Liability Insurer May Have to Cover Knockoff Jewelry Site for Allegedly Violating Reese Witherspoon’s Right of Publicity

kateHave you always wanted to own “The One Ring to Rule Them All” of Lord of the Rings fame?  Do you dream of an engagement ring just like Kate Middleton’s?  Your dreams can come true with a visit to Emitations.com, a website that sells costume jewelry, including imitations of celebrity baubles.  There you can search for “Middleton” and find several versions of the famous royal sapphire-and-diamond band, next to pictures of the Duchess herself wearing the real thing.  But… if you long for your very own copy of Reese Witherspoon’s engagement ring, you’re too late.

Emitations has apparently removed its replica of Witherspoon’s ring, or at least stopped referring to it by her name, since the celebrity sued the website’s parent company, Marketing Advantages International, in June 2013.  Witherspoon’s suit, pending in California state court, asserts claims of violation of right of publicity, violation of common law right of privacy, common law trademark/trade name infringement, common law trade dress infringement, and common law slogan infringement, arising from Emitations’s unauthorized use of her name and image to sell jewelry, in particular a knockoff of her engagement ring.

The Insurance Battle0620-reese-witherspoon-emitations-2

In response to the lawsuit, Marketing Advantages notified Maryland Casualty Company. Maryland had issued Marketing Advantages a Commercial General Liability insurance policy covering, among other things, “advertising injury” that Marketing Advantages might inflict on third parties.  Maryland agreed to pay Marketing Advantages’ defense costs in the Witherspoon suit, but reserved its right to dispute coverage. It then filed a declaratory judgment action against Marketing Advantages and Witherspoon, asserting that it had no duty under the policy to defend or indemnify Marketing Advantages.  Witherspoon and Marketing Advantages moved to dismiss or stay the insurer’s case on the ground that a federal court should abstain from deciding issues that are raised in a prior pending state action.  In an order issued in January, the federal court agreed, but decided to stay the action pending resolution of the underlying litigation, rather than dismiss it outright and subject the insurer to the risk of a potential time bar.

Exceptions and Exclusions

In arguing that its policy does not cover the Witherspoon suit, Maryland pointed to the policy’s intellectual property exclusion, which bars coverage for advertising injury “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.”  However, an exception to the exclusion provides that “this exclusion does not apply to infringement, in your ‘advertisement’ of copyright, trade dress, or slogan.”

The effect of this exclusion-and-exception is generally to clarify that the insurance is not intended to cover all claims of intellectual property infringement, but rather only those infringements that happen in the context of advertisements.  Due to the different list of harms in the exception and the exclusion, however, it can be argued that there is coverage for infringement in an advertisement of copyright, trade dress, or slogan, but not for infringement of other forms of intellectual property such as trademarks – which are listed in the exclusion but not in the exception – or, presumably, right of publicity.  While Witherspoon has not raised claims of copyright infringement, she has included counts of trade dress infringement and slogan infringement, which fall within the exception to the exclusion and would appear to invoke coverage.

A Claim by Any Other Name…

In California, however, the duty to defend is judged not simply by comparing the policy with the causes of action named in the complaint, but rather by looking at the alleged facts underlying the complaint (or otherwise known to the insurer).  Thus, Maryland argued that the court should recognize that Witherspoon’s complaint is in fact based exclusively on use of her name and image and does not properly sound in trade dress or slogan infringement.  Indeed, Maryland accused Witherspoon’s counsel of “deliberately mislabeling” her causes of action so as to shoehorn the claim into the policy’s coverage and avoid the application of California precedent holding that right of publicity claims are non-covered intellectual property claims.

Without directly addressing Maryland’s accusations of overly creative complaint-drafting, the federal court concluded that it was being asked to decide issues that should be left up to the state court in the first instance.  In particular, the court held that the coverage issue turned on whether Witherspoon had “stated a claim for infringement of trade dress or slogan.”

Although the opinion does not specify, presumably the court means that the question is whether Witherspoon has stated a claim sufficiently supported by factual allegations to survive a motion to dismiss.  Clearly, the question is not whether she stated the claims on the face of her Complaint – she unquestionably did.  Nor can the question be whether she has stated claims on which she will prevail, since the insurer’s duty to defend is based on claims brought, not ultimate liability.  Rather, as Maryland argued, coverage is judged based on whether the facts Witherspoon has alleged would support a covered claim, such that there is some possibility of Marketing Advantages being held liable for a covered injury.

The problem with this outcome, from Maryland’s perspective, is that it is not a party to the underlying litigation, and its policyholder, Marketing Advantages, has no incentive to bring a motion to dismiss two causes of action that, if successful, would deprive it of insurance coverage.  As articulated in its opposition to the motion to dismiss or stay, Maryland fears that it will have to choose between continuing to pay defense costs, and paying Witherspoon to settle the suit, without an opportunity to litigate the issue of coverage under the policy.

Meanwhile, fans can continue to buy jewelry “inspired by” other celebrities’ bling, though Emitations is careful to point out that the celebrities pictured on its site have not sponsored or endorsed its products.  Rather, Emitations.com claims that its use of the celebrity pictures and names is “for informational purposes only, in order to demonstrate the similarity of Emitations.com’s products with those worn by celebrities.”

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No Privilege for Claims Handling Documents

Insurance companies often utilize lawyers as claims handlers to determine whether there is coverage for a particular claim.  Because a lawyer was making the determination, insurers routinely take the position that any documents relating to that coverage determination are privileged. 

An intermediate appellate court in New York recently rejected that position.  In National Union Fire Insurance Company v. TransCanada Energy USA, the court held that an insurance company cannot insulate its claims handling function from discovery by having a lawyer act as a claims handler: 

Documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so ‘merely because [the] investigation was conducted by an attorney.’”

If an insurer undertakes its claims handling function in good faith, it cannot presume in advance that a claim will be denied such that it can say the claims handling evaluation was being done in anticipation of litigation.

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Whose Expectations Matter — Named Insured or Additional Insured?

In many instances, the interpretation of an insurance policy hinges on the expectation of the policyholder.  For example, many definitions of “occurrence” require property damage that was neither intended nor expected from the perspective of the policyholder.  Where there is an Additional Insured, however, an issue arises whether the expectation to be considered is that of the Named Insured or that of the Additional Insured.  This issue recently arose in a California case,  Transport Insurance Company v. R.R. Street & Co.  with the court holding that the expectations that governed coverage were those of the Additional Insured when it is the Additional Insured that was the party claiming coverage.

 The Transport Insurance case arose out of serial claims for coverage first by a parent corporation and then by its subsidiary with respect to an underlying environmental claim.  The parent had litigated to conclusion its claims against its insurers.  The subsidiary, which was an additional insured under the parent’s policies, then sought to obtain defense from one of the excess insurers.  That excess insurer argued that there was no duty to defend because there had not been exhaustion of the underlying policies.  According to the excess insurer, the subsidiary was barred by collateral estoppel from contending that there had been exhaustion of the underlying policies because this issue had been decided in the earlier litigation brought by the parent.

The court rejected the collateral estoppel argument.  As the court explained, the term “underlying policies”  was ambiguous since it was unclear if that term referred to all underlying policies in effect or only the underlying policies that had been expressly identified in an attached schedule.  In the first litigation, that ambiguity had been resolved by looking to the reasonable expectations of the parent as to what the underlying policies were.  The court then went on to note that the reasonable expectations of the subsididary might be different:  

We hold that for purposes of determining whether an additional insured to an excess and umbrella general liability insurance policy is entitled to a defense by the insurer, the reasonable expectations of the additional insured may be different than the reasonable expectations of the named insured.

In pursuing coverage, an Additional Insured should not allow the insurer to saddle it with the Named Insured’s expectations.

 

 

Coverage for Corporate Liability in Delaware Is Forever

Ever since the Supreme Court’s decision in Citizen’s United, an effort has been made to humanize corporations, culminating in Mitt Romney’s infamous pronouncement that “Corporations are people my friend.”  Now it turns out that corporations may not be entirely like people.  In a recent decision, the Delaware Court of Chancery in In the Matter of Krafft-Murphy Company, Inc. ruled that corporations are in at least one respect immortal in that their liability to third parties lives forever. 

In Krafft-Murphy, asbestos claimants sought to reach the unexhausted liability insurance of a dissolved corporation long after the expiration of the Delaware three year wind-down period.  The corporation, defended by its liability insurers, appeared for the purpose of establishing that it was indeed dead and could not respond to new claims.  Although the trial court agreed that a dissolved corporation was dead to new claims, the Court of Chancery reversed.  Despite acknowledging that the corporation had been dissolved, the court went on to say that there was no statute of limitations in Delaware that extinguished the corporation’s liability – which apparently will continue forever.  Upon the appointment of a receiver, the dissolved corporation could be resurrected for the limited purpose of responding to the suit and potentially distributing the proceeds of the corporation’s  insurance if the claimants in the suit prevail.  

Given that many corporations are organized under Delaware law, the Krafft-Murphy decision may provide a route to gain access to the insurance of long-dissolved corporations.

Insurer Communications with Reinsurers As A Source of Factual Admissions in Coverage Litigation

In coverage litigation, policyholders can often find valuable factual admissions in an insurer’s communications with its reinsurers.  Yesterday’s New York Times reported on a case that provides a good example.  There, the owner of $15 million in commercial properties discovered that someone he had done business with had somehow been able to take out mortgages on those properties by forging the loan documents with the owner’s name.  The owner found out about the mortgages when the lenders began foreclosure proceedings. 

The lenders and the owner sought to have the falsified loans paid off by the title insurer, Stewart Title,  whose policy covered not only defects in title but also forged loan documents.  Stewart Title  declined to pay off twelve of the fifteen mortgages in part on the argument that the insurance was issued by an agent who was not authorized by Stewart.  It turned out, however, that Stewart Title was taking exactly the opposite position in a suit it brought against its reinsurers to recover on these same claims.  In that reinsurance litigation, Stewart Title contended that the agent had been fully authorized to issue the title insurance.   

While it is permissible for litigants to assert alternative legal positions, it seems dubious that litigants can properly take inconsistent factual positions.   Given that it is often the case that an insurer has exactly the opposite  interest with its reinsurers than it has with the policyholder, it is sometimes the case that an insurer will take different factual positions with its reinsurers than with its policyholders.  It is for that reason that policyholders in coverage disputes should be mindful that an insurers communications with its reinsurers may provide a source of valuable factual admissions.

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Is The Absolute Pollution Exclusion Absolute? It Depends On Which State Answers the Question

The battle over the scope of the absolute pollution exclusion in general liability policies continues to be fought in the context of defective drywall manufactured in China.  An earlier blog entry discussed a Virginia court that had concluded that there was no coverage for defective drywall claims, rejecting decisions from a number of states that had ruled that the absolute pollution exclusion should be limited to industrial pollution claims, particularly Superfund claims.

In Probuild Holdings, Inc. v. Travelers Property Casualty Company of America, a Colorado court relying on Massachusetts and Florida law recently took the other side from the Virginia court.  The Colorado court denied a summary judgment motion by an insurer in a defective drywall claim.  Citing the Massachusetts case that suggested that the absolute pollution exclusion should be limited to industrial pollution claims, particularly Superfund claims, and not defective product claims involving residential properties, the court concluded that the meaning of the exclusion was at best ambiguous and ambiguity would typically be construed against the insurer.  Although suggesting that the policyholder appeared at summary judgment to have the stronger position, the Colorado court left for trial the final resolution.

For the moment at least, the scope of the absolute pollution exclusion depends on which jurisdiction’s law applies.