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Court considers duty to defend

Bablitch

"Isn’t advertising implicit in this? If they have the product, but no one knows they have the product, there’s going to be no injury. Somehow, word has to get out to the public through some form of advertising."

Hon. William A. Bablitch
Wisconsin Supreme Court

Following oral arguments last week, the state Supreme Court is considering whether an insurance company had a duty to pay for defense of a Milwaukee manufacturer in a case alleging misappropriation of trade secrets.

The policy, issued to Bradley Corporation by Fireman’s Fund Ins. Co. of Wisconsin, included coverage to defend against allegations of advertising injuries. Bradley maintained that a lengthy lawsuit, which Lawler Manufacturing Corp. Inc. filed against it, included elements that met the definition of advertising injuries. Fireman’s argued that nothing within the 26-page, 128-paragraph pleading specifically stated an advertising injury claim.

Thomas L. Shriner Jr., of Foley & Lardner, represented Bradley Corporation in its appeal of a Wisconsin Court of Appeals decision, which found Fireman’s did not have a duty to defend Bradley. Shriner told the high court that although Lawler’s complaint did not specifically mention injuries from advertising, it did make claims to activities that fell into that category.

"In these insurance coverage and duty to defend cases, we sometimes find ourselves awash in a welter of words – words in the insurance policy versus words in the complaint," Shriner told the justices.

William P. Croke, of Quale, Feld-bruegge, Calvelli, Thom & Croke SC in Milwaukee, represented Fireman’s. Croke also indicated the need to compare the language of the complaint with that of the insurance policy. In this case, he said, the complaint does not specifically state a claim that would be covered by the Fireman’s policy.

"The rule is – look at the words of the complaint," Croke explained. "Let’s not look at what might have been pled. Let’s look at what was pled. There are certain things that were not included in the complaint."

He observed that the complaint never referred to trademark or trade dress, which would have fallen into the category of advertising.

Background

The case began in December 1998 when Lawler sued competitor Bradley in federal court in Indiana. Lawler claimed a breach of fiduciary duty, misappropriation of trade secrets, unjust enrichment, diversion of corporate opportunities, conversion, negligence, unfair competition and patent infringement.

Lawler alleged Bradley obtained key information when it hired former Lawler employee Kevin Kline, who allegedly had detailed information regarding Lawler’s strategic plans, sales reports and strategies, pricing margins, new product development and more. Lawler contended that Bradley used that information to develop a thermostatic mixing valve, which Bradley promoted at a trade show and in brochures.

In March 2000, Bradley notified Fire-man’s of the lawsuit and the insurer denied the claim. Fireman’s indicated that none of the allegations in Lawler’s complaint were covered under the four policies issued to Bradley. In August 2000, Fireman’s sought declaratory judgment in Milwaukee Circuit Court, stating that it had no duty to indemnify Bradley. Both parties filed motions for summary judgment; the court granted Bradley’s. The trial court ordered Fireman’s to pay Bradley $2.89 million for defense and indemnification costs.

Fireman’s appealed and the District I Court of Appeals reversed, determining that Fireman’s did not have a duty to indemnify Bradley based on Lawler’s trade secret misappropriation claim or Lawler’s Lanham Act claim.

Judge Patricia S. Curley, writing on behalf of the court, stated, "We conclude that the alleged harm was caused by the misappropriation of the trade secrets, not by the advertising itself, and, therefore, Bradley fails to satisfy the requirement that the injury be caused by an offense committed in the course of advertising its good or products."

Regarding the Lanham Act claim Curley wrote, "We conclude that although the complaint sets forth a claim for unfair competition, the claim is based on the theft of trade secrets rather than trademark or trade dress infringement."

The court of appeals found that there was no "satisfactory c
ausal connection" between any Bradley advertising and the injuries being alleged.

Bradley’s Appeal

While addressing the Supreme Court, Shriner acknowledged that the Lawler complaint was very lengthy and included many claims that were not advertising injury. However, elements of it did relate to advertising. At one point, he said, the complaint referred to display of the systems at a trade show and in promotional materials – acts that can only be viewed as advertising.

Shriner also pointed to claims brought "under the Lanham Act, which is where one finds trademark infringement and the use of false information in advertising." The lawsuit makes claims about the loss of business opportunity resulting from Bradley’s alleged actions.

"Properly understood, this really does say, ‘You stole information from us and you conveyed it to people in a way – in an advertising sort of way – in order to further the sale of your good, products or services,’" Shriner said.

Despite the ambiguities, Shriner noted that the court has been deferential to the insured when gray areas of coverage have arisen. At least initially, Fireman’s should have fulfilled a duty to defend, he said.

"Because the decision to defend against a lawsuit comes at the beginning, you can’t let it go by default then find out what it was about later on," Shriner said. "Our law has long held and this court has long held that you look to the language of the complaint to determine whether there is a duty to defend against the lawsuit."

He acknowledged that advertising in-jury is a "theory-based coverage" which makes it more difficult to intuit when coverage exists. In this case, when the issue of whether an advertising injury claim would stand was unclear, the insurer had an initial duty to defend until a determination could be made one way or the other, he said.

"It may be at the end of the day that the claim is dismissed, so the insurance company has no duty to indemnify," Shriner said. "But it has a duty until it is clear that there are in fact no indemnified claims to defend the action."

Fireman’s Response

Croke noted Lawler’s complaint focused not on advertising, but on the misappropriation of trade secrets, technology and designs, sales reports, strategic plans, pricing margins, distribution costs, new product development and personnel information. Because of that, the advertising injury defense element of the policy did not come into effect.

"None of those things have anything to do with trade dress or even advertising," Croke said. "All of these items are about how they go about competing in the market."

Several justices questioned the alleged harm caused by dissemination of information about the system that Bradley was to have misappropriated.

Justice Diane S. Sykes pointed to display of the products at a trade show and in promotional materials. She also referenced the Lanham Act claim as a possible advertising issue.

"How is this not an advertising injury?" Sykes asked.

Croke pointed to newspaper and television advertising as clear examples of things that could lead to advertising injury. Sykes challenged the limited nature of that definition.

"There is no allegation in here that they were injured in the course of advertising the goods," Croke said.

The issue in this case is the allegation of stealing the information, he said.

Justice William A. Bablitch also questioned the idea that advertising was not implied as an element within the complaint.

"Isn’t advertising implicit in this?" Bablitch asked. "If they have the product, but no one knows they have the product, there’s going to be no injury. Somehow, word has to get out to the public through some form of advertising.

Links

Wisconsin Supreme Court

R
elated Article

Oral Argument

"Isn’t there always a causal connection between advertising and the injury?"

Croke rejected that notion.

"There can’t always be a causal connection," he responded. "There’s plenty of case law where the court held there is no causal connection."

If the causal connection were implicit, Croke said, then the court would rule that as a matter of law and it would never be an issue of fact.

Croke noted that the court should not be substituting words into the complaint to find that there was coverage. In this case, Lawler had 128 paragraphs in which to assert an advertising claim, but it did not, he said.

The court is expected to release its decision by the end of June. The case is 01-2432, Fireman’s Fund Ins. Co. v. Bradley Corp., et al.

Tony Anderson can be reached by email.

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