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Clear & Unambiguous Exclusion Effective



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IN State Farm Fire And Casualty Company v. Jason Hines, Individually Doing Business As Dedicated Business Systems International LLC; Dedicated Business Systems International, LLC; Tri-State Communication Services LLC, doing business as US Voice and Data, LLC Jason Hines; Dedicated Business Systems International, LLCNo. 21-2354, United States Court of Appeals, Third Circuit (October 14, 2022), an insurer was found to have no duty to defend due to a trademark infringement exclusion.

ACTUAL BACKGROUND

An insurance coverage dispute arose regarding the extent of two commercial liability policies. The policies covered advertising damages arising from infringement of another’s trade dressbut they exclude damages arising from trademark violation.

When the insured was sued for trademark infringement, the insurer initially agreed to defend the insured with reservations. After completing its investigation, State Farm applied for leave to withdraw from this representation. The insurer sued and sought declaratory judgment, and the district court granted summary judgment in its favor: the policies’ coverage of the dress infringement claim did not extend to the trademark infringement claim.

The insurance conditions

The two commercial policies in question were issued by State Farm. In 2013, both policies used the same language to provide coverage for “personal and advertising injury.” That coverage included the duty to defend against suits arising out of infringement “of another’s copyright, trade dress or tagline in your “ad.” (my italics). But that advertising damage coverage excluded claims”[a]arises from infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” (my italics). Under both policies, that exception did not apply to infringement of an advertisement “of copyright, trade dress or slogan.” (my italics).

Dedicated Business Systems International (“DBSI”) purchased these policies from State Farm for itself and its officers while conducting DBSI business.

The underlying lawsuit

For some time, DBSI was an authorized reseller of Avaya communication technology. The arrangement with authorized resellers ended in 2013, but DBSI and one of its officials allegedly continued to access Avaya’s software licensing portals afterwards – without Avaya’s permission. By doing so, they allegedly were able to distribute pirated licenses to customers for a handsome profit, while using Avaya’s trade name and trademarks to falsely represent that the software was “valid and authorized by Avaya.”

Avaya believed that DBSI was engaged in a “massive illegal software piracy” and sued DBSI and its official. Avaya’s eight complaints included federal claims of trademark infringement and copyright infringement. In response, State Farm sent a letter to DBSI and the officer informing them that it had appointed counsel to defend them in the Avaya lawsuit, but that letter reserved State Farm’s right to withdraw if it determined that the claims were outside the policies’ extent .

Pursuant to this reservation of rights, State Farm moved for a judgment declaring it need not defend or indemnify DBSI and its officer in the Avaya lawsuit, moved for summary judgment, and the motion was granted. DBSI appealed.

DISCUSSION

Because neither policy specifically defines the two critical terms – “trade dress” infringement and “trademark” infringement, the Third Circuit held that the concepts of trademark and trade dress have much in common, with trade dress often the case. treated as a subspecies of brand. The case was not about trade dress in the abstract; it concerned insurance policies that exclude claims for trademark infringement and coverage claims for trespassing in clothing.

Claims of trademark infringement and trademark infringement have different elements.

First: A trademark infringement claim has three parts:

  1. a valid and legally protectable mark;
  2. owned by the claimant;
  3. which, when used by the defendant to identify goods or services, is likely to create confusion as to the origin of the goods or services.

Second: A claim of dress infringement requires an articulation of the specific features of the distinctive dress sought to be protected followed by proof that an infringing design does not work; distinctive, either intrinsically or by secondary meaning; and likely to confuse consumers.

In order for State Farm to have a duty to defend the Avaya suit against DBSI and its officer, Avaya’s operative complaint must potentially include a claim for trade dress infringement. But it doesn’t.

The operative complaint never mentions “trade dress.” Nor does it provide any basis for reasonably inferring such a claim. It does not contain the requisite description of the particular characteristics of a trade dress which it seeks to protect.

Avaya’s complaint lacked allegations necessary for a professional suit, and the district court did not err in applying New Jersey law to conclude that State Farm was not required to defend DBSI and its officer in the Avaya litigation.

The district court’s judgment was therefore upheld.

Trademark infringement is the type of lawsuit that is often contentious and expensive to defend. Insurance companies, such as State Farm, prefer to avoid such actions and exclude defenses or remedies for trademark infringement. On the other hand, infringement of dress code, putting out a product with a label that looks almost exactly like someone else’s – a Rolex watch is not a Bolex that looks like a Rolex but isn’t the same; a Mont Blanc pencil is not the same as a Mont Blank pencil even if it has a snow cap.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com. Subscribe and receive videos limited to Excellence in Claims Handling subscribers at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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