SPANDEX HOUSE, INC., Plaintiff, -against- HARTFORD FIRE INSURANCE COMPANY and HARTFORD CASUALTY INSURANCE COMPANY, Defendants.
18-CV-8367 (VEC)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
8/26/2019
VALERIE CAPRONI, United States District Judge
OPINION AND ORDER; USDC SDNY DOCUMENT ELECTRONICALLY FILED DOC #: DATE FILED: 8/26/2019
Plaintiff Spandex House, Inc. (“Spandex House“) has sued its insurers, Hartford Fire Insurance Company and Hartford Casualty Insurance Company (collectively, “Hartford“), for breach of contract and for a declaratory judgment. See Compl., Dkt. 6. Spandex House alleges that Hartford has a duty to defend and indemnify it against claims asserted by a third party, Rex Fabrics, in an action for copyright infringement, Rex Fabrics v. Spandex House, Inc., No. 1:17-CV-4736-SHS (S.D.N.Y.) (the “Rex Fabrics Action” or the “Action“). The parties have cross-moved for summary judgment, pursuant to
For the following reasons, Hartford‘s motion for summary judgment is GRANTED. Spandex House‘s motion for summary judgment is DENIED. This case is DISMISSED. The Court enters this ruling, however, without prejudice to Spandex House moving, in a letter-brief of no more than five pages, to reopen this case should circumstances in the Rex Fabrics Action change in such a way that a reasonable possibility of coverage of that Action arises.
I. Hartford‘s Insurance Coverage
Hartford provides commercial general liability insurance to Spandex House. See Defs.’ 56.1 Stmt. ¶ 9; Pl.‘s 56.1 Stmt. ¶ 9. As relevant here, the parties’ insurance agreement provides coverage for “personal and advertising injury” as follows (the “General Coverage Provision“):
We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “personal and advertising injury” to which this insurance does not apply. We may, at our discretion, investigate any offense and settle any claim or “suit” that may result.
Compl. Ex. A at 167; see also Defs.’ 56.1 Stmt. ¶ 12; Pl.‘s 56.1 Stmt. ¶ 12. The policy defines “[p]ersonal and advertising injury,” in relevant part, as “injury . . . arising out of“:
- Copying, in your “advertisement“, a person‘s or organization‘s “advertising idea” or style of “advertisement“; [or]
- Infringement of copyright, slogan, or title of any literary or artistic work, in your “advertisement.”
Compl. Ex. A at 179; Defs.’ 56.1 Stmt. ¶ 13; Pl.‘s 56.1 Stmt. ¶ 13.2
These coverage provisions are subject to a number of exclusions. See Defs.’ 56.1 Stmt. ¶ 22; Pl.‘s 56.1 Stmt. ¶ 22. As relevant here, the policy contains a provision generally excluding coverage for allegations of infringement of intellectuаl-property rights (the “IP Exclusion“). The IP
- Infringement Of Intellectual Property Rights
- “Personal and advertising injury” arising out of any actual or alleged infringement or violation of any intellectual property right, such as copyright, patent, trademark, trade name, trade secret, service mark or other designation of origin or authenticity; or
- Any injury or damage alleged in any claim or “suit” that also alleges an infringement or violation of any intellectual property right, whether such allegation of infringement or violation is made by you or by any other party involved in the claim or “suit“, regardless of whether this insurance would otherwise apply.
Compl. Ex. A at 161; see also Defs.’ 56.1 Stmt. ¶¶ 25, 56-57; Pl.‘s 56.1 Stmt. ¶¶ 25, 56-57. The IP Exclusion is, however, subject to an exception (the “Advertising Exception“), which states:
[The IP Exclusion] does not apply if the only allegation in the claim or “suit” involving any intellectual property right is limited to:
- Infringement, in your “advertisement“, of:
- Copyright;
- Slogan; or
- Title of any literary or artistic work; or
- Copying, in your “advertisement“, a person‘s or organization‘s “advertising idea” or style of “advertisement“.
Compl. Ex. A at 161; see also Defs.’ 56.1 Stmt. ¶ 28; Pl.‘s 56.1 Stmt. ¶ 28.3
II. The Rex Fabrics Action
In December 2016, Rex Fabrics, a fabric wholesaler based in California, sued Spandеx House for copyright infringement. See Schurin Decl. Ex. E; Defs.’ 56.1 Stmt. ¶¶ 3-4, 40-41; Pl.‘s 56.1 Stmt. ¶¶ 3-4, 40-41.4 In its Complaint, Rex Fabrics alleged that Spandex House and certain unnamed co-Defendants illicitly “created, sold, manufactured, caused to be manufactured, imported and/or distributed” fabrics and garments identical to five of Rex Fabrics‘s designs. Schurin Decl. Ex. E ¶¶ 13, 19, 25, 30, 35; see also Defs.’ 56.1 Stmt. ¶¶ 5-8;
In February 2017, Spandex House tendered to Hartford a claim for the defense and indemnification of the Rex Fabrics Action. See Defs.’ 56.1 Stmt. ¶ 46; Pl.‘s 56.1 Stmt. ¶ 46. Hartford denied coverage because, in its view, the allegations in the Rex Fabrics Action fall within the IP Exclusion and do not fall within the Advertising Exception. See Defs.’ 56.1 Stmt. ¶ 55; Pl.‘s 56.1 Stmt. ¶ 55.
DISCUSSION
I. Standard of Review
Summary judgment is appropriate when “the movant shows that there is no gеnuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
II. The Applicable Law
The parties agree that New York law applies to this case. See Defs.’ Mem. of Law at 6; Pl.‘s Mem. of Law at 8-9. Under New York law, “[i]nsurance policies are, in essence, creatures of contract, and, accordingly, subject to principles of contract interpretation.” In re Estates of Covert, 97 N.Y.2d 68, 76 (2001); see also Lepore v. Hartford Fire Ins. Co., 374 F. Supp. 3d 334, 343 (S.D.N.Y. 2019). The interpretation of a contract “is a matter of law for the court to decide.” Int‘l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002). As the Second Circuit has explained:
In determining a motion for summary judgment involving the construction of contractual language, a court should accord that language its plain meaning giving due consideration to the surrounding circumstanсes and apparent purpose which the parties sought to accomplish. Where contractual language is ambiguous and subject to varying reasonable interpretations, intent becomes an issue of fact and summary judgment is inappropriate. The mere assertion of an ambiguity does not suffice to make an issue of fact. Ambiguity resides in a writing when—after it is viewed objectively—more than one meaning may reasonably be ascribed to the language used. Only where the language is unambiguous may the district court construe it as a matter of law and grant summary judgment accordingly.
Palmieri v. Allstate Ins. Co., 445 F.3d 179, 187 (2d Cir. 2006) (quoting Thompson v. Gjivoje, 896 F.2d 716, 721 (2d Cir. 1990)). Any ambiguity in an insurance contract is construed against the insurer. Ment Bros. Iron Works Co. v. Interstate Fire & Cas. Co., 702 F.3d 118, 124 (2d Cir. 2012) (citing Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 383 (2003)).
An insurer has a duty to defend its insured against a third party‘s claims “whenever the allegations in [the third party‘s] complaint state a cause of action that gives rise to the reasonable possibility of recovery under the policy.” Fieldston Prop. Owners Ass‘n, Inc. v. Hermitage Ins. Co., 16 N.Y.3d 257, 264 (2011). “[W]hatever may later prove to be the limits of the insurer‘s
responsibility to pay,” Hugo Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608, 620 (2d Cir. 2001), the insurer has a duty to defend against claims if there is any “possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured],” Allianz Ins. Co. v. Lerner, 416 F.3d 109, 115 (2d Cir. 2005) (emphasis added); see also Century 21, Inc. v. Diamond State Ins. Co., 442 F.3d 79, 82 (2d Cir. 2006); Auto. Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 137 (2006). In other words, the duty to defend is broader than the duty to indemnify: the duty to indemnify arises only when a third party‘s claim actually lies within a policy‘s coverage, but the duty to defend arises so long as the action could potentially give rise to a covered claim. See Century 21, 442 F.3d at 82; Fieldston, 16 N.Y.3d at 264-65; Allianz, 416 F.3d at 115.
An insurer has a duty to defend against actions that contain both covered and non-covered allegations; this principle is referred to as the “entire action” rule. See Fieldston, 16 N.Y.3d at 264-65. Consistent with this rule, if any claims in the underlying litigation are arguably or potentially covered, “the insurer is required to defend the entire action,” including both the arguably covered claims and the indisputably non-covered claims. Id. (citing Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 N.Y.2d 435, 443 (2002); Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997)); see also High Point Design, LLC v. LM Ins. Corp., 911 F.3d 89, 95 (2d Cir. 2018).
Nevertheless, “unsubstantiated speculation” about facts that may be alleged or adduced in the underlying litigation does not trigger a duty to defend. RSUI Indem. Co. v. RCG Grp. (USA), 890 F. Supp. 2d 315, 331 (S.D.N.Y. 2012), aff‘d, 539 F. App‘x 3 (2d Cir. 2013); see also Stamford Wallpaper Co. v. TIG Ins., 138 F.3d 75, 81 (2d Cir. 1998); Transportation Ins. Co. v. Hugo Neu & Sons, Inc., 233 A.D.2d 234, 234 (1st Dep‘t 1996); Barry R. Ostrager & Thomas R.
Newman, 1 Handbook on Ins. Coverage Disputes § 5.03[a] at 363 (19th ed. 2019). Moreover, the duty to defend cannot be imposed “through a strained, implausible reading of the complaint that is linguistically conceivable but tortured and unreasonable.” Century 21, 442 F.3d at 83 (internal quotation marks omitted). Rather, the duty to defend is triggered only if there is a “reasonable possibility of recovery” under the policy. Fieldston, 16 N.Y.3d at 264 (emphasis added).
In determining whether there is a duty to defend, a court must compare the terms of the insurance policy to the allegations
The policyholder bears the initial burden of showing that the insurance policy covers the claims at issue. Morgan Stanley Grp. Inc. v. New England Ins. Co., 225 F.3d 270, 276 (2d Cir. 2000). Once that burden is met, the burden shifts to the insurer to show that an
exclusion to the policy applies. Ment Bros., 702 F.3d at 121. If the insurer establishes the applicability of an exclusion, the burden shifts back to the policyholder to show that an exception to the exclusion applies and, therefore, that the disputed claims are covered. Id. at 121-22.
III. Hartford‘s Policy Does Not Cover the Rex Fabrics Action
The parties agree, for purposes of this motion, that the Rex Fabrics Action falls under the General Coverage Provisiоn, because the Action is a “suit” seeking damages for “personal and advertising injury.” See Defs.’ Mem. of Law at 1, 9; Pl.‘s Mem. of Law at 2-3.6 The parties disagree over whether the Action falls within the IP Exclusion and the Advertising Exception.
A. The IP Exclusion Applies to the Rex Fabrics Action
1. The IP Exclusion Is Unambiguous
The Court begins its analysis by considering each paragraph of the IP Exclusion. The first paragraph bars coverage for personal and advertising injury “arising out of” allegations of infringement of intellectual-property rights. Compl. Ex. A at 161. Spandex House does not argue that this language is ambiguous, and courts have held that exclusions containing similar language are unambiguous as a matter of law. See Mount Vernon Fire Ins. Co. v. Creative Hous. Ltd., 88 N.Y.2d 347, 351 (1996); Darwin Nat. Assur. Co. v. Westport Ins. Corp., No. 13-CV-2076, 2015 WL 1475887, at *12 (E.D.N.Y. Mar. 31, 2015) (collecting cases). The Court agrees with the reasoning of those cases.
The second paragraph is also unambiguous. It states that Hartford‘s insurance does not cover any damages alleged in
infringement of an intellectual-property right, whether alleged by the insured “or by any other party,” the entire “suit” is excluded from coverage, “regardless of whether [the] insurance would otherwise apply.” Id. While broad, this language does not lend itself to “varying reasonable interpretations.” Palmieri, 445 F.3d at 187. Indeed, the second paragraph has been considered in nearly a dozen cases across the country, and those courts have consistently found that the provision is unambiguous as a matter of law. See, e.g., Lepore, 374 F. Supp. 3d at 345 (“[T]he text of the IP Exclusion clearly applies [as] a complete bar to coverage for any claims brought in a suit that also alleges intellectual property infringement.“); Tela Bio, Inc. v. Fed. Ins. Co., 313 F. Supp. 3d 646, 659 (E.D. Pa. 2018) (“While perhaps harsh in its application, it cannot be seriously disputed that [the IP Exclusion] clearly and unambiguously excludes from coverage all allegations within a suit, if that suit contains any allegations of intellectual property rights violations.“), aff‘d, 761 F. App‘x 140, 144 (3d Cir. 2019).7 This Court agrees with and adopts those courts’ reasoning.
Spandex House argues that the second paragraph of the IP Exclusion is ambiguous because Hartford agreed to provide a defense to a different policyholder under similar circumstances. See Pl.‘s Mem. of Law at 18-19. In Spandex House‘s view, the fact that
“different adjustors at [Hartford] reached different conclusions regarding the meaning and application of the [IP Exclusion]” creates an “ambiguity” in the exclusion. Id. at 19. The Court disagrees. Under New York law, extrinsic evidence may not be used “to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Sec. Plans, Inc. v. CUNA Mut. Ins. Soc., 769 F.3d 807, 815-16 (2d Cir. 2014) (quoting W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 163 (1990)). Because the language of the IP Exclusion is clear on its face, evidence of its application in a different case cannot be considered to create an ambiguity.8
Each of the two paragraphs of the IP Exclusion bars coverage for the Rex Fabrics Action. As to the first paragraph, the personal and advertising injury alleged in the Action indisputably “aris[es] out of” an alleged infringement of intellectual-property rights, Compl. Ex. A at 161, inasmuch as copyright infringement is the only cause of action alleged by Rex Fabrics, see Schurin Decl. Ex. E ¶¶ 36-49. The first paragraph of the Exclusion therefore bars coverage for all personal and advertising injury alleged in the Action. Spandex House does not argue that there is any basis for coverage of the Action other than the alleged personal and advertising injury; accordingly, pursuant to the first рaragraph of the IP Exclusion, Hartford has no duty to defend against the Action.
The second paragraph of the IP Exclusion also applies. Because the Rex Fabrics Action contains allegations of copyright infringement, see Schurin Decl. Ex. E ¶¶ 36-49, the second
paragraph of the Exclusion dictates that Hartford‘s insurance policy does not apply to “[a]ny injury or damage” alleged in the entire “suit.” Compl. Ex. A at 161.
Because the IP Exclusion applies to the Rex Fabrics Action, Hartford has no duty to defend Spandex House unless the Advertising Exception applies.
B. The Advertising Exception Does Not Apply
1. The Advertising Exception Is Unambiguous
To this Court‘s knowledge, no court has interpreted the Advertising Exception under New York law, and only one, Beach for Dogs Corp., 2017 WL 6570079, at *5, has interpreted it under the law of another state. While novel, the plain language of the Exception is not ambiguous.
The Advertising Exception states that the IP Exclusion does not apply “if the only allegation in the claim or ‘suit’ involving any intellectual property right is limited to: (1) [i]nfringement, in your ‘advertisement,‘” of copyright, slogan, or title, or “(2) [c]opying, in your ‘advertisement,’ a person‘s or organization‘s ‘advertising idea’ or style of ‘advеrtisement.‘” Compl. Ex. A at 161. The phrase “claim or ‘suit’ involving any intellectual property right” clearly refers to the claim or suit that was excluded from coverage pursuant to the IP Exclusion. Id. The Advertising Exception, therefore, only applies if “the only allegation” in the otherwise-excluded claim or suit is one of the forms of “[i]nfringement” or “[c]opying” that is specified in the Exception. Id. (emphasis added). As to those forms of infringement and copying, the term “in your advertisement” requires there to be “a causal relationship” between the alleged injury and the insured‘s advertisement; put differently, the alleged injury must have been caused in some way by the policyholder‘s advertisement. 3 New Appleman Law of Liability Insurance § 18A.04[2][a]-[b] (2019); see also High Point, 911 F.3d at 94, 96; U.S. Fid. & Guar. Co. v. Fendi Adele S.R.L., 823 F.3d 146, 151-52 (2d Cir. 2016) (hereinafter Fendi); Bridge Metal Indus., LLC
v. Travelers Indem. Co., 559 F. App‘x 15, 19 (2d Cir. 2014); R.C. Bigelow, Inc. v. Liberty Mut. Ins. Co., 287 F.3d 242, 247-48 (2d Cir. 2002); accord GRE Ins. Group/Tower Ins. Co. v. Complete Music, Inc., 271 F.3d 711, 714 (8th Cir. 2001); Simply Fresh Fruit, Inc. v. The Cont. Ins. Co., 94 F.3d 1219, 1222-23 (9th Cir. 1996).9
Reading all of this language together, the meaning of the Advertising Exception is clear and unambiguous: when a lawsuit is excluded from coverage pursuant to the IP Exclusion, the Advertising Exception will apply if “the only allegation” in the lawsuit is an act of infringement or copying that is causally related to the insured‘s advertisements. Compl. Ex. A at 161. If the lawsuit alleges any other theory of infringement—such as infringement caused by the policyholder‘s sales, distribution, manufacturing, or other activities unrelated to its advertisements—then the Exception does not apply. See Fendi, 823 F.3d at 151-52 (allegations that a policyholder sold counterfeit goods did not fall under a policy that covered “[i]nfringement of another‘s copyright, trade dress or slogan in [the policyholder‘s] ‘advertising‘“); Bridge Metal, 559 F. App‘x at 19 (“A complaint does not claim an advertising injury if it alleges only the manufacture, importation, and sale of infringing goods without claiming harm arising from advertising . . . .“).
Spandex House argues that this interpretation is unreasonable because, in its view, all copyright infringement inherently arises out of advertisement-related activity. See Pl.‘s Reply Mem. of Law at 7-8. Citing the language of the Copyright Act, Spandex House points out that a copyright-infringement action must be based on allegations that the defendant violated the
plaintiff‘s exclusive right to “reproduce,” prepare “derivative works” of, “distribute copies” of, “perform,” or “display” a copyrighted work—all of which, in Spandex House‘s view, are a form of advertising. Id. (citing
Spandex House also argues that the Advertising Exception is ambiguous due to the presence of commas setting off the phrase “in your ‘advertisement.‘” Pl.‘s Reply Mem. of Law at 5-6; see Compl. Ex. A at 161 (the IP Exclusion does not apply if the only allegation in the otherwise-excluded claim or suit is “[i]nfringement, in your ‘advertisement,’ of” copyright, slogan, or title). In Spandex House‘s view, those commas signal that the Exception applies as long as the allegations of infringement in the underlying lawsuit relate to the same copyright “as that which appears in the insured‘s advertisement.” Pl.‘s Reply Mem. of Law at 6. Put differently, Spandex House argues that even when allegations of infringement focus entirely on the policyholder‘s manufacturing, sales, or distribution activities, the Advertising Exception applies if the policyholder‘s advertisements display the same copyrighted work as that which is the subject of the infringement allegations. See id. This argument is unpersuasive. Courts have held
Accordingly, in line with the overwhelming weight of authority, the Court interprets the phrase “infringement, in your advertisement,” as requiring a causal connection between the alleged act of infringement and the advertisement, rather than simply that the infringing items be displayed in the advertisement.10
Finally, Spandex House argues that the Advertising Exception applies to actions that contain allegations of infringement unrelated to advertising, as long as the allegations unrelated to advertising happen to be asserted within the “same claim” as the advertising-related allegations. Pl.‘s Mem. of Law at 19; see also Pl.‘s Reply Mem. of Law at 1; cf. Compl. ¶¶ 56-66. Thus, in Spandex House‘s view, when, as in the Rex Fabrics Action, infringement allеgations relating to manufacturing and distribution are asserted within the same cause of action as infringement allegations relating to advertising, the Advertising Exception applies; the Exception would not apply only if the two sets of allegations were asserted in separate counts in the underlying complaint. See Pl.‘s Mem. of Law at 19; Pl.‘s Reply Mem. of Law at 1. This argument lacks merit. Nothing in Advertising Exception suggests that its application should depend on how different allegations are grouped together into claims. Quite the contrary. By its plain terms, the Advertising Exception only applies if infringement in the policyholder‘s
advertisement is “the only allegation in the [otherwise-excluded] claim or ‘suit,‘” that is, the only allegation in the entire action. Compl. Ex. A at 161 (emphasis added).11
2. The Rex Fabrics Action Does Not Fall Under the Advertising Exception
(i) The Rex Fabrics Action Contains Numerous Allegations of Infringement Unrelated to Spandex House‘s Advertisements
To determine whether a duty to defend exists, a court must compare the terms of
The Complaint in the Rex Fabrics Action alleges that Spandex House and its co-Defendants “created, sold, manufactured, caused to be manufactured, imported and/or distributed” fabrics and garments identical to five of Rex Fabrics‘s designs. Schurin Decl. Ex. E ¶¶ 13, 19, 25, 30, 35. According to the Complaint, Spandex House (or one of its co-Defendants) “supplied” to a series of “retailers” garments that violate Rex Fabrics‘s copyrights. Id. ¶ 38. In a joint Rule 26(f) report filed in the Rex Fabrics Action, Rex Fabrics asserted that Spandex House and its co-Defendants “engaged in infringing activity by creating, importing, manufacturing, distributing, marketing, advertising, purchasing, selling, and/or transferring apparel and fabric,” in violation of Rex Fabrics‘s copyrights. Schurin Decl. Ex. J at 2. In a discovery request, Rex Fabrics demanded from Spandex House “[a]ll documents referring or relating to [Spandex House‘s] distribution and sale” of the allegedly infringing products and all documents showing
Spandex House‘s “gross profits from sales” of the products at issuе. Schurin Decl. Ex. K at 6-7 (Requests Nos. 22, 26). Spandex House, for its part, acknowledged, in pleading its counterclaim, that it “sold in commerce the fabric alleged by [Rex Fabrics] to infringe its copyrights.” Schurin Decl. Ex. F at 14 (Counterclaim ¶ 9).
Based on these documents, it is clear beyond doubt that the Rex Fabrics Action contains allegations of intellectual-property infringement other than infringement “in [Spandex House‘s] ‘advertisement[s].‘” Compl. Ex. A at 161. To be sure, some of Rex Fabrics‘s allegations appear to relate to Spandex House‘s advertisements. See, e.g., Schurin Decl. Ex. E ¶ 39 (alleging that Spandex House committed infringement through its “catalogues” and “on-line websites“); id. Ex. J at 2 (accusing Spandex House of infringing copyrights through “marketing” and “advertising“); id. Ex. K at 6-7 (Requests Nos. 23-24). But the bulk of the allegations of infringement relate not to advertisements but to sale and distribution. Spandex House has made no showing that the allegations of sale and distribution arise out of—or are in any way causally related to—its advertising activities (other than the unremarkable assertion that some of the advertisements depict the allegedly infringing products). Bеcause allegations of “infringement, in [Spandex House‘s] ‘advertisement,‘” are not “the only allegations” in the Rex Fabrics Action, the Advertising Exception simply does not apply. Compl. Ex. A at 161. Accordingly, Hartford has no duty to defend Spandex House.
(ii) Spandex House Cannot Impose the Duty to Defend Based on Unsupported Speculation
Spandex House argues that Hartford has a duty to defend because it is possible that, someday, all of the allegations in the Rex Fabrics Action except those relating to advertising could be dismissed. See Pl.‘s Mem. of Law at 14-15. If, for example, summary judgment were granted as to all allegations relating to Spandex House‘s sale and distribution, but not as to the
allegations relating to its advertising, infringement “in [Spandex House‘s] ‘advertisement[s]‘” would be the “only allegation” left in the Action, and the Advertising Exception would apply. Compl. Ex. A at 161; see Pl.‘s Mem. of
Spandex House offers no basis—whatsoever—for the Court to infer that the Rex Fabrics Action might one day get skinnied down to allegations that relate solely to advertising. See Pl.‘s Mem. of Law at 14-15. Indeed, this possibility has all but been foreclosed by Spandex House‘s concession in its counterclaim that it “sold in commerce the fabric alleged by [Rex Fabrics] to infringe its copyrights.” Schurin Decl. Ex. F at 14 (Counterclaim ¶ 9) (emphasis added).13
Spandex House‘s argument, then, is no more than sheer conjecture—with a dash of magical thinking. That is insufficient to sustain its burden of proving that the Advertising Exceptiоn applies.14
Spandex House‘s argument, moreover, would essentially read out of the Advertising Exception the phrase “the only allegation.” Compl. Ex. A at 161. In any case containing a mix of allegations both related and unrelated to advertising, there will always be some hypothetical possibility that the allegations unrelated to advertising could, for one reason or another, be dropped or dismissed. Absent a requirement that the policyholder proffer some factual basis to support that possibility, Hartford would have a duty to defend against every case containing a mix of
(iii) The Court‘s Ruling Does Not Make Hartford‘s Duty to Defend Narrower thаn Its Duty to Indemnify
“It is well settled that an insurance company‘s duty to defend is broader than its duty to indemnify.” Cook, 7 N.Y.3d at 137. That is because the duty to defend is “measured against the
possibility of a recovery, [whereas] the duty to pay is determined by the actual basis for the insured‘s liability to a third person.” Allianz, 416 F.3d at 115 (quoting Frontier, 91 N.Y.2d at 178) (internal quotation marks omitted) (emphasis added). Accordingly, courts ordinarily avoid interpreting insurance contracts in ways that “render the duty to defend narrower than the duty to indemnify.” Fitzpatrick, 78 N.Y.2d at 65.
If, as Spandex House dreams might occur, the Advertising Exception were to apply in the future because all allegations except those relating to advertising were to magically disappear from the Rex Fabrics Action, Hartford would, presumably, have a duty to indemnify Spandex House for any liability resulting from those remaining allegations. In Spandex House‘s view, that possibility would lead to the anomalous result in which Hartford had no duty to defend (pursuant to the Court‘s ruling today) but did have a duty to indemnify. See Pl.‘s Mem. of Law at 14-15. This result would, Spandex House argues, cause the duty to defend to be impermissibly narrower than the duty to indemnify. See id.
The Court disagrees. Several courts have held that the duty to defend may arise during the course of litigation, even if it does not exist at the outset of the case. See, e.g., High Point, 911 F.3d at 95 (duty to defend attached after a counterclaim and discovery demands were served); Stellar Mech. Servs. of New York, Inc. v. Merchants Ins. of New Hampshire, 74 A.D.3d 948, 951 (2d Dep‘t 2010) (duty to defend attached after a second amended complaint was served); 3 New Appleman on Insurance Law: Library Edition § 17.05 (2019). That is because, as discussed above, the duty to defend exists when there is a reasonable possibility of recovery but does not exist when recovery is speculative or conjectural. If such a reasonable possibility of coverage were to arise during the course of the Rex Fabrics Action—that is, if it became reasonably, and not just hypothetically, possible that the case could be narrowed to include only
allegations of infringement in Spandex House’s advertisements—the duty to defend would attach; that duty would then be broader than any subsequently-imposed duty to indemnify, which would attach only if Spandex House were found liable for a covered claim.
Because, based on the present record, Spandex House has offered no evidence of any reasonable possibility of coverage, Hartford has no duty to defend the Rex Fabrics Action. And because when “there is no duty to defend, there also is no corresponding duty to indemnify,” Ogden Corp. v. Travelers Indem. Co., 924 F.2d 39, 42 (2d Cir. 1991), the Court also finds, based on the present record, that Hartford has no duty to indemnify. The Court, however, enters this ruling without prejudice to Spandex House moving to reopen this matter should circumstances in the Rex Fabrics Action change in such a way that a reasonable possibility of coverage of that Action arises.
IV. Hartford’s Policy Comports with Principles of New York Insurance Law
Apart from its challenges to the interpretation and application of Hartford’s policy, Spandex House argues that the IP Exclusion and Advertising Exception run afoul of longstanding principles of insurance law and, therefore, that this Court should strike or modify those provisions. This argument lacks merit.
A. The Policy Does Not Run Afoul of the “Entire Action” Rule
Under well-established precedent, if a lawsuit contains a mix of allegations covered by an insurance policy and other allegations falling outside the scope of the policy, the insurer is required to defend the policyholder against the entire lawsuit, including both the covered and the non-covered allegations. See Fieldston, 16 N.Y.3d at 264–65. Known as the “entire action” rule (or the “complete defense” rule, or the “in for one, in for all” rule), “[i]f the insurer has a duty to defend any part of an action, then the insurer has a duty to defend the entire action.” Cowan v. Codelia, P.C., No. 98-CV-5548, 1999 WL 1029729, at *4 (S.D.N.Y. Nov. 10, 1999) (citing Frontier, 91 N.Y.2d at 175).
Spandex House argues that Hartford’s policy “aim[s] to circumvent” the entire-action rule. Pl.’s Mem. of Law at 16; see also id. at 11–12. In some sense, Spandex House is correct. The language of the Advertising Exception mirrors the policy’s definition of advertising injury (contained within the definition of “personal and advertising injury”).15 Pursuant to the General Coverage Provision, advertising injury is, ordinarily, covered by Hartford’s policy. See Compl. Ex. A at 167. But when the IP Exclusion applies, advertising injury is covered only if it is “the only allegation” in a case. See id. at 161. Put differently, when the IP Exclusion applies, Hartford has no duty to defend otherwise-covered allegations of advertising injury if they are joined with allegations of other, unrelated sorts of injury. See id. This arrangement is unusual: ordinarily, insurers agree to defend against suits alleging a mix of covered and non-covered injuries, consistent with the entire-action rule. But, by expressly conditioning coverage on a particular injury being “the only allegation” in a lawsuit, Hartford has essentially contracted around the entire-action rule.
Spandex House argues that the Court should strike or modify the IP Exclusion
Second, the policy language is clear and unambiguous. Whilе New York applies the entire-action rule, New York law also requires unambiguous insurance contracts to “be enforced as written.” J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324, 334 (2013). Because “[f]reedom of contract” is a “deeply rooted” tradition under New York law, this Court is not free to substitute Spandex House’s notions of fairness and propriety for the express provisions of the parties’ agreement; rather, “parties to an insurance arrangement may generally contract as they wish and the courts will enforce their agreements without passing on the substance of them.” Id. (internal quotation marks omitted); see also, e.g., Read Prop. Grp. LLC v. Hamilton Ins. Co., No. 16-CV-4573, 2018 WL 1582291, at *12 (E.D.N.Y. Mar. 30, 2018). That Hartford’s policy may “aim to circumvent” traditional insurance arrangements affords no basis for this Court to strike or modify it.17
Third, the IP Exclusion and Advertising Exception, although unusual, comport with the broad purposes underlying the entire-action rule. The rationale behind the rule is that an insurer can provide its insured with a meaningful defense only if it provides a complete defense. As one frequently-cited case explained:
To defend meaningfully, the insurer must defend immediately. To defend immediately, it must defend entirely. It cannot parse the claims, dividing thosе that are at least potentially covered from those that are not. To do so would be time consuming. It might also be futile: The plasticity of modern pleading allows the transformation of claims that are at least potentially covered into claims that are not, and vice versa.
Buss v. Superior Court, 16 Cal. 4th 35, 49 (1997) (citations and internal quotation marks omitted). Or as another jurist explained, a policyholder would be deprived of an effective defense if it were required to “parse the various counts and have one attorney appointed by the insurer defend against some and an attorney retained by the insured defend against others.” Mount Vernon Fire Ins. Co. v. Visionaid, Inc., 477 Mass. 343, 356 (2017) (Gants, C.J., dissenting).18 Put simply, the entire-action rule makes the duty to defend a binary proposition: either the insurer has a duty to defend, in which case it must defend the entire lawsuit, or the insurer has no duty to defend the lawsuit at all. What the insurer cannot do is provide a defense for some claims in a lawsuit but not others.
Hartford’s policy does not violate these principles, as nothing in the policy would require Hartford to provide Spandex House with this sort of partial defense. The IP Exclusion and the Advertising Exception determine when Hartford has an obligation to defend an action at all, not which claims within an action Hartford must defend. When the second paragraph of the IP Exclusion applies, Hartford has no duty to cover “[a]ny injury or damage” alleged in the applicable suit. Compl. Ex. A at 161 (emphasis added). And in order for the Advertising Exception to apply, “the only allegation[s]” in the suit must be covered forms of “personal and advertising injury,” making Hartford indisputably obligated to defend the entire action. Id. (emphasis added). In short, Hartford’s policy does not alter the rule that if an insurer has a duty to defend, it must defend the entire action; instead, it simply narrows the range of cases in which the duty to defend exists in the first instance.
Fourth, and finally, the IP Exclusion and Advertising Exception are analogous to other insurance-policy provisions that have been upheld under New York law. Several courts have upheld provisions that exclude from coverage “damage caused by an excluded peril even when covered perils also contribute to the damage” (known as “anti-concurrent” сlauses). Alamia v. Nationwide Mut. Fire Ins. Co., 495 F. Supp. 2d 362, 368 (S.D.N.Y. 2007); see also, e.g., Clarke v. Travco Ins. Co., No. 13-CV-5140, 2015 WL 4739978, at *8 (S.D.N.Y. Aug. 7, 2015) (“[W]here a loss results from multiple contributing causes, coverage is excluded if the insurer can demonstrate that any of the concurrent or contributing causes
B. The Policy Does Not Violate Fitzpatrick
In Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61 (1991), the New York Court of Appeals held that the duty to defend can attach based on facts about a third party’s lawsuit that are not pleaded in the third party’s complaint. Id. at 67. Specifically, the Court held that an insurer has a duty to defend when the insurer is aware of facts underlying the lawsuit that create a reasonable possibility of coverage—even if those facts are not alleged in the underlying complaint. See id. at 70. In so holding, the Court rejected the “wooden” and “mechanical[]” rule that “the complaint allegations are, in all cases, the sole determining consideration” in deciding whether a duty to defend exists. Id. at 65–67. In light of “the plasticity of modern pleadings,” the Court reasoned, the insured’s “right to a defense should not depend solely on the allegations a third party chooses to put in the complaint.” Id. at 68.
Because the Advertising Exception turns on whether certain losses are “the only allegation[s]” in a lawsuit, Compl. Ex. A at 161, Spandex House argues that the Exception violates the principle that “an insured’s right to a defense should not depend solely on the allegations a third party chooses to put in the complaint,” Pl.’s Mem. of Law at 15 (quoting Fitzpatrick, 78 N.Y.2d at 68); see also Pl.’s Reply Mem. of Law at 3–4. Spandex House has plucked Fitzpatrick’s language out of context. Fitzpatrick stands only for the proposition that a court must look beyond the four corners of a complaint to the universe of facts known to the insurer in order to determine whether a duty to defend exists. Applied here, Fitzpatrick dictates simply that the Court must consider “unpleaded facts,” id. at 68, when determining whether the types of injury specified in the Advertising Exception are “the only allegation[s]” in the lawsuit, Compl. Ex. A at 161, and, therefore, whether Hartford has a duty to defend.
A hypothetical will make this principle clear. Hartford would have a duty to defend if the complaint at issue contained boilerplate assertions that the policyholder infringed copyrights through “manufacturing, distribution, and/or advertising” but the docket submissions, discovery, and other facts known to Hаrtford made clear that the policyholder was, for example, an advertising agency that had never manufactured or distributed anything. In that case, the facts underlying the litigation would make clear that infringement “in [the insured’s] advertisement” was the only real allegation in the suit. Compl. Ex. A at 161. Hartford, then, would not be permitted to avoid the duty to defend through a “wooden” and “mechanical” application of the “four corners of the complaint” rule. Fitzpatrick, 78 N.Y.2d at 66–67. But that is all that Fitzpatrick would require.
This Court’s analysis of the Rex Fabrics Action complied with Fitzpatrick. In determining whether “the only allegation” in that Action is infringement in Spandex
C. The Policy Is Not Illusory
Like any other contract, an insurance agreement that is “illusory” is unenforceable. See Lend Lease (US) Const. LMB Inc. v. Zurich Am. Ins. Co., 28 N.Y.3d 675, 684–85 (2017); Children’s Apparel Network Ltd. v. Twin City Fire Ins. Co., No. 18-CV-10322, 2019 WL 3162199, at *5 (S.D.N.Y. June 26, 2019). An agreement is “illusory” if it lacks mutuality of obligation, that is, if it is “[a]n agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation.” Lend Lease, 28 N.Y.3d at 684. An insurance policy, however, is “not illusory if it provides coverage for some acts,” even if it is subject to “a potentially wide exclusion.” Id. at 685 (emphasis added).
Spandex House argues that the IP Exclusion is so broad, and the Advertising Exception so narrow, that they effectively erase Hartford’s coverage for “personal and advertising injury,” thus rendering the policy illusory. Pl.’s Mem. of Law at 21–25. The Court disagrees. It is not difficult to imagine scenarios in which the Advertising Exception would apply. If, for example, Spandex House used a competitor’s slogan in its advertisements without permission, it could be sued for “[i]nfringement, in [its] advertisement, of . . . [s]logan.” Compl. Ex. A at 161.20 Or if it used a copyrighted photograph in its advertisements without the proper license, it could be sued for “[i]nfringement, in [its] advertisement, of . . . [c]oрyright.” Id. And so forth. In each of these examples, the alleged infringement would be wholly unrelated to manufacturing, sale, distribution, or other non-advertising activities. The allegations of “[i]nfringement, in [Spandex House’s] advertisement[s],” therefore, would be “the only allegation[s]” in the lawsuit, in which case the Advertising Exception would apply. Id.
All of this said, there is no doubt that the Advertising Exception is exceedingly
D. Hartford Provided Ample Notice of the IP Exclusion and the Advertising Exception
In order to amend an insurance agreement, an exclusion must be “stated in clear and unmistakablе language.” Cont’l Cas. Co. v. Rapid-Am. Corp., 80 N.Y.2d 640, 652 (1993); see also Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 311 (1984) (“[E]xclusions or exceptions from policy coverage must be specific and clear in order to be enforced.”).
Spandex House argues that the policy endorsements that expanded the IP Exclusion did not provide clear notice of their effect on Spandex House’s coverage. See Pl.’s Mem. of Law at 12–13; Pl.’s Reply Mem. of Law at 8–10. Specifically, Spandex House points out that one of these endorsements, Form HC 00 88 12 10, stated that it “broaden[ed] coverage,” leading Spandex House (allegedly) to believe that the endorsement would expand, not narrow, its intellectual-property-related coverage. See Pl.’s Mem. of Law at 12–13 (citing Compl. Ex. A at 159).
This argument falls short. Hartford amended the IP Exclusion through two endorsements, Form HC 00 88 12 10 and Form 00 97 12 10, but only Form HC 00 88 12 10 contained the reference to “broaden[ing] coverage.” Compl. Ex. A at 159, 161. Moreover, both of the endorsements stated, in large, bold headers, “This endorsement changes the policy. Please read it carefully.” Id. And one of the endorsements stated specifically, “Amendment of Exclusions and Definition – Personal and Advertising Injury.” Id. at 161. Courts have held that this sort оf language provides adequate notice that an endorsement may narrow coverage. See CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 720 F.3d 71, 84 (2d Cir. 2013). Further, several courts have rejected Spandex House’s argument in the context of the specific endorsements at issue here. See Lepore, 374 F. Supp. 3d at 351; Pinnacle Brokers, 2015 WL 5159532, at *4; Ventana, 2010 WL 1752509, at *20. Accordingly, Spandex House had ample notice that Hartford’s endorsements could narrow its insurance coverage, regardless of the stray reference to “broaden[ing] coverage.” Compl. Ex. A at 159.
Moreover, the reference to “broaden[ing] coverage” in Form HC 00 88 12 10 states in full, “This endorsement broadens coverage for ‘your web site’ or internet-related activities.” Compl. Ex. A at 159. That was an appropriate word choice, given that the endorsement adds the words “on ‘your web site’” to the Advertising Exception. See id. at 160 (“[T]his exclusion does not apply if the only allegation in the claim or ‘suit’ involving any intellectual property right is limited to . . . [i]nfringement, in your ‘advertisement’ or on ‘your web site’ . . . .” (emphasis added)). No reasonable person could have interpreted the
CONCLUSION
For all the foregoing reasons, Hartford’s motion for summary judgment is GRANTED. Spandex House’s motion for summary judgment is DENIED. This case is DISMISSED. The Court enters this ruling, however, without prejudice to Spandex House moving, in a letter-brief of no more than five pages, to reopen this case should circumstances in the Rex Fabrics Action change in such a way that a reasonable possibility of coverage of that Action arises.
The Clerk of Court is respectfully directed to terminate all open motions and to CLOSE the case.
SO ORDERED.
VALERIE CAPRONI
United States District Judge
Date: August 26, 2019
New York, New York