Federal Ins. v. Symons

Filed 3/7/07 Federal Ins. v. Symons CA1/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

Symons Corporation (Symons) appeals from a summary judgment entered in favor of its insurers Federal Insurance Company, American International Surplus Lines Insurance Company, International Insurance Company, and Westchester Fire Insurance Company. The trial court concluded Symons was unable to demonstrate that damages awarded in an Iowa federal court action were awarded for an advertising injury covered by the insuring policies. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Symons sells and distributes heavy steel concrete-forming equipment. Royal Surplus Lines Insurance Company (Royal) was Symonss primary insurer under a commercial general liability policy. Federal Insurance Company (Federal), American International Surplus Lines Insurance Company (AISL), International Insurance Company (International), and Westchester Fire Insurance Company (Westchester; collectively hereafter the insurers) each provided Symons with excess and umbrella insurance coverage.

In 1996, Symons was sued by a competitor, EFCO Corporation (formerly known as Economy Forms Corporation; hereafter EFCO), in an Iowa federal district court. (EFCO Corp. v. Symons Corporation (S.D. Iowa, Civ. No. 4-96-CV-80552.) EFCO sought damages and injunctive relief against Symons for false advertising in violation of Section 43(a) of the Lanham Act (15 U.S.C.  1125(a)(1)(B)), misappropriating trade secrets in violation of Iowa state law, inducing a former EFCO employee to breach a fiduciary duty, and intentionally interfering with EFCOs contractual relations. The gist of the complaint was that Symons induced a former EFCO employee to disclose to Symons trade secrets belonging to EFCO. According to EFCO, Symons used this confidential information to develop, produce, market and sell a competing product. EFCO alleged that Symons by advertising and/or promotion of its products used words and false or misleading descriptions of fact and false or misleading representations of fact to misrepresent the nature, characteristics and/or qualities of its and, by comparison, EFCOs goods, services and/or commercial activities. EFCO specifically alleged that at various times [Symons] misrepresented the strength, weight and relative usefulness of its products in comparison to EFCOs products. Each of these misleading descriptions and misrepresentations violate[d] the provisions of [the Lanham Act].

A jury awarded EFCO compensatory damages of $13 million for Symonss false advertising in violation of the Lanham Act,[1] $12.3 million for Symonss misappropriation of five enumerated trade secrets,[2] and $200,000 for inducing a former EFCO employee to breach a fiduciary duty.[3] When it entered judgment, the district court eliminated any duplication in the award of compensatory damages based on the jurys special verdicts by awarding the aggregate sum of $13 million as compensatory damages. The district court denied EFCOs posttrial motion to increase the award. The court ruled that the jurys special verdict of $13,000,000 for EFCOs Lanham Act compensatory damages reache[d] the outer limit of what EFCO proved were its commercial injuries and damages on all its theories. EFCOs recovery would be excessive if the court added to the $13,000,000 Lanham Act compensatory damages any part of the compensatory damage verdicts returned by the jury on EFCOs other theories for recovery. The Eighth Circuit Court of Appeals affirmed the district courts rulings in all respects. (EFCO Corp. v. Symons Corp. (8th Cir. 2000) 219 F.3d 734, 738-744.) Following the entry of a final judgment by the Iowa district court, Symons paid the judgment.

In this case, the parties sought to resolve whether the insurers had a duty to indemnify Symons for the compensatory damages awarded under the Iowa judgment.[4] The parties filed competing motions for summary judgment and adjudication contesting whether the damages Symons was obligated to pay on account of the Iowa judgment were covered under the advertising injury clauses of the various insurance policies. The trial court entered summary judgment for the insurers, concluding Symons had failed to meet its burden of establishing that the damages awarded in the Iowa action were awarded for an advertising injury covered by the insuring policies. Symons now appeals from the judgment entered in favor of the insurers.[5]

DISCUSSION

In determining whether summary relief was properly granted to the insurers and denied to Symons, we review the trial courts decision de novo. (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 641.)[6] It was Symonss burden to establish the Iowa judgment was entered on a theory covered under the insuring policies. (See Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1114-1115 (Palmer); Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1188.) Symons failed to meet its burden.

Both the duty to indemnify and the duty to defend are in fact dependent on coveragethe former on actual coverage, the latter on at least potential coverage. (Buss v. Superior Court (1997) 16 Cal.4th 35, 47, fn. 10.) But, [t]he obligation to indemnity must be distinguished from the duty to defend. The duty to defend arises when there is a potential for indemnity. [Citations.] It may exist even when coverage is in doubt and ultimately is not established. [Citations.] The obligation to indemnify, on the other hand, arises when the insureds underlying liability is established. [Citations.] Although an insurer may have a duty to defend, it ultimately may have no obligation to indemnify, either because no damages were awarded in the underlying action against the insured, or because the actual judgment was for damages not covered under the policy. (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 659, fn. 9.)

The insurers agreed to indemnify Symons for damages it became legally obligated to pay for an advertising injury.[7] All the policies define an  Advertising Injury  to include: (1) [o]ral or written publication of material that . . . disparages a persons or organizations goods, products or services, or (2) [m]isappropriation of advertising ideas or style of doing business. The insurers did not undertake to insure against all of Symonss activities arising from the advertising or marketing of its products. Instead, indemnity was only required if Symons were held liable for damages arising from its publication of a disparaging statement of another persons or organizations goods, products, or services, or its misappropriation of advertising ideas or style of doing business in the course of advertising activities.

Symons argues the advertising injury provision provides indemnity for the Iowa judgment because the false advertising claim was based on statements disparaging of EFCOs products, and because Symonss misappropriation of marketing information, including EFCOs bottom line cost information, constituted the misappropriation of advertising ideas or style of doing business.[8]

But, in determining the insurers duty to indemnify, we do not look at the nature of Symonss conduct that caused the lawsuit. Instead, we evaluate whether the judgment  has been entered on a theory which is actually . . . covered by the policy.  (Palmer, supra, 21 Cal.4th at p. 1120 (italics added), quoting Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 803; see City of Laguna Beach v. Mead Reinsurance Corp. (1990) 226 Cal.App.3d 822, 829-830 (City of Laguna Beach); Rafeiro v. American Employers Ins. Co. (1970) 5 Cal.App.3d 799, 805 (Rafeiro).)

Section 43(a) of the Lanham Act (hereafter Section 43(a)), codified at 15 U.S.C. 1125, is a congressionally-created cause of action for false representation of goods in commerce. (See Alum-A-Fold Shutter Corp. v. Folding Shutter Corp. (5th Cir. 1971) 441 F.2d 556, 557, and cases cited therein.) Before its 1988 revision, Section 43(a) did not cover acts traditionally denominated as product disparagement or trade libel,  that is, it was construed to cover only misrepresentations that a defendant made about its own products and not misrepresentations concerning the products or services of a plaintiff competitor. (Gordon & Breach Science Publishers v. AIP (S.D.N.Y. 1994) 859 F.Supp. 1521, 1530.) However, the Lanham Act also extended to false comparative advertising, in which defendants allegedly made misrepresentations about both their own goods and those of competitors, asserting the comparative superiority of their own products over their competitors products. (Id. at p. 1531.) Under the 1988 amendments to Section 43(a), trade libel and product disparagement claims became actionable. This was accomplished by rephrasing the statute so that it include[d] not only misrepresentations about the nature of the defendants goods or services, but also misrepresentations about another persons goods, services, or commercial activities.  (Id. at p. 1530.)

The Iowa federal district courts instructions to the jury on the false advertising claim incorporated much of the current language of that portion of Section 43(a)[9] that provides the basis for what are generally known as false advertising, trade libel, and product disparagement claims. (Zenith Electronics Corp. v. Exzec, Inc. (Fed. Cir. 1999) 182 F.3d 1340, 1347-1348.) The jury was told that the Lanham Act provides a cause of action for a party who is damaged by [a]ny person who, on or in connection with any goods or services . . . uses in commerce any . . . false or misleading description of fact, or false or misleading representation of fact, which in commercial advertising or promotion, misrepresents the nature, characteristics, qualities . . . of his or her or another persons goods, services or commercial activities. []  In other words, the Lanham Act prohibits unfair competition through false or deceptive advertising. Additionally, the court instructed the jury that EFCOs claim for unfair competition and false advertising required proof of five common elements: 1. Symons made a false or misleading description or representation of fact about its own or an EFCO product in a commercial advertisement or promotion; [] 2. The statement actually deceived or has the tendency to deceive a substantial segment of its audience; [] 3. The deception is material, in that it is likely to influence the purchasing decision; [] 4. Symons caused its false or misleading statement to enter interstate commerce; and [] 5. EFCO has been injured or is likely to be injured as a result of the false or misleading statement, either by direct diversion of sales from EFCO to Symons, or by a loss of goodwill associated with its products. (Italics added; accord, Cook, Perkiss & Liehe v. N. Cal. Collection Serv. (9th Cir. 1990) 911 F.2d 242, 244.)

We are not persuaded by Symonss extensive argument that disparagement is inherent in the false advertising that was challenged by EFCO in the Iowa action. Not all negative comments about a competitors products or claims of product superiority constitute disparagement. (See Gillette Co. v. Norelco ConsumerProducts Co. (D. Mass. 1996) 946 F.Supp. 115, 128; Ragold, Inc. v. Ferrero, U.S.A., Inc. (N.D. Ill. 1980) 506 F.Supp. 117, 128.) In any event, Symonss argument misses the point. Section 43(a) is written in the disjunctive, i.e., it applies both to false or misleading statements about defendants own products and to false or misleading statements made by defendant about plaintiffs products. (15 U.S.C.  1125(a)(1)(B).) Thus, the Iowa jury was not required to predicate liability under the Lanham Act on the basis that Symons made statements disparaging EFCOs products. Instead, the jury could have predicated its verdict on a finding that Symons falsely represented its own products. That the jury might have or could have found Symons attributed undesirable characteristics to EFCOs products is irrelevant. (See City of Laguna Beach, supra, 226 Cal.App.3d at pp. 829-830; Rafeiro, supra, 5 Cal.App.3d at pp. 804-805, 809-810; see also Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1117 [an insured may not manufacture coverage by speculating about unpled third party claims].) It was Symonss burden to establish the Iowa judgment was entered on a theory actually covered by the policies. (Palmer, supra, 21 Cal.4th at p. 1120.) To meet that burden, Symons was required to show the damages payable under the Iowa judgment necessarily encompassed an award of damages for disparaging statements concerning EFCOs products. Having failed to meet its burden, Symonss argument for coverage on this basis fails.

Additionally, we agree with the trial court that nothing in the Iowa judgment regarding EFCOs claim for misappropriation of its trade secrets necessarily encompassed a finding by the jury that Symons misappropriated EFCOs advertising ideas or style of doing business. EFCO alleged Symons misappropriated five trade secrets. Four of them concerned product design or manufacture, and one concerned marketing information, including EFCOs bottom-line cost information. The jury found Symons misappropriated all five, but nothing in the verdict[10] or judgment infers a causal relationship between the misappropriation of any trade secret and Symonss advertising activity. The absence of this causal link defeats Symonss claim for coverage for the misappropriation of advertising ideas or style of doing business. (See Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1274-1276.)[11]

DISPOSITION

The judgment filed on January 5, 2004, is affirmed.

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Siggins, J.

We concur:

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McGuiness, P.J.

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Parrilli, J.

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[1] The jury was not asked to delineate the specific statements it relied on in reaching its verdict.

[2] The jury was instructed and specifically found that Symons had misappropriated trade secrets of EFCO concerning the design and development of certain EFCO products, and marketing information, including EFCOs bottom-line cost information.

[3] Although the jury also found Symons had intentionally interfered with EFCOs prospective business relationships and awarded EFCO compensatory damages of $9.7 million and punitive damages of $100,000 on that theory, the district court set aside the jurys finding and award of damages because there was insufficient evidence to support an award of damages on that theory. The jury also awarded EFCO $1.1 million in punitive damages on EFCOs claims for Symonss violations of the Lanham Act and inducing a former EFCO employee to breach a fiduciary duty, for which damages Symons does not seek indemnity.

[4] Royal settled its dispute with Symons but the policy issued by Royal is relevant to our discussion because its provisions were incorporated into the Federal policy.

[5] Although the judgment under review does not resolve Symonss claims against all named defendants in its cross-complaint, Symons may properly appeal from this judgment that is final as to its claims against the insurers. (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 182, fn. 2.)

[6] Consequently, we will not address Symonss arguments either challenging or relying on some of the trial courts statements in its decision.

[7]The International, Westchester, and Federal policies provide that the insurers shall pay those sums that the insured becomes legally obligated to pay as damages because of . . . advertising injury to which this coverage part applies. AISL agreed to pay compensatory damages (excluding all fines, penalties, punitive or exemplary damages) because of . . . Advertising Liability, caused by an occurrence to which this insurance applies, due to: [] 1) liability imposed upon the insured by law . . . . The quoted language from the AISL policy has been interpreted to mean the same thing as the quoted language in the other insurers policies. (See AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 814-815.)

[8] The Iowa judgment of $13 million represented an aggregate award of compensatory damages for false advertising, misappropriating trade secrets, and inducing a former EFCO employee to breach a fiduciary duty. Symons only seeks indemnity from AISL for damages payable for any false advertising, and indemnity from the other insurers for damages payable for any false advertising and misappropriating trade secrets. Symons does not seek indemnity for any damages payable for inducing a former EFCO employee to breach a fiduciary duty. Nor does it seek indemnity from AISL for damages payable for misappropriating trade secrets. Nevertheless, Symons asserts it is entitled to recover $13 million because the judgment represents damages payable only for its false advertising liability. Alternatively, Symons argues that if some allocation of the judgment is required, the matter should be remanded for trial. In light of our determination that the judgment was not entered on a theory covered under the insuring policies, we need not resolve whether Symons would be entitled to recover $13 million or any part thereof.

[9] Section 43(a) reads, in relevant part: (1) Any person who, on or in connection with any goods or services, . . . uses in commerce . . . any . . . false or misleading description of fact, or false or misleading misrepresentation of fact, which [] (B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities . . . of his or her or another persons goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. (15 U.S.C.  1125(a)(1)(B).)

[10] The Iowa jury was instructed that an owner of a trade secret is entitled to damages for the misappropriation [of the trade secret]. After enumerating the five trade secrets that EFCO asserted it owned, the jury was told that, In order for EFCO to succeed in its claim for damages for misappropriation of trade secrets against [Symons], EFCO must prove each of the following propositions: [] 1. EFCO owned one or more trade secrets; [] 2. The defendant whose case you are considering misappropriated one or more trade secrets; [] 3. The misappropriation of one or more trade secrets was a proximate cause of damage of EFCO; and [] 4. The nature and the extent of damage. The jury was also told that it must determine whether Symons . . . wrongful used or wrongfully disclosed the trade secret in question. [] A defendant who has acquired trade secret information by improper means has no right to use or to disclose the information in any way whatever. Thus, any use or disclosure by a defendant who had acquired a trade secret by improper means is wrongful.

[11] In light of our determination, we do not address Symonss other arguments.