Taco Bell Corp. v. Continental Cas. Co.

• Decision Date: 05 November 2004
• Docket Number: No. 03-2868.,No. 03-3550.,No. 03-2867.,03-2867.,03-2868.,03-3550.
• Parties: TACO BELL CORPORATION, Plaintiff-Appellee/Cross-Appellee, v. CONTINENTAL CASUALTY COMPANY, Defendant-Third Party Plaintiff-Appellee/Cross-Appellant, v. Zurich American Insurance Company, Defendant-Third Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

388 F.3d 1069

TACO BELL CORPORATION, Plaintiff-Appellee/Cross-Appellee, v. CONTINENTAL CASUALTY COMPANY, Defendant-Third Party Plaintiff-Appellee/Cross-Appellant, v. Zurich American Insurance Company, Defendant-Third Party Defendant-Appellant.

No. 03-2867.

No. 03-2868.

No. 03-3550.

United States Court of Appeals, Seventh Circuit.

Argued September 27, 2004.

Decided November 5, 2004.

Appeal from the United States District Court for the Northern District of Illinois, 2003 WL 21372473, Harry D. Leinenweber, J.

COPYRIGHT MATERIAL OMITTED

Eugene A. Schoon (argued), Sidley Austin Brown & Wood, Chicago, IL, for Plaintiff-Appellee.

Michael G. Bruton (argued), Rebecca L. Ross, Ross, Dixon & Bell, Chicago, IL, for Continental Cas. Co.

Melinda Sue Kollross, Clausen Miller, Chicago, IL, for Zurich American Ins.

Before POSNER, KANNE, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

Taco Bell has sued two insurance companies, Zurich and Continental, each of which had issued it a liability-insurance policy. The basis of federal jurisdiction is diversity of citizenship, and the substantive issues are governed, the parties tacitly agree, by Illinois law. The suit seeks a declaration that the insurance companies have a duty to pay for Taco Bell's defense against a diversity lawsuit that has been brought against it in a federal district court in Michigan by a design agency named Wrench. (That suit has already given rise to nine judicial opinions, beginning with Wrench LLC v. Taco Bell Corp., 1998 WL 480871 (W.D.Mich.1998), and is still going strong.) Taco Bell settled with Continental. The district court, on summary judgment, awarded the declaratory relief sought by Taco Bell—and despite the settlement awarded it against Continental as well as Zurich. The court also ordered Zurich to pay Taco Bell $142,000 for defense costs already incurred by the latter in the Wrench litigation and an additional $45,000 for the cost to Taco Bell of litigating this declaratory-judgment suit against Zurich. Finally, the court ordered Zurich to pay Continental $1.8 million, representing one-half the Taco Bell defense costs that Continental had paid. (We have rounded off the dollar figures.) Zurich appeals, as does Continental, which would like the judgment against it vacated and also would like Zurich to be ordered to pay a larger share of Taco Bell's defense costs.

The amended complaint in Wrench's suit (now on appeal to the Sixth Circuit after the award of substantial damages to Wrench) alleges the following: In 1995 Wrench developed a marketing gimmick that it called "Psycho Chihuahua," which "involved the image of a clever, feisty Chihuahua dog with an attitude," the idea being "to use the humor of seeing a small dog character with a big dog's attitude." At a trade show the following year, Taco Bell expressed interest in using the design to promote its restaurants. Wrench proposed to Taco Bell "an advertising campaign based on a Chihuahua with an attitude obsessed with Taco Bell food, describing the Chihuahua to be used in the campaign as edgy and feisty, with a spicy Mexican personality and an insatiable craving for Taco Bell food." Beginning in the summer of 1997, Taco Bell, without obtaining permission from Wrench, began running television commercials on the theme of "a Chihuahua obsessed with the thought of Taco Bell food to the exclusion of anything else, including a female Chihuahua." What is more, the next year Taco Bell based its entire national advertising campaign on "the same basic idea of a Chihuahua with an attitude that is obsessed with Taco Bell food. Taco Bell has also used several of the specific commercial ideas provided by [Wrench] in its campaign, including the idea of using a live dog manipulated by computer graphic imaging, the idea of having a boy Chihuahua passing up a girl Chihuahua for Taco Bell food, the idea of using a bobbing head doll in a commercial, the idea of having a Chihuahua sneaking into the rear window of a car to obtain Taco Bell food, the idea of a Chihuahua popping his head out through a hole at the end of a commercial, and the idea of using a consistent tag line at the end of every commercial to keep the Chihuahua as a consistent icon for Taco Bell." These alleged appropriations of Wrench's design ideas are, so far as bears on our case, charged as misappropriation in violation of the common law of Michigan.

The insurance policies that Continental and Zurich issued to Taco Bell were similar but covered occurrences in different periods. Continental's covered the period January 1, 1997, to October 6, 1997, and Zurich's ran from October 7, 1997, to the end of 1998. Both policies covered "advertising injury," defined in both as "injury arising out of paid announcements in the... broadcast media resulting from ... misappropriation of advertising ideas or style of doing business." It is apparent that Wrench's complaint charges advertising injury. But Zurich appeals to the policy exclusion for advertising injury "arising out of oral or written publication of material whose first publication took place before the beginning of the policy period." The first "Chihuahua" ads ran before the coverage under Zurich's policy began, and Zurich argues that therefore Taco Bell's entire Chihuaha-inspired advertising campaign, most of which occurred later, had first been published before the policy took effect; if so, Zurich is off the hook.

The purpose of the "prior publication" exclusion (a common clause in liability-insurance contracts, though rarely litigated) can be illustrated most clearly with reference to liability insurance for copyright infringement. Suppose a few months before insurance coverage began on October 7, 1997, the insured published an infringing book that it continued selling after October 6. The "prior publication" exclusion would bar coverage because the wrongful behavior had begun prior to the effective date of the insurance policy. The purpose of insurance is to spread risk— such as the risk that an advertising campaign might be deemed tortious—and if the risk has already materialized, what is there to insure? Matagorda Ventures, Inc. v. Travelers Lloyds Ins. Co., 203 F.Supp.2d 704, 716 (S.D.Tex.2000). The risk has become a certainty. That would be true in this case had Taco Bell during the period covered by Zurich's policy just rebroadcast the commercials it had broadcast before October 7, 1997.

The later commercials were different from the earlier ones, however, though that in itself need not be decisive. Suppose a magazine article that infringed copyright and was published before the policy period began was republished later as part of an anthology. The anthology would be a different, probably a much different, work from the magazine, but the wrongful act—the copying of the copyrighted article without authorization— would be the same and so the prior-publication exclusion would, we believe (we can find no reported cases on the question), click in. Zurich argues in like vein that while the commercials broadcast after October 6 were different from the earlier ones, they used the same misappropriated design, namely the idea of the Chihuahua with attitude, etc.

Zurich is wrong. Wrench's complaint alleges—and the duty of an insurance company to defend against a suit against its insured is determined by the allegations of the complaint in that suit rather than by what is actually proved, Dixon Distributing Co. v. Hanover Ins. Co., 161 Ill.2d 433, 204 Ill.Dec. 171, 641 N.E.2d 395, 398 (1994); American Alliance Ins. Co. v. 1212 Restaurant Group, L.L.C., 342 Ill.App.3d 500, 276 Ill.Dec. 642, 794 N.E.2d 892, 897 (2003); Roman Catholic Diocese v. Maryland Casualty Co., 139 F.3d 561, 565 (7th Cir.1998) (Illinois law)— that those later commercials appropriated not only the "basic idea" ("Psycho Chihuahua") but other ideas as well that are protected by Michigan's common law of misappropriation, like the idea of the Chihuahua's poking its head through a hole at the end of the commercial. This is a modest idea. Who knows whether it's really protected by Michigan law (there are no cases on point other than the district court decision in Wrench's suit, which as we said is currently on appeal) yet not preempted by federal copyright law. But that is not the issue. The charge of misappropriation of the idea of the Chihuahua's head popping out of a hole is a claim of advertising injury, meritorious or not; and Taco Bell bought insurance against having to pay the entire expense of defending against such claims.

At some point a difference between the republished version of an unlawful work and the original version would be so slight as to be immaterial. See Ringler Associates Inc. v. Maryland Casualty Co., 80 Cal.App.4th 1165, 1181, 96 Cal.Rptr.2d 136, 150 (2000); P.J. Noyes Co. v. American Motorists Ins. Co., 855 F.Supp. 492, 495 (D.N.H.1994). But that observation cannot save the insurer when the republication contains new matter that the plaintiff in the liability suit against the insured alleges as fresh wrongs. Wrench's complaint claims that Taco Bell stole the "basic idea" before October 7, 1997, and used it in its earliest commercials, which predated Zurich's coverage, but that it stole additional, subordinate but still protected, ideas as well and incorporated them into the later commercials.

The only thing that gives the slightest color to Zurich's invocation of the "prior publication" exclusion is a certain vagueness in the misappropriation tort compared to copyright infringement. The copyright infringer copies an expressive work (or a significant part of it) that is "fixed in any tangible medium of expression," 17 U.S.C. § 102(a); Erickson v. Trinity Theatre, Inc., 13 F.3d 1061, 1071 (7th Cir.1994); Martha Graham School & Dance Foundation, Inc. v. Martha Graham Center of Contemporary Dance, Inc., 380 F.3d 624, 632 (2d Cir.2004), and that therefore has pretty definite metes and bounds....