Phoenix Control Systems, Inc. v. Insurance Co. of North America

• Decision Date: 10 July 1990
• Docket Number: No. CV-89-0158-PR,CV-89-0158-PR
• Citation: 165 Ariz. 31,796 P.2d 463
• Parties: PHOENIX CONTROL SYSTEMS, INC., a Wisconsin corporation, Petitioner, v. INSURANCE COMPANY OF NORTH AMERICA, Respondent.
• Court: Arizona Supreme Court

Page 463

796 P.2d 463

165 Ariz. 31

PHOENIX CONTROL SYSTEMS, INC., a Wisconsin corporation, Petitioner, v. INSURANCE COMPANY OF NORTH AMERICA, Respondent.

No. CV-89-0158-PR.

Supreme Court of Arizona,

In Banc.

July 10, 1990.

[165 Ariz. 32] Merl O. Barns and Alioto & Alioto by John I. Alioto, San Francisco, Cal., and Slater & Santaguida, P.C. by David B. Goldstein, Mesa, for petitioner.

Snell & Wilmer by Robert W. Haskin, Jr., and Eileen J. Moore, Phoenix, for respondent.

OPINION

CAMERON, Justice.

I. JURISDICTION

Phoenix Control Systems petitions this court for review of the decision of the court of appeals, Phoenix Control Systems v. Insurance Company of North America, 161 Ariz. 420, 778 P.2d 1316 (App.1989), which affirmed summary judgment in favor of Insurance Company of North America. We have jurisdiction under Ariz. Const. art 6., § 5(3) and A.R.S. § 12-120.24.

II. QUESTIONS

1. Did the court of appeals err in finding, as a matter of law, that the insured's coverage for copyright infringement was limited to infringements that arose in the insured's advertising?

2. Did the court of appeals err in finding, as a matter of law, that the facts in the underlying action conclusively established that Phoenix Control Systems (PCS) acted intentionally and therefore relieved Insurance Company of North America (INA) of its obligation to defend?

III. FACTS

The trial court granted summary judgment in favor of INA holding that INA had no duty to defend PCS in a civil action instituted by Johnson Controls, Inc. (Johnson) in the United States District Court for the District of Arizona. The Arizona Court of Appeals affirmed. Because summary judgment was granted in favor of INA, we view the facts in a light most favorable to PCS. United Services Auto. Ass'n v. Morris, 154 Ariz. 113, 114, 741 P.2d 246, 247 (1987).

PCS and Johnson are both engaged in the business of designing and selling industrial automated control systems, including computer programs and devices for the control of water and waste water treatment plants.

Each module of Johnson's software contains a proprietary statement that the computer program is Johnson's property, and that use without their written consent is prohibited. Johnson used its software to develop a computer program for process control at a waste water treatment plant on 91st Avenue in Phoenix. The JC-5000S water treatment program is a registered copyright of Johnson's, under the title "JC-5000 Process Control System".

John Schratz was an employee of Johnson's from April 1974 through December 1982 when he was fired. He then formed PCS and engaged in competition with Johnson.

Rodney Larsen was the project manager of the 91st Avenue project. He was a Johnson employee from 13 September 1976, through 4 January 1984. According to Johnson, Larsen was discharged because of his involvement in the preparation of the PCS Union Hills bid. Larsen then joined PCS.

Schratz allegedly intended to market the JC-5000S, or its functional equivalent, as a PCS product. Johnson sued PCS, Schratz, and Larsen in federal district court based on this and other actions PCS took allegedly to interfere with Johnson's business. Johnson Controls Inc. v. Phoenix Control Systems, Inc., CIV. NO. 85-1084 PHX EH. In that suit Johnson alleged: 1) copyright infringement; 2) misappropriation of trade secrets; 3) interference with prospective contractual relations; and 4) injurious falsehood. Johnson sought damages as well as interlocutory and permanent injunctive relief enjoining PCS from further engaging in the alleged illegal activities. ¹

Johnson's allegations were based on the following activities. First, in November 1983, Schratz, acting on behalf of PCS, wrote to the city engineer of the City of Fort Lauderdale, Florida that PCS wanted to compete for the contract to expand Fort Lauderdale's Lohmeyer plant. The letter stated that PCS had a contract to help implement the management information system at the 91st Avenue plant, and was therefore "in the unique position ... of being the only other potential vendor to qualify by experience, to expand the current Lohmeyer project hardware and software." The current water treatment program utilized at the Lohmeyer plant was installed by Johnson. Johnson planned to bid on the expansion contract as well.

Second, in December 1983, Schratz prepared a proposal for the Union Hills water treatment plant in Phoenix. The proposal stated that "the PC-850 ... is operating successfully at similar installations such as the City of Phoenix 91st Avenue waste water treatment plant...." Schratz testified in the federal district court action that this reference to the PC-850 was an attempt to make it appear that there was a standard PCS software system in place at the 91st Avenue plant, when, in fact, the JC-5000S was in place there.

During this time, PCS held a comprehensive property damage and liability insurance policy with INA. The policy provided that INA would defend PCS "in any lawsuits brought against you as the result of any activity covered by YOUR LIABILITY COVERAGE ..."

PCS requested that INA defend it in the federal court and INA refused. INA maintained that it had no duty to defend PCS in the Johnson action because the alleged copyright infringement did not occur in connection with advertising activity. INA also contended that PCS's activity fell within the policy's "intentional acts" exclusion.

IV. APPLICATION OF THE LAST ANTECEDENT RULE

Liability claims covered under the INA insurance policy included "bodily injury, personal injury, or property damage, resulting from an occurrence...." (Emphasis in original). Personal injury was defined in eight separate categories:

* Mental suffering caused by the fact that someone was killed or suffered bodily injury, if the original injury or death was covered by this policy.

* Damage to someone's reputation or violation of someone's privacy caused by a publication or statement you or another insured make while this policy is in effect.

* False arrest, detention or imprisonment.

* Malicious prosecution.

* Wrongfully entering someone's home, business premises, or other property.

* Wrongfully evicting someone from his or her home, business premises, or other property.

* Any other wrongful invasion of someone's right of occupancy.

* Any infringement of copyright or improper or unlawful use of slogans in your advertising.

INA contends that the phrase "any infringement of copyright or improper or unlawful use of slogans in your advertising" means that PCS would be covered only if the "infringement of copyright" or "unlawful use of slogans" occurred in connection with advertising activity. In other words, INA believes that "in your advertising" modifies both infringement of copyright and the unlawful use of slogans. Thus, from INA's perspective there is no coverage for infringement of copyright because PCS's actions were not in connection with advertising activity.

The court of appeals agreed with INA's reasoning, finding that each section of the personal injury list set forth in the policy covered only one occurrence. It would therefore create an anomaly to hold that one sentence explaining coverage included two occurrences. ² Thus, the court of appeals held that "in your advertising" applied to modify both "infringement of copyright" and "improper or unlawful use of slogans."

PCS contends that the last antecedent doctrine should be applied to interpret "infringement of copyright" to include all forms of copyright infringement and not just that in connection with advertising.

The last antecedent rule is recognized in Arizona and requires that a qualifying phrase be applied to the word or phrase immediately preceding as long as there is no contrary intent indicated. Snyder v. Lena, 145 Ariz. 583, 585-86, 703 P.2d 527, 529-530 (App.1985); Tanner Companies v. Ariz. State Land Dept., 142 Ariz. 183, 189, 688 P.2d 1075, 1081 (App.1984) ("modifying phrase 'used as aggregate, ... fill and for similar purposes' is limited to its last antecedent, 'materials of similar occurrence.' "); Town of Florence v. Webb, 40 Ariz. 60, 9 P.2d 413 (1932) (rule will not apply where its application would render the rest of the statute at issue merely surplusage, and where more important rules of construction, such as giving effect to every part of a statute, are applicable). The last antecedent rule is not inflexible and it will not be applied where the context or clear meaning of a word or phrase requires otherwise. As stated by Appleman in his treatise on insurance:

Qualifying words and phrases in an insurance contract ordinarily refer only to their immediately preceding antecedent. When a sentence contains several antecedents and several consequents, the words are applied to the subjects to which they seem most properly related by context and applicability.

An insurance policy is not to be interpreted in a factual vacuum.

13 Appleman, Insurance Law and Practice § 7383 at 8 (1989 Supp.).

By applying the last antecedent rule, PCS asserts that "in your advertising" modifies only the words "improper or unlawful use of slogans", and does not modify "infringement of copyright." Thus, any form of copyright infringement would be covered and INA would have a duty to defend the federal district court action instituted by Johnson. We agree.

We will construe insurance contracts to protect the reasonable expectations of the insured. See Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 389-90, 682 P.2d 388, 394-95 (1984). We believe that PCS, from reading the policy, could reasonably expect that all forms of copyright infringement would be covered, while coverage for the improper or unlawful use of slogans would be limited to that in connection with advertising activity. We believe that the context and clear meaning of the insurance policy does not require us to construe copyright infringement as limited to that in connection with...