John Deere Ins. Co. v. Shamrock Industries, Inc.

• Decision Date: 13 October 1988
• Docket Number: Civ. No. 4-88-176.
• Citation: 696 F. Supp. 434
• Parties: JOHN DEERE INSURANCE COMPANY, Plaintiff, v. SHAMROCK INDUSTRIES, INC.; Gregory Erlandson; Jack T. Mowry; Metal Craft Machine & Engineering, Inc.; NEOS, Inc.; and Cardinal Packaging, Inc., Defendants.
• Court: U.S. District Court — District of Minnesota

696 F. Supp. 434

JOHN DEERE INSURANCE COMPANY, Plaintiff, v. SHAMROCK INDUSTRIES, INC.; Gregory Erlandson; Jack T. Mowry; Metal Craft Machine & Engineering, Inc.; NEOS, Inc.; and Cardinal Packaging, Inc., Defendants.

Civ. No. 4-88-176.

United States District Court, D. Minnesota, Fourth Division.

October 13, 1988.

Richard P. Mahoney and Mahoney, Dougherty & Mahoney, Minneapolis, Minn., for plaintiff.

Malcolm L. Moore, Philip G. Alden and Moore & Hansen, Minneapolis, Minn., for defendant Shamrock Industries, Inc.

James W. Reuter, Jon G. Trangsrud and Barna, Guzy, Merrill, Hynes & Giancola, Ltd., Minneapolis, Minn., for defendants Erlandson, Mowry, Metal Craft, and NEOS, Inc.

ORDER

DOTY, District Judge.

This diversity case comes before the Court on defendants Metal Craft Machine & Engineering, Inc.'s and Jack T. Mowry's ("Metal Craft and Mowry") motion for partial summary judgment in a declaratory judgment action brought against defendants by plaintiff John Deere Insurance Company ("Deere"). Deere responded with its own motion for summary judgment including as defendants subject to the motion (in addition to defendants Metal Craft and Mowry), NEOS, Inc. ("NEOS"), Gregory Erlandson ("Erlandson"), Shamrock Industries, Inc. ("Shamrock") and Cardinal Packaging, Inc. ("Cardinal") who are also defendants in the declaratory judgment action. During argument on the motion, NEOS and Erlandson joined Metal Craft and Mowry's motion for partial summary judgment. The Court grants the motion of Metal Craft, Mowry, NEOS and Erlandson except as indicated below and denies that part of the motion of Deere which is against defendants Metal Craft, Mowry, NEOS and Erlandson. The Court grants that part of the motion of Deere which is against defendant Cardinal. The Court grants and denies these motions for the reasons stated below.

FACTS

The parties agree on the following facts. On June 25, 1987, Shamrock commenced an action against Erlandson, Mowry, Metal Craft, NEOS and Cardinal alleging patent infringement, misappropriation of trade secrets, unfair competition and breach of contract (the "underlying action"). These defendants tendered the defense of the underlying action to Deere by letter dated November 25, 1987, stating that a number of insurance policies purchased by Metal Craft obligated Deere to defend the action. Deere refused the tender on December 22, 1987. These defendants requested Deere to reconsider by letter dated January 19, 1988. Deere subsequently commenced this action on February 22, 1988, requesting the Court to declare that it had no duty to defend or indemnify these defendants with respect to the underlying action commenced by Shamrock.

Background of the Underlying Action

Shamrock is a Minnesota corporation engaged in the business of selling plastic containers to dairies. Cardinal is a direct competitor of Shamrock. Both Cardinal and Shamrock install ice cream pail filling machines in their customers' places of business, and permit their customers to use the machines as part of transactions in which their customers buy Cardinal and Shamrock's plastic containers.

Metal Craft is a supplier of precision parts for various industries. Mowry is president and sole owner of all of Metal Craft's stock. Erlandson used to be an employee of Shamrock. In about October of 1985, while still in Shamrock's employ, Erlandson conceived an idea for a machine which would fill containers of ice cream faster than any machine in existence.

Erlandson spoke with Mowry about this idea and in October, 1985, the two agreed to build the machine and market it. Assembly of the prototype began sometime in June, 1986, at the shop of Metal Craft. The prototype was ready for testing in October, 1986.

Mowry and Erlandson decided to form a new company, NEOS, Inc. to continue development and marketing of the machine. NEOS was incorporated in January, 1987. Mowry owns 100 percent of the shares of NEOS. Erlandson left his employment with Shamrock on April 16, 1987, and immediately went to work for NEOS. He has no financial interest in NEOS.

In the fall of 1985 and early 1986, before NEOS had been incorporated, Mowry wrote to Arthur Blackburn, the president of Cardinal, a number of times on Metal Craft letterhead to tell him about this new proposed machine. Blackburn stated he would have an interest if it would perform as well as Mowry said it would. In October, 1986, Blackburn was present at the first demonstration of the prototype at the Metal Craft shop in Elk River, Minnesota. He made no commitment at that time.

In April, 1987, Erlandson and Mowry brought the machine to Winston-Salem, North Carolina, and installed it in Dairy Fresh, a customer of Cardinal. The test was a resounding success. A purchase order for ten of the machines was drafted, but not signed, on April 29, 1987. The actual agreement was finally consummated on August 1, 1987, when Blackburn, on behalf of Cardinal, and Mowry, on behalf of NEOS, signed an exclusive distribution agreement. Mowry personally guaranteed that same agreement.

On May 29, 1987, Shamrock, through its attorney, sent everyone concerned a letter notifying them of Shamrock's assertion of patent infringement. The first installation of a machine at a facility of a former customer of Shamrock occurred on August 6, 1987, when one was installed at Heartland Farms Dairy in Hazelwood, Missouri. That machine did not go into operation until January of 1988.

The essential paragraphs of Shamrock's complaint relevant to this declaratory judgment action allege that Mowry, Metal Craft, NEOS and/or Erlandson manufactured, used and sold pail filling machines; copied features of plaintiff's pail filling machines; have disclosed, disseminated and/or published through direct communication and/or through the sale and distribution of machines, trade secrets and proprietary information of Shamrock, particularly information regarding Shamrock's business practices, design plans and contemplated future improvements for its pail filling machines; and have sold and are continuing to sell and solicit purchase orders for pail filling machines.

The Insurance Contracts

Metal Craft purchased six insurance contracts from Deere (hereinafter referred to as policies I, II, III, IV, V, and VI).¹ This case requires the Court to examine five different areas of these contracts: (1) the scope of the word "insureds" and (2) the phrase "advertising injury"; (3) the meaning of an exclusion which excludes advertising activity coverage where the first publication occurred prior to the commencement of the policy period; (4) the meaning of the phrase "actual malice"; (5) the meaning of a provision which excludes liability "assumed by the insured under any contract or agreement."

The named insured on all the policies is Metal Craft. The policies differ as to the extent to which other insureds are included. Policies I and II extend the definition of an insured to cover "an executive officer ... acting within the scope of his duty as such." Policies III and IV contain the same extension, but also include "any subsidiary of the Named Insured and any other entity coming under the Named Insured's control over which it assumes active management." Policy V extends coverage to "executive officers ... but only with respect to their duties as such." Policy VI contains the same language as Policy V but also extends coverage to "your subsidiaries under active management and control at the inception of this policy."

Deere contends that only Metal Craft, if anyone, is an insured under these policies. Defendants Metal Craft, Mowry, NEOS and Erlandson all claim coverage under the policies. Defendant Cardinal, by affidavit, admits the policies afford it no coverage.

All of the contracts require Deere to defend the insured against suits brought against the insured which allege "advertising injury". Deere and the defendants vigorously dispute the meaning of that phrase. The policies all define "advertising injury" in essentially the same fashion; that is, policies I and II define it as "injury arising out of an offense ... 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 ...". Policies III and IV call the covered phrase "advertising liability", not "advertising injury" and define it as "damages because of libel, slander, defamation, infringement of copyright, title or slogan, piracy, unfair competition, idea misappropriation or invasion of right of privacy arising out of the named insured's advertising activities ...". Policy V states that "this insurance applies to `advertising injury' only if caused by an offense committed ... in the course of advertising your goods, products or services", and defines advertising injury as "injury arising out of one or more of the following offenses:

(a) oral or written publication or 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 of 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."

Policy VI defines advertising injury as "injury arising out of one or more of the following `offenses' committed in the course of advertising an insured's goods, products or services:

a. oral or written publication of material that slanders or libels a person or organization of disparages a person's or organization's goods, products or services;

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

c. misappropriation of advertising ideas of style of doing business;

d. infringement of copyright, title or slogan; or

e. unfair competition."

Deere contends the suit brought by Shamrock clearly...