Solers, Inc. v. Hartford Cas. Ins. Co.

• Decision Date: 04 June 2001
• Docket Number: Civil Action No. 00-1947-A.
• Parties: SOLERS, INC., Plaintiff, v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

146 F.Supp.2d 785

SOLERS, INC., Plaintiff, v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant.

Civil Action No. 00-1947-A.

United States District Court, E.D. Virginia, Alexandria Division.

June 4, 2001.

Stephen W. Grafman, Kirkpatrick & Lockhart, Washington, DC, for plaintiff.

Richard W. Driscoll, Eccleston and Wolf, Washington, DC, for defendant.

Memorandum Opinion and Order

LEE, District Judge.

THIS MATTER is before the Court on Defendant Hartford Casualty Insurance Company's Motion for Summary Judgment and Plaintiff's Cross Motion for Summary Judgment. This case involves a dispute about an insurance company's duty to defend an insured in an action involving the alleged misappropriation of trade secrets and customer lists, and the exploitation of a commercial opportunity. The question presented is whether the subject matter of the misappropriation dispute arguably falls within the insurance policy's definition of "advertising injury." First, the Court must consider whether the defendant insurance company has a duty to defend the insured in a claim brought by a former employer for tortious interference with contract, breach of fiduciary duty, conspiracy, misappropriation of trade secrets, and conversion under the insurance policy's "advertising injury" coverage. Solers, Inc., the insured, asserts that the disputed claim is within the purview of the insurance company's duty to defend an "advertising injury" because the third party claimant asserts that Solers misappropriated business proposals and plagiarized marketing materials in order to take improperly the claimant's customers. Second, the Court must consider whether the submission of written proposals to a potential customer soliciting business one-on-one constitutes "advertising," "misappropriation of advertising ideas," or "infringement of copyright, title or slogan" within the meaning of the insurance contract such that the insurance company had a duty to defend the civil suit against Solers. Third, assuming that coverage would apply, the Court must consider whether Solers can show a causal connection between the alleged misappropriation and the third party's claim for damages. Fourth, if the disputed claim falls within the purview of the insurance policy, then the Court must determine whether Solers' claims for legal fees in connection with defense of the third party's claim is covered by the insurance policy where it is shown that the acts complained of occurred for the first time before the insurance policy issued.

The Court finds that resolution of the first issue renders unnecessary an analysis on the succeeding issues. The Court holds that Solers' submission of proposals on a one-to-one basis does not rise to the level of advertising activity. Advertising is the widespread promotion of goods or services to the public at large, or to the company's customer base. Because the Court concludes that Solers' submission of proposals to two customers does not constitute "advertising," the Court holds that the insurance company did not have a duty to defend Solers. Therefore, summary judgment will be granted for Defendant insurance company, Hartford Casualty Insurance Company.

I. BACKGROUND

Plaintiff Solers, Inc. was founded by David Kellogg and Joseph Smith. Before founding Solers, Kellogg and Smith worked for a company called Decision Science Applications, Inc. ("DSA"). They then worked for SM & A Corporation, which acquired DSA. Kellogg and Smith were displeased with the structure and business plan of SM & A as contrasted with how DSA had been run. Therefore, Kellogg and Smith left SM & A to form their own company: Solers.

Solers, and previously DSA, engineer sophisticated computer programs and software for government agencies. The solicitation of business from federal government agencies is regulated by federal law contained in the Federal Acquisition Regulations ("FAR") and Defense Federal Acquisition Regulations Supplement ("DFARS"), 48 C.F.R. §§ 1-99, 200-299. FAR and DFARS require agencies and contractors to abide by regulatory protocols in the solicitation and award of government contracts. For companies such as Solers (and DSA), the principal mechanism used to solicit government contract business is the proposal submission process, which is governed by FAR and DFARS. SM & A's main line of business involves assisting government contractors in the preparation of proposals. Solers has obtained all of its business through the submission of formal written proposals. Companies like Solers sometimes submit proposals to federal agencies on an unsolicited basis.

To start its business, Solers submitted proposals to two federal contractors to work on federal projects: Charles Stark Draper Laboratory ("Draper") and Boeing Information Services, Inc. ("Boeing"). Before the SM & A acquired DSA, Kellogg and Smith wrote proposals for DSA to act as a subcontractor to Draper and Boeing. SM & A retained the proposals. SM & A believed that the proposals Solers submitted to Draper and Boeing were based on proposals that Solers misappropriated from SM & A. SM & A sued Solers for interference with contractual relations, breach of fiduciary duty, conspiracy, misappropriation of trade secrets, and conversion. SM & A's principal allegations were that Solers misappropriated business opportunities by the misuse of SM & A's confidential materials and proprietary trade secrets.

Solers had a business insurance policy ("Policy") with Defendant Hartford Casualty Insurance Company. The Hartford Policy was effective for the period January 4, 1999 to January 4, 2000. The Policy provided coverage for "personal and advertising injury." The definition for advertising injury included injury arising out of the offense of "misappropriation of advertising ideas or styles of doing business" or "infringement of copyright, title or slogan." The policy stated that Hartford would pay sums up to $1,000,000.00 that the insured became legally obligated to pay as damages, and that Hartford had the duty to defend any suit seeking damages. The policy further provided: "This insurance applies to ... `advertising injury' caused by an offense committed in the course of advertising your goods, products or services[, but] only if the offense was committed in the `coverage territory' during the policy period."

Upon being sued by SM & A, Solers filed a claim for defense and indemnification with Hartford under the Policy. Hartford denied Solers' claim for coverage. Hartford asserted that Solers' submission of proposals was not "advertising," and that any offense alleged against Solers was not committed "in the course of advertising" (i.e., that any misappropriation of trade secrets occurred before Solers' supposed advertising, not in the course of the advertising). Hartford argued, therefore, that injury from suit arising out of Solers' proposal submission was not covered by the Policy, and that, therefore, Hartford had no duty to defend the lawsuit. Solers settled the suit with SM & A for $100,000.00.

Solers asserts that Hartford breached its contractual obligation to defend Solers in the SM & A lawsuit, and that Hartford was obligated to reimburse Solers for Solers' expenses incurred in defending the SM & A litigation. Solers sues Hartford for the damages Solers has agreed to pay SM & A, as well as for the litigation and settlement expenses, fees, and costs for the SM & A lawsuit. In total, Solers seeks to recover $714,471.76.

II. THE PARTIES' CONTENTIONS

The parties raise a number of arguments addressing whether the Policy covers SM & A's claims (1) because the claims are based on Solers' submission of proposals, (2) because acts alleged by SM & A might have occurred before the Policy period's inception, (3) because the proposals might not embody advertising ideas, and (4) because Solers' alleged misappropriation might constitute infringement of copyright. The Court finds that resolution of the first argument renders unnecessary analysis of the succeeding arguments. Therefore, the only contentions set forth herein are the parties' contentions addressing whether proposal submission constitutes "advertising" such that Policy coverage is appropriate.

A. Defendant Hartford

Hartford argues that it had no obligation to defend the SM & A suit because it was not liable under its contract for the allegations as stated in SM & A's complaint. See Virginia Electric & Power Co. v. Northbrook Property & Cas. Ins. Co., 252 Va. 265, 475 S.E.2d 264, 265-66 (1996); Lerner v. General Ins. Co., 219 Va. 101, 245 S.E.2d 249, 251 (1978); see also Town Crier, Inc. v. Hume, 721 F.Supp. 99, 102 (E.D.Va.1989), aff'd, 907 F.2d 1140 (4th Cir.1990). Hartford argues that Solers' claim for coverage must fail because: (1) the conduct alleged in SM & A's complaint was not an offense defined by the policy as giving rise to "advertising injury," and (2) the conduct alleged in the complaint did not occur in the course of advertising Solers' products or services.

Hartford contends that it had no duty to defend on the basis of proposal submission because the term "advertising" must be given its ordinary and customary meaning. See Lower Chesapeake Associates v. Valley Forge Ins. Co., 260 Va. 77, 532 S.E.2d 325, 330 (2000); Scottsdale Ins. Co. v. Glick, 240 Va. 283, 397 S.E.2d 105, 108 (1990). Thus, advertising is the widespread dissemination of promotional materials to the public at large, and does not include one-to-one solicitations. See, e.g. Erie Ins. Group v. Sear Corp., 102 F.3d 889, 894-95 (7th Cir.1996) (hereinafter "Sear"); Select Design, Ltd. v. Union Mut. Fire Ins., 165 Vt. 69, 674 A.2d 798, 802 (1996); Monumental Life Ins. Co. v. U.S. Fid. & Guar. Co., 94 Md.App. 505, 617 A.2d 1163, 1174 (Spec.App.1993); THE AMERICAN HERITAGE DICTIONARY (4th ed.2000); MERRIAM-WEBSTER'S COLLEGIATE DICTIONARY (2001). Hartford asserts that Solers' submission of bid proposals to single customers Draper and Boeing does not come...