2d 434, 438 (S.D.N.Y. 2003). "The court must consider each motion independently of the other and, when evaluating each, the court must consider the facts in the light most favorable to the non-moving party." Id. (citing Morales v. Quintel Entm't,Inc., 249 F.3d 115, 121 (2d Cir. 2001)).
Summary judgment in favor of an insurer is appropriate when the allegations raised in a complaint for which coverage is sought fall entirely within a policy exclusion. Brooklyn Law Sch. v. Aetna Cas. And Sur. Co., 849 F.2d 788, 789 (2d. Cir. 1988).
Although neither party has briefed this issue and they both cite substantive caselaw from courts throughout the country, choice-of-law is the first issue a federal court must address in a diversity case. A federal court applies the choice-of-law rules of the state in which it sits to determine which law to apply to the case. Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). In New York, "the law of the jurisdiction having the most significant contacts and the greatest interest in the litigation will be applied." R.E. Turner, Inc. v. Conn. Indem. Co., 925 F. Supp. 139, 144 (W.D.N.Y.1996). In cases involving insurance contracts, New York courts "traditionally resolved choice of law issues . . . by applying the law of the state which the parties understood would be the principal location of the risk." Snyder v. Nat'l Union Fire Ins. Co., 688 F. Supp. 932, 934-35 (S.D.N.Y.1988); see also Cunninghame v. Equitable Life Assur. Soc. of U.S., 652 F.2d 306, 308 (2d Cir. 1981) (). Therefore, because the insured party resides in New York and because this Court lacks any further information, New York law should be applied to this action. No other state has any apparent interest in the litigation beyond the fact thatone of the parties is a citizen of that state. In such a situation, New York, the forum state, has the most significant contacts and greatest interest in this litigation. See Andy Warhol Found. for Visual Arts, Inc. v. Fed. Ins. Co., 189 F .3d 208, 214 (2d Cir.1999); Morgan Stanley Group, Inc. v. New England Ins. Co., 36 F. Supp. 2d 605, 606 (S.D.N.Y.1999).
The duty to defend insureds - long recognized as broader than that to indemnify - is derived from the allegations of the complaint and the terms of the policy. See Technicon Elec. Corp. v. Am. Home Assur. Co., 74 N.Y.2d 66, 73, 542 N.E.2d 1048, 544 N.Y.S.2d 531 (1989). If the complaint contains any facts or...
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