False Advertising Claims Trigger Coverage or a Competitor Initiates Suit Under Advertising Injury Coverage
Two distinct decisions, one applying North Carolina the other Illinois law, both found false advertising claims fell within standard advertising injury coverage where initiated by competitors.
Granutec, Inc. v. St. Paul Fire & Marine Ins. Co., No. 5:96-CV-489-BO(2), 2008 WL 312146 (E.D.N.C. Jan. 16, 2008)
Granutec, Inc. (“Granutec”) is a North Carolina corporation that manufactures and sells generic, over-the-counter (“OTC”), pharmaceutical products. Following an initial agreement with Johnson & Johnson in 1989 to employ a color scheme for generic caplets different from that of the Tylenol Gelcaps, in February 1994 Granutec changed the color scheme to mimic the Tylenol Gelcaps. This conduct precipitated a suit against it for Lanham Act claims under 15 U.S.C. § 1125(a) and 43(a)(2) for false and deceptive advertising, as well as trademark trade/trade dress infringement.
Following issuance of a preliminary injunction against Granutec on December 21, 1995, Granutec agreed to market its OTC product in a color scheme that was conspicuously different from that used by McNeil, a Johnson & Johnson subsidiary, after incurring $500,000.00 in defense fees. Two policy forms were in effect from June 30, 1994 to July 31, 1994, a 1986 ISO form covering as “advertising injury” “misappropriation of advertising ideas or style of doing business”, and from August 1, 1994 to August 1, 1995, a St. Paul variant of an ISO 2001 policy form covering as “advertising injury” “unauthorized taking or use of any advertising material, slogan or title of others” the later policy included intellectual property exclusion.
Focusing on the express unfair competition claim pursuant to NCGS § 75-1.1 et seq., which prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce,” the court found a defense owed. It noted under the earlier 1986 ISO policy issued by Aetna:
Id. at *4-8.
The court found the causal nexus to advertising readily satisfied because the advertising content of the color scheme change was the basis for asserted liability. St. Paul was also held to have a duty to defend since there were distinct unfair competition allegations outside the scope of the intellectual property exclusion and the term “unauthorized taking or use of any advertising material” was deemed to be synonymous with misappropriation and advertising material to encompass ideas as well as tangible marketing tools.
Greenwich Ins. Co. v. RPS Products, Inc., 882 N.E.2d 1202 (Ill. App. Ct. (1st Dist.) 2008)
The underlying suit asserted claims for patent and trademark infringement as well as unfair competition. At issue was alleged infringement of the Holmes patent for its “HAPG 600 Harmony Air Filter.” An amended complaint tendered after denial by the carrier under a patent infringement exclusion asserted false advertising claims, to wit, the pertinent allegations assert in paragraph 9 that
The label on the H600 Replacement Filter box prominently displays the claim that it ‘Fits Holmes®,’ and lists the following Holmes® Harmony® Air Purifier Models: HAP 615, 625, 650, 675, 675RC. This designation is literally false because the RPS Replacement Filters do not meet Holmes performance standards, a high proportion of the RPS Replacement Filters are defectively manufactured and, when the RPS Replacement Filters are placed in one of the Holmes machines that they purportedly ‘fit’, the RPS filter will not allow the door to close.
Id. at 1204. It is further alleged in paragraph 13 that the replacement filter “substantially and materially underperforms.” Id.
The court quickly rejected the argument that a patent is property and the infringement of the patent is “damaging.” The court pointed out that property damage is defined in the Greenwich policy as “physical injury to tangible property, including all resulting loss of use of that property . . . .” A patent right encompasses intangible, incorporeal rights, not tangible property. Newark Morning Ledger Co. v. United States, 507 U.S. 546, 556, 123 L.Ed.2d 288, 300, 113 S.Ct. 1670, 1676 (1993).
Looking to the causal nexus sufficient to meet the requirement that the advertising of infringing products falls within the definition of advertising injury as contained in the Greenwich policy, the court noted:
The advertisement must instruct or explain to the purchaser exactly how to recreate or reassemble the product into one that infringes a patent. Count I of Holmes’ amended complaint (that RPS manufactured and sold allegedly infringing products) does not allege that RPS provided any detailed instructions to its customer on how to infringe the patent. RPS’ argument is, therefore, unpersuasive.
Id. at 1209 (citation omitted).
The court also found the patent infringement exclusion applicable to bar a defense in any event.
The court found the absence of the term “unfair competition” within the 1998 ISO policy language problematic. Neither disparagement nor trade dress infringement were specifically asserted in the court’s view. The court noted that trademark infringement is expressly excluded from the policy and therefore that count cannot trigger a defense as well. The court found that it was not problematic that the policy excluded trademark advertising injuries, yet covered trade dress advertising injuries. The court reasoned
The answer to RPS’ inquiry lies in the fact that trade dress infringement and trademark infringement are two different causes of action. See Schwinn Bicycle Co. v. Ross Bicycles, Inc., 870 F.2d 1176, 1182 (7th Cir.1989) (“[a] product’s trade dress is the overall image used to present it to its purchasers * * *. [Citation.] A trademark is thought of as something more specific, such as a logo” (emphasis in original )). We therefore find RPS’ argument unpersuasive.
Id. at 1212.
Notably, the court did not explain what coverage the trademark infringement might fall within, though it seems conceivable that the “use of another’s advertising idea in your ‘advertisement’ ” offense might have been contemplated. However, the court does not make its analysis on this point clear. Indeed, for a court of appeal decision it is remarkably inarticulate about the basis for its analysis. The court also fails to look at fact allegations that might underlay both the trade dress and trademark claims, as well as other case authority finding trademark claims readily covered, applying Illinois law under the very policy language at issue herein, to wit: Central Mut. Ins. Co. v. StunFence, Inc., 292 F. Supp. 2d 1072 (N.D. Ill. 2003).
