Kln Steel Products Co. v. Cna Ins. Cos.

• Decision Date: 31 December 2008
• Docket Number: No. 04-07-00830-CV.,04-07-00830-CV.
• Citation: 278 S.W.3d 429
• Parties: KLN STEEL PRODUCTS COMPANY, LTD., Appellant/Cross-Appellee, v. CNA INSURANCE COMPANIES, National Fire Insurance Company of Hartford, Continental Casualty Company, and American Guarantee and Liability Insurance Company, Appellees/Cross-Appellants.
• Court: Texas Court of Appeals

278 S.W.3d 429

KLN STEEL PRODUCTS COMPANY, LTD., Appellant/Cross-Appellee, v. CNA INSURANCE COMPANIES, National Fire Insurance Company of Hartford, Continental Casualty Company, and American Guarantee and Liability Insurance Company, Appellees/Cross-Appellants.

No. 04-07-00830-CV.

Court of Appeals of Texas, San Antonio.

December 31, 2008.

Renee Forinash McElhaney, Brett W. Schouest, Ellen B. Mitchell, Mark J. Barrera, Cox Smith Mathews Incorporated, San Antonio, TX, for Appellant.

Ellen Van Meir, Harrison H. Yoss, Mariah Baker Quiroz, Thompson, Coe, Cousins & Irons, L.L.P., Dallas, TX, Brian L. Blakeley, Blakeley & Reynolds, P.C., San Antonio, TX, Jeffrey A. Berman, Victoria Dizik, Chicago, IL, for Appellee.

Sitting: ALMA L. LÓPEZ, Chief Justice, CATHERINE STONE, Justice, REBECCA SIMMONS, Justice.

OPINION

Opinion by REBECCA SIMMONS, Justice.

This is a duty to defend case. KLN Steel Products Company, Ltd. (KLN) sued CNA Insurance Companies, National Fire Insurance Company of Hartford, Continental Casualty Company (collectively CNA) and American Guarantee and Liability Insurance Company (AGLIC) seeking a declaration that CNA and AGLIC have a duty to defend KLN and indemnify KLN against a competitor's suit.¹ KLN also asserted claims for breach of contract and extra-contractual claims. All parties moved for summary judgment and the trial court denied all parties' motions.² This mutually agreed interlocutory appeal followed.

On appeal, KLN contends that CNA and AGLIC have a duty to defend KLN against the lawsuit brought against it by Michelle D. Connell and Hi-Tech Beds Systems Corp. (collectively Hi-Tech). Both CNA and AGLIC respond that they have no duty to defend KLN, as a matter of law, and even assuming potential coverage, Hi-Tech's allegations fall within the policies' exclusions. Because (1) the allegations in Hi-Tech's complaint do not reveal a potential claim within the covered risks under the insurance policies, and (2) alternatively, the allegations in the complaint fall within clearly defined exclusions, we affirm the trial court's denial of summary judgment with regard to KLN and reverse and render judgment with regard to the trial court's denial of summary judgment in favor of CNA and AGLIC.

BACKGROUND

A. Procedural History

Hi-Tech filed suit against KLN and Clark/Blinderman/Knight, L.L.C. (Clark) specifically asserting claims in its complaint for (1) patent infringement, (2) misappropriation of trade secrets, (3) unfair business practices and unfair competition, and (4) interference with a prospective business relationship. CNA and AGLIC subsequently denied coverage under the policies and consequently refused to defend KLN. In the alternative, CNA and AGLIC claimed multiple policy exclusions defeat any duty to defend KLN. The trial court denied both summary judgments and this appeal followed pursuant to Texas Civil Practice and Remedies Code section 51.014(d). TEX. CIV. PRAC. & REM.CODE ANN. § 51.014(d) (Vernon 2008).

B. The Hi-Tech Complaint

Since a determination of the duty to defend an insured is based on the factual allegations contained within the complaint, a brief summary of pertinent allegations is set forth. According to Hi-Tech's complaint, Hi-Tech learned in 1999 that the United States Navy planned to construct open barracks at its Naval Station Great Lakes training center and would need to purchase beds. In response, Hi-Tech supplied its original version of the SB-200, which is a mobile space saving storage sleeper or bed, both to the Navy and Clark, a procurement company, with the Navy's and Clark's assurances that (1) the design would be kept confidential and (2) the bed would be kept in a restricted part of the training center. The Navy and Clark also knew that the SB-200 was the embodiment of pending patents.³

KLN had been the major provider of beds for the Navy's training center prior to 2000. Upon learning of the training center expansion, KLN determined that it would submit only its current model bed to the Navy for use at the training facility. In the latter part of 2001 and early 2002, Clark, the procurement company, issued a request for proposals for beds with specifications almost identical to the Hi-Tech SB-200. KLN used its special relationship and influence with the Navy to gain access to and examine Hi-Tech's first version of the SB-200. As a result, KLN obtained, through improper means, confidential information not available to the public regarding the SB-200. KLN was thus able to design a bed equivalent to the SB-200 and submit a response to Clark's request for proposals for the manufacture of a bed with the same features as the SB-200. Thereafter, KLN repeatedly gained improper access to, and acquired proprietary and confidential information about, improved versions of the SB-200 located at the training center and used that information to create infringing, competing products. KLN then used its infringing models, based on the SB-200, to usurp sales of the Hi-Tech SB-200. The specific allegations that KLN contends create a duty to defend will be discussed below.

STANDARD OF REVIEW

Whether a duty to defend exists is a question of law that we review de novo. St. Paul Ins. Co. v. Tex. Dep't of Transp., 999 S.W.2d 881, 884 (Tex.App.-Austin 1999, pet. denied). In an insurance coverage dispute, the insured has the initial burden of establishing that its claim comes within the scope of coverage provided by the policy. Venture Encoding Serv., Inc. v. Atl. Mut. Ins. Co., 107 S.W.3d 729, 733 (Tex.App.-Fort Worth 2003, pet. denied). The burden then shifts to the insurer to show that the claim falls within a policy exclusion or limitation of coverage. Id. If the insurer succeeds in showing the applicability of an exclusion, the burden shifts back to the insured to show that an exception to the exclusion brings the claim within coverage. Id.

DUTY TO DEFEND

KLN asserts that a liberal reading of the facts alleged in the Hi-Tech complaint reveals a potential claim within the coverage of the policy and, thus, a duty to defend KLN against the claim. KLN specifically focuses on potential claims that fall under "personal and advertising injury," including claims of (1) publication of disparaging material and (2) trade dress infringement. We first address the rules governing our review of the pleadings and the insurance policies and then analyze each of the foregoing claims separately.

A. The Eight-Corners Rule

"`[T]he duty to defend is distinct from, and broader than, the duty to indemnify.'" Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490 (Tex.2008) (alteration in original) (quoting 14 LEE R. Russ & THOMAS F. SEGALLA, COUCH ON INSURANCE § 200:1 (3d ed.2007)). An insurer's duty to defend is triggered if the factual allegations in the plaintiff's complaint potentially support a covered claim, while the duty to indemnify is based on whether the alleged facts are actually established. Id.; see also GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 310 (Tex.2006); Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex.1965) ("`Where the complaint does not state facts sufficient to clearly bring the case within or without the coverage, the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy.'" (quotation omitted)). An "insurer is obligated to defend a suit if the facts alleged in the pleadings would give rise to any claim within the coverage of the policy." Utica Nat'l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 201 (Tex.2004); St. Paul Ins. v. Tex. Dep't of Transp., 999 S.W.2d 881, 884 (Tex. App.-Austin 1999, pet. denied) (reiterating that if an insurer owes a duty to defend any portion of the suit, the insurer must defend the entire suit).

The eight-corners rule takes its name from the fact that only two documents are ordinarily relevant to the determination of the duty to defend: the policy and the pleadings of the third-party claimant. GuideOne, 197 S.W.3d at 308. The eight-corners rule requires the court to compare the allegations in the petition filed against the insured with the coverage afforded by the insurance policy. King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex.2002). Facts outside the pleadings, even those easily ascertained, are not material to the court's determination. Nat'l Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).

When applying the eight-corners rule, an appellate court gives a liberal interpretation to the allegations in the petition and any doubt regarding the duty to defend is resolved in favor of the duty. Dallas Fire Ins., 85 S.W.3d at 187; Nat'l Union Fire Ins., 939 S.W.2d at 141. The truth or falsity of the allegations in the pleadings is not a factor; similarly, what the parties know or believe to be the true facts is not a factor. Zurich, 268 S.W.3d at 491; GuideOne, 197 S.W.3d at 311.

The insured need only show that a reasonable reading of the plaintiff's allegations would allow evidence of a claim that is covered by the policy, not that the claim itself be clearly enunciated within the pleadings. Terra Int'l, Inc. v. Commonwealth Lloyd's Ins. Co., 829 S.W.2d 270, 271 (Tex.App.-Dallas 1992, writ denied). Moreover, the pleadings are read in light of the insurance policy's provisions and an appellate review focuses on the petition's factual "`allegations that show the origin of the damages rather than on the legal theories alleged.'" Nat'l Union Fire Ins., 939 S.W.2d at 141 (quotation omitted); see also Adamo v. State Farm Lloyds Co., 853 S.W.2d 673, 676 (Tex.App.-Houston [14th Dist.] 1993, writ denied) ("It is not the cause of action alleged which determines coverage but the facts giving rise to the alleged actionable conduct.").

In accordance with the eight-corners rule, we first examine the pertinent insurance policies and then review the Hi-Tech...