Ecology Works, Inc. v. Essex Insurance

MEMORANDUM** On November 8, 1999, Ecology Works obtained a commercial general liability policy from Essex Insurance which included advertising injury coverage.1 Alkaline [715] Corp. sued Ecology alleging that Ecology’s use of the phrase “DUSTMITEX” in advertising Ecology’s anti-dust mite product violated the Lanham Act and state law because it was confusingly similar to Alkaline's trademark “MITE-X.” Ecology appeals the district court’s order denying its motion for summary judgment and granting the cross motion of Essex on the issue of whether Essex owed Ecology a duty to defend the Alkaline suit. The district court had jurisdiction pursuant to 28 U.S.C. § 1332; we have jurisdiction pursuant to 28 U.S.C. § 1291. We reverse the entry of summary judgment in favor of Essex and remand for entry of summary judgment in favor of Ecology. The facts are known to the parties and will be addressed on insofar as necessary to explain our decision. In its order granting summary judgment to Essex, the district court focused on an interrogatory answer Ecology filed in the underlying action to find that Ecology’s first use of the DUSTMITEX name predated its coverage under the Essex policy. Even though Alkaline did not allege in its underlying complaint when the conduct on which its cause of action is based occurred, the court agreed with Essex that “Ecology itself identifies the date upon which the complained of conduct began, [May 1998] and that date preceded the issuance of the Policy.” Applying trademark law, the district court concluded that, as an assignee of the DUSTMITEX mark, Ecology stepped into the shoes of its assignor, and both the benefits, such as priority of use, and the liabilities followed the mark. Because it found the advertising injury “offense” was committed in May 1998, the district court held that “[u]nder no conceivable theory, therefore, did the ‘offense’ trigger coverage under the Policy.” It thus concluded that Essex owed Ecology no duty under the policy to defend the underlying action and granted summary judgment to Essex. We review the grant of summary judgment de novo. See Delta Savings Bank v. United States, 265 F.3d 1017, 1021 (9th Cir.2001). Our review is governed by the same standard used by the trial court under Federal Rule of Civil Procedure 56(c); thus we must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Id. at 1021. The California law defining a liability insurer’s duty to defend is “well settled.” Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100 Cal.App.4th 1017, 1033, 123 Cal. Rptr.2d 256 (2002). “[A] liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity.” Gray v. Zurich Insurance [716] Co., 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168 (1966); Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993). “[T]he carrier must defend a suit which potentially seeks damages within the coverage of the policy.” Gray, 65 Cal.2d at 275, 54 Cal.Rptr. 104, 419 P.2d 168 (emphasis in original). “Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded.” Montrose, 6 Cal.4th at 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153; Horace Mann, 4 Cal.4th at 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792. “The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.” Montrose, 6 Cal.4th at 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153; Gray, 65 Cal.2d at 276, 54 Cal.Rptr. 104, 419 P.2d 168. “For an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit____ Hence the duty ‘may exist even where coverage is in doubt and ultimately does not develop.’ ” Saylin v. California Ins. Guarantee Assn., 179 Cal.App.3d 256, 263, 224 Cal.Rptr. 493 (1986) (internal citation omitted). The duty to provide a defense is a “continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded or until it has been shown that there is no potential for coverage.... ” Montrose, 6 Cal.4th at 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153. “The scope of the duty does not depend on the labels given to the causes of action in the third party complaint; instead it rests on whether the alleged facts or know extrinsic facts reveal a possibility that the claim may be covered by the policy.” Atlantic Mutual, 100 Cal.App.4th at 1034, 123 Cal.Rptr.2d 256 (emphasis in original). Once the possibility of coverage has been raised, the insurer may defeat such claim of coverage by extrinsic evidence, but only where “such evidence presents undisputed facts which conclusively eliminate a potential for liability.” Montrose, 6 Cal.4th at 298-99, 24 Cal.Rptr.2d 467, 861 P.2d 1153. The Montrose Court rejected the insurer’s position that, rather than a mere “possibility” of coverage, the law required a “reasonable potential for coverage.” It held, applying Gray that the insured is entitled to a defense if the “underlying complaint alleges the insured’s liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy.” Montrose, 6 Cal.4th at 299, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (emphasis in original) (citing Gray, 65 Cal.2d at 275-76, 54 Cal.Rptr. 104, 419 P.2d 168). We find the district court erred in its analysis of the duty to defend. Although citing Gray and Montrose, the district court improperly focused its attention solely on the issue of whether the offense occurred prior to the issuance of the policy, applying trademark law to resolve this question. This analysis put the cart before the proverbial horse. Rather than deciding the duty to defend issue by looking at the potential for coverage and then determining whether Essex had conclusively eliminated that potential, the district court jumped directly to the extrinsic evidence, concluding from the interrogatory responses in the Alkaline suit that the policy was never triggered. In other [717] words, the district court made a coverage determination, not a duty to defend determination. As the duty to defend is broader than the duty to indemnify, and only the duty to defend was raised in Ecology’s declaratory judgment complaint, we find this was error. Under the California Supreme Court’s analytical framework, the allegations contained in the Alkaline complaint established potential coverage as a matter of law. Similar to the situation encountered in Atlantic Mutual, the underlying complaint was silent on the issue of when the alleged advertising “offense” occurred. Applying the Gray / Montrose analysis, that court determined that The allegations of the Continental complaint did not specify the date of Lamb’s first utterance of any disparagement. Thus, based upon those allegations alone, the possibility of coverage existed. That complaint was tendered to Atlantic Mutual. This was sufficient, at that moment, to create a potential for coverage and Atlantic Mutual’s duty to defend arose. Atlantic Mutual at 1038, 123 Cal.Rptr.2d 256 (emphasis in original). The court went on to find that Atlantic Mutual’s extrinsic evidence — a declaration executed by its claims adjuster to the effect that a representative of the insured told him the dispute originated prior to the policy term— was (1) vague and ambiguous, (2) did not clearly establish the date of the critical first publication, and (3) did not conclusively negate the possibility of coverage. Id. at 1039, 123 Cal.Rptr.2d 256. It reiterated that, as the potential for coverage was established by the allegations of the underlying complaint which was silent as to the date of the offense, the insurer needed no other information on this point. Rather, the court held that Even though it may ultimately be determined that Atlantic Mutual has a viable defense to coverage by virtue of the “first publication” exclusion, this can only affect its liability for indemnification. Its duty to defend depended on the existence of only a potential for coverage. That potential was never conclusively negated and obviously cannot be negated short of an actual trial to resolve what is clearly a genuine factual dispute. Id. at 1040, 123 Cal.Rptr.2d 256 (emphasis in original). The Atlantic Mutual decision is indistinguishable from the situation presented here. It is undisputed by the parties, and the district court acknowledged, that the Alkaline complaint, while raising claims within the Essex policy’s coverage, did not identify the date on which any of Ecology’s allegedly improper conduct occurred. The insurer’s duty to defend was thereby clear from the face of the underlying complaint. The issue of whether Ecology stepped into the shoes of the assignor of the mark, and accordingly, first used the mark in May 1998, is one that cannot be negated short of an actual trial on the underlying complaint. If Ecology’s affirmative defense is rejected, it will be denied a defense for a viable claim that by definition the insurer must indemnify. The potential for coverage and the concomitant duty to defend cannot be extinguished in such circumstances where the insurer’s duty to indemnify remains contingent. Accordingly, the entry of summary judgment in favor of Essex on the issue of its duty to defend the underlying suit will be vacated and the case will be remanded with instructions to enter summary judgment in favor of Ecology. REVERSED AND REMANDED. Footnotes [**] This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as may be provided by 9th Cir. R. 36-3. [1] The "advertising injury” provision of the policy provided: COVERAGE B. PERSONAL AND ADVERTISING INJURY LIABILITY 1. Insuring Agreement a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal injury” or "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, [715] we will have no duty to defend the insured against any “suit” seeking damages for “personal injury” or "advertising injury” to which this insurance does not apply. We may at our discretion investigate any "occurance” or offense and settle any claim or "suit” that may result, b. This insurance applies to: (2) "Advertising injury” caused by an offense commited in the course of advertising you goods, products or services; but only if the offense was committed in the "coverage territory" during the policy period. [2] Exclusions This insurance does not apply to a. "Personal injury” or "advertising injury”: (2) Arising out of oral or written publication of material whose first publication took place before the beginning of the policy period. "Advertising injury” is defined later in the policy to mean "injury arising out of one or more of the following offenses: ... c. Misappropriation of advertising ideas or style of doing business, d. Infringement of copyright, title or slogan.”