Pa. Nat'l Mut. Cas. Ins. Co. v. Beach Mart, Inc.

• Decision Date: 01 August 2019
• Docket Number: No. 18-1285,18-1285
• Citation: 932 F.3d 268
• Parties: PENNSYLVANIA NATIONAL MUTUAL CASUALTY INSURANCE COMPANY, Plaintiff - Appellee v. BEACH MART, INC., Defendant - Appellant and L&L Wings, Inc. Defendant
• Court: U.S. Court of Appeals — Fourth Circuit

932 F.3d 268

PENNSYLVANIA NATIONAL MUTUAL CASUALTY INSURANCE COMPANY, Plaintiff - Appellee

v.BEACH MART, INC., Defendant - AppellantandL&L Wings, Inc. Defendant

No. 18-1285

United States Court of Appeals, Fourth Circuit.

Argued: May 7, 2019

Decided: August 1, 2019

ARGUED: Stephen Forest Shaw, WOMBLE BOND DICKINSON (US) LLP, Greensboro, North Carolina, for Appellant. Michael Duane Jones, HEDRICK GARDNER KINCHELOE & GAROFALO, LLP, Charlotte, North Carolina, for Appellee. ON BRIEF: Charles A. Burke, WOMBLE BOND DICKINSON (US) LLP, Raleigh, North Carolina, for Appellant. David L. Levy, HEDRICK GARDNER KINCHELOE & GAROFALO, LLP, Charlotte, North Carolina, for Appellee.

Before KEENAN, WYNN, and FLOYD, Circuit Judges.

Reversed and remanded with instructions by published opinion. Judge Wynn wrote the opinion, in which Judge Keenan and Judge Floyd joined.

WYNN, Circuit Judge:

In this appeal, Pennsylvania National Mutual Casualty Insurance Company ("Penn National") contends that it has no duty to defend its insured, Beach Mart, Inc. ("Beach Mart"), in an underlying lawsuit against L&L Wings, Inc. ("L&L"). Penn National argues that its duty to defend was eliminated by the "prior publication" exclusions in the insurance policies, which preclude an insured from obtaining coverage for injuries caused to third parties through continuous conduct that began prior to coverage. The district court agreed but for the reasons that follow, we reverse and remand.

I.

To resolve this issue of whether Penn National has a duty to defend Beach Mart in the underlying lawsuit against, L&L. we look to: (A) L&L’s pleadings in the underlying action, and (B) the insurance policies that Penn National issued to Beach Mart.

A.

In September 2011, Beach Mart brought the underlying action against L&L in the United States District Court for the Eastern District of North Carolina to determine who could use the WINGS trademark. L&L answered the complaint and asserted several counterclaims, including claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Beach Mart subsequently amended its complaint, and L&L in turn amended its answer and reasserted its counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing.¹ For purposes of this appeal, the factual allegations supporting L&L’s counterclaims and amended counterclaims are taken as true. See, e.g., Bain v. Unitrin Auto & Home Ins. Co. , 210 N.C.App. 398, 708 S.E.2d 410, 413 (2011). Those allegations are materially indistinguishable, so we jointly discuss them below.

L&L and Beach Mart each operate retail stores that sell beach apparel in beachfront communities. Since 1978, L&L has continuously operated and marketed its stores under the WINGS trademark, and in 2008, it registered that mark with the United States Patent and Trademark Office for use in "retail apparel stores; retail clothing stores; [and] retail discount store services in the field of beachwear clothing." J.A. 663.

Prior to 1995, L&L employed Israel Golassa to work in its retail stores. But on January 1, 1995, Golassa left L&L to found Beach Mart. That same day, L&L and Beach Mart executed a one-year agreement wherein L&L licensed the WINGS mark to Beach Mart for use in two North Carolina stores "to sell beach-related apparel, beach toys, souvenirs and other related items under the WINGS trademark." J.A. 664, 788. At the end of the year, the parties reached an oral understanding that allowed Beach Mart to continue using the mark for an annual fee. That oral licensing agreement continued "for a number of years," but at some point, Beach Mart refused to pay for the WINGS mark yet continued to use it without L&L’s authorization. J.A. 664, 789.

Thereafter, L&L and Beach Mart "negotiated a resolution" pertaining to Beach Mart’s use of the mark, which was "memorialized in the 2005 Agreement, dated August 29, 2005." J.A. 664, 789. Under the 2005 Agreement, Beach Mart acknowledged that L&L owned the WINGS mark and any goodwill associated with it. Beach Mart also agreed that it would not use WINGS on a standalone basis after December 31, 2005. In exchange, L&L authorized Beach Mart to use the mark in several North Carolina counties, but only in the form BIG WINGS or SUPER WINGS.

According to L&L’s complaint, "[s]ubsequent to December 31, 2005," Beach Mart breached the 2005 Agreement in two principal ways. J.A. 666, 790. First, Beach Mart used WINGS alone, and thus without the SUPER or BIG designations required by the 2005 Agreement. For example, Beach Mart did not include BIG or SUPER on its WINGS hang tags, sales receipts, discount coupons, or internet advertising. Beach Mart’s employees also answered store calls with "Hello, Wings." J.A. 666, 790. Second, Beach Mart sometimes used the SUPER designation, but it did so in such a way that was virtually undetectable and therefore contrary to the 2005 Agreement. Thus, on its signs, SUPER was "so small that it [was] not observable by customers, especially after dark [because] the WINGS trademark ... illuminated, but the word [SUPER did] not." J.A. 667, 791. Beach Mart "similarly diminished the size of the word [SUPER], to the extent it [was] used at all, in connection with merchandise labels and advertising so that it [was] possible only upon careful up-close inspection to see that the word [SUPER was] even being used." J.A. 667, 791.

In addition to allegedly infringing upon the WINGS trademark, L&L claimed that Beach Mart "further breached its duty to act in good faith and deal fairly by undermining the distinctiveness of [Beach Mart] and [L&L] as intended by the 2005 Agreement." J.A. 672, 799. Specifically, Beach Mart "adopted the advertising slogan — ‘All you need for the beach’ — which is virtually identical to [L&L’s] slogan — ‘All you need to reach the beach.’ " J.A. 667–68, 791–92. According to L&L’s complaint, Beach Mart also "construct[ed] and operat[ed] retail stores that use[d] the identical façade as [L&L’s] stores, which use a triangular tower above the entry and a distinctive wave sign." J.A. 667, 791.

Citing these alleged breaches of contract and covenant, L&L sent Beach Mart a letter on August 9, 2011, terminating the 2005 Agreement effective October 21, 2011. L&L complains that, notwithstanding this termination letter, Beach Mart has allegedly continued to unlawfully use the WINGS mark and its goodwill.

B.

On January 1, 2008, Penn National issued two commercial insurance liability policies to Beach Mart: a Businessowner Policy and an Umbrella Policy. Both policies were delivered in North Carolina and provided coverage for one year. The parties annually renewed the policies in 2009, 2010, and 2011.

Under both policies, Penn National agreed to be liable for those damages that Beach Mart became obligated to pay because of "personal injury" or "advertising injury." Penn National also agreed to defend Beach Mart in any suit seeking such damages. As pertinent here, the Businessowner Policy defines "advertising injury" as an "injury arising out of ... [m]isappropriation of advertising ideas or style of doing business; or [i]nfringement of copyright, title, or slogan." J.A. 82. And the Umbrella Policy defines "personal and advertising injury" as an injury arising out of "[i]nfringing upon another’s copyright, trade dress, or slogan[.]" J.A. 503.

Both policies include two relevant exclusions to coverage. First, the policies exclude coverage for injuries arising "out of the infringement of ... trademark." J.A. 117, 492. Under the plain language of the policies, however, that "exclusion does not apply to infringement ... of ... slogan." J.A. 117, 493. Second, the policies include a prior publication exclusion, which precludes coverage for injuries "[a]rising out of oral or written publication of material whose first publication took place before the beginning of the policy period[.]" J.A. 77, 492.

In June 2012, Beach Mart requested that Penn National defend and indemnify it against L&L’s counterclaims in accordance with its insurance policies. According to Beach Mart, it spent the next seven months attempting to convince Penn National that the underlying lawsuit constituted a covered event. Ultimately, in January 2013, Penn National appointed an attorney to defend Beach Mart, while also reserving its rights under the policies.

In February 2014, Penn National filed this declaratory judgment action, seeking a declaration of non-coverage under the policies. But before responsive pleadings were due, the district court stayed this action from May 2014 to September 2017. After the stay was lifted, in October 2017, Penn National amended its complaint. The same day, Beach Mart finally answered Penn National’s complaint and asserted state-law counterclaims for breach of contract, unfair and deceptive practices, and bad faith, each of which rested on Penn National’s alleged failure to honor its contractual duty to defend.

In December 2017, Penn National moved for judgment on the pleadings, pursuant to Federal Rule of Civil Procedure 12(c). Penn National argued that, even assuming L&L’s pleadings in the underlying lawsuit otherwise alleged a covered injury, Penn National nevertheless did not have a duty to defend Beach Mart because the prior publication exclusions in the policies precluded coverage. The district court agreed and, in an order dated March 6, 2018, held that Penn National had no duty to defend. See Penn. Nat’l Mut. Cas. Ins. Co. v. Beach Mart, Inc. , No. 2:14-CV-8-BO, 2018 WL 1178004, at *3 (E.D.N.C. Mar. 6, 2018).

According to the district court, the policies’ prior publication exclusions eliminated coverage for injuries "arising from actions which first occurred prior to the policy period," which "did not become effective until January 1, 2008." Id. Examining L&L’s pleadings, the court determined that Beach Mart "used WINGS on a stand-alone basis continually from January 1, 1995, and SUPER WINGS continually from January...