CITIZENS INS CO V PRO SEAL SERVICE GROUP INC
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Michigan Supreme Court
Lansing, Michigan
Opinion
Chief Justice:
Justices:
Clifford W. Taylor
Michael F. Cavanagh
Elizabeth A. Weaver
Marilyn Kelly
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman
FILED APRIL 25, 2007
CITIZENS INSURANCE COMPANY,
Plaintiff/Counter-Defendant-Appellant,
v
No. 130099
PRO-SEAL SERVICE GROUP, INC, d/b/a
PRO-SEAL, INC,
Defendant/Counter-Plaintiff-Appellee,
and
SETH SHORT, RANDY QUINCY,
FLOWSERVE CORPORATION, and
FLOWSERVE MANAGEMENT COMPANY,
Defendants.
_______________________________
BEFORE THE ENTIRE BENCH
PER CURIAM.
At issue in this insurance coverage dispute is whether defendant Pro-Seal
Service Group, Inc.’s, act of shipping a product in a competitor’s packaging with
Pro-Seal’s labeling affixed to it constitutes an “advertisement” for purposes of an
insurance policy.
The Court of Appeals determined that plaintiff (Citizens
Insurance Company) was required to defend defendant under the terms of a
commercial general liability policy (CGL policy) because the underlying
complaint alleged a violation of trade dress1 and such a violation inherently
involves advertising activity. Because we conclude that the act of shipping a
product in a competitor’s packaging with one's own name affixed to it is
insufficient to satisfy the CGL policy’s definition of an “advertisement,” we
reverse the judgment of the Court of Appeals that held to the contrary and remand
this case to the trial court for further proceedings not inconsistent with this
opinion.
I. FACTS AND PROCEDURAL HISTORY
Defendant Pro-Seal Service Group, Inc., is a Michigan corporation that
sells and repairs mechanical seals used in oil production facilities in Alaska. ProSeal has a CGL policy and an umbrella insurance policy with plaintiff Citizens
Insurance. Pro-Seal’s major competitor for mechanical seal sales in the Alaskan
market is defendant Flowserve Corporation, a New York corporation that
manufactures, sells, and refurbishes mechanical seals.
The dispute between
Flowserve and Pro-Seal began in June 2003, when a Flowserve employee
discovered that two Flowserve mechanical seals that had been repaired by Pro-
1
“The trade dress of a product is essentially its total image and overall
appearance. It involves the total image of a product and may include features such
as size, shape, color or color combinations, texture, graphics, or even particular
sales techniques.” Two Pesos, Inc v Taco Cabana, Inc, 505 US 763, 764 n1; 112
S Ct 2753; 120 L Ed 2d 615 (1992) (internal quotation marks and citations
omitted).
2
Seal were being shipped to a customer in the original Flowserve container, with
the name “Pro-Seal” affixed to the outside of the container. Flowserve brought a
suit against Pro-Seal in the United States District Court for the District of Alaska,
claiming that Pro-Seal created confusion in the marketplace by imitating or
infringing trademarks or product marks, and by using trade secrets, blueprints,
engineering drawings, packaging materials, and sales practices that misrepresented
Pro-Seal seals as being Flowserve seals.2 Pro-Seal requested that plaintiff defend
it in the Flowserve action pursuant to both insurance policies. Plaintiff concluded
that the nature of the allegations in the Flowserve complaint were beyond the
scope of either policy and, therefore, refused to defend Pro-Seal. Plaintiff filed the
instant action seeking a declaration that plaintiff was not required to defend ProSeal under either policy.
The trial court granted plaintiff’s motion for summary disposition,
introducing its analysis by noting that if a contract is plain and unambiguous, it
must be enforced according to its terms. Burkhardt v Bailey, 260 Mich App 636,
656; 680 NW2d 453 (2004). According to the terms of the instant insurance
contract, coverage is excluded for advertising injuries that are “knowingly made.”
The trial court concluded that coverage did not exist for the conduct asserted in the
2
After a facilitation session, the Flowserve complaint was dismissed by
stipulation. Defendant admitted two inadvertent trademark infringements and
settled the case for $1,800.
3
Flowserve lawsuit because it “alleges an intentional course of conduct involving
fraud, deceit, and counterfeit parts being sold as genuine.”
On appeal, the Court of Appeals vacated the judgment of the trial court in a
published opinion, holding that plaintiff was required to represent defendant ProSeal because Flowserve’s allegations fell within the definition of an “advertising
injury” under the CGL policy. 268 Mich App 542; 710 NW2d 547 (2005). The
Court of Appeals undertook its analysis by noting that the protection of trade dress
is intended to “‘“secure to the owner of the mark the goodwill of his business and
to protect the ability of consumers to distinguish among competing producers.”’”
Id. at 550-551, quoting Two Pesos, supra at 774, quoting Park 'N Fly, Inc v Dollar
Park & Fly, Inc, 469 US 189, 198; 105 S Ct 658; 83 L Ed 2d 582 (1985). Because
the underlying complaint alleged that Pro-Seal’s conduct confused and misled
customers into believing that Pro-Seal seals were Flowserve seals, the ability of
customers to “distinguish between competing producers” was implicated. On that
basis, the Court of Appeals held that Flowserve’s complaint alleged a trade dress
infringement.
The Court of Appeals also held that the alleged trade dress
infringement occurred in an “advertisement” because “‘allegations of trademark
and trade dress infringement inherently involve advertising activity. In other
words, there can be no trademark/trade dress infringement without advertising
having occurred.’” Id. at 551-552, quoting Poof Toy Products, Inc v United States
Fidelity & Guaranty Co, 891 F Supp 1228, 1235-1236 (ED Mich, 1995).
4
Leave to appeal was sought in this Court and, after directing the parties to
address certain issues,3 we heard oral argument on whether to grant the plaintiff’s
application for leave to appeal or take other peremptory action permitted by MCR
7.302(G)(1). 474 Mich 1112 (2006).
II. STANDARD OF REVIEW
We review de novo the grant or denial of a motion for summary
disposition. Kreiner v Fischer, 471 Mich 109, 129; 683 NW2d 611 (2004). This
case requires that we consider whether defendant’s alleged conduct took place in
an “advertisement” as that term in defined in the insurance policy.
The
construction and interpretation of the language in an insurance contract is a
question of law that this Court reviews de novo. Klapp v United Ins Group
Agency, Inc, 468 Mich 459, 463; 663 NW2d 447 (2003).
III. ANALYSIS
The terms of the CGL policy provide that plaintiff “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.” The CGL policy defines
a “personal and advertising injury” as follows:
3
These issues were as follows: “(1) whether Flowserve's complaint alleged
an advertising injury within the meaning of the commercial general liability policy
that Citizens Insurance Company issued to Pro-Seal, Inc., and (2) if so, whether
Citizens was relieved of its duty to defend Pro-Seal by operation of the policy
exclusion for actions taken with knowledge that an advertising injury would
result.”
5
14. “Personal and advertising injury” means injury, including
consequential “bodily injury”, arising out of one or more of the
following offenses:
* * *
(f)
The use of another’s advertising idea in your
“advertisement”; or
(g) Infringing upon another’s copyright, trade dress or slogan
in your “advertisement.”
The umbrella policy defines an “advertising injury” as follows:
A. Advertising Injury means injury caused by one or more of
the following offenses committed during the policy period in the
course of advertising your goods, products or services:
1. Oral or written publication of material that slanders or
libels a person or organization or disparages a person’s or
organization’s goods, products or services.
2. Oral or written publication of material that violates a
person’s right or [sic] privacy.
3. Misappropriation of advertising ideas or style of doing
business; or
4. Infringement of copyright, title or slogan.
The term “advertisement” is defined in the CGL policy as4
4
The umbrella policy does not define the word “advertising.” However,
the umbrella insurance policy does state:
The definitions, terms, conditions and exclusions of
underlying insurance in effect at the inception of this policy apply to
[the umbrella] coverage unless:
A. They conflict with any of the provisions of this policy; or
(continued…)
6
a notice that is broadcast or published to the general public or
specific market segments about your goods, products or services for
the purpose of attracting customers or supporters.
“[I]n reviewing an insurance policy dispute we must look to the language of
the insurance policy and interpret the terms therein in accordance with Michigan’s
well-established principles of contract construction.” Henderson v State Farm
Fire & Cas Co, 460 Mich 348, 353-354; 596 NW2d 190 (1999). In Henderson,
this Court described those principles as follows:
First, an insurance contract must be enforced in accordance
with its terms. A court must not hold an insurance company liable
for a risk that it did not assume. Second, a court should not create
ambiguity in an insurance policy where the terms of the contract are
clear and precise. Thus, the terms of a contract must be enforced as
written where there is no ambiguity.
While we construe the contract in favor of the insured if an
ambiguity is found, this does not mean that the plain meaning of a
word or phrase should be perverted, or that a word or phrase, the
meaning of which is specific and well recognized, should be given
some alien construction merely for the purpose of benefiting an
insured. The fact that a policy does not define a relevant term does
not render the policy ambiguous. Rather, reviewing courts must
interpret the terms of the contract in accordance with their
(…continued)
B. There is a provision in this policy for which a similar
provision is not contained in underlying insurance.
As it relates to an “advertising injury,” there is no conflict between the terms of
the CGL policy and the umbrella policy. Furthermore, the “advertising injury”
section of the umbrella policy is substantially similar to the “advertising injury”
provisions in the CGL policy. The dictionary defines the term “advertising” as
“paid announcements; advertisements.” Random House Webster’s College
Dictionary (1997) at 20. Therefore, pursuant to the terms of the umbrella policy,
the definition of the term “advertisement” in the CGL policy applies to the
umbrella policy as well.
7
commonly used meanings. Indeed, we do not ascribe ambiguity to
words simply because dictionary publishers are obliged to define
words differently to avoid possible plagiarism. [Id. at 354 (citations
omitted).]
The Court of Appeals erred in this case by failing to enforce the terms of
the CGL policy as written.5 While the Court of Appeals noted that the CGL policy
defined the term “advertisement,” it ultimately rejected that definition in favor of a
different definition articulated by the United States District Court in Poof Toy,
supra at 1235-1236. In Poof Toy, the United States District Court held that
allegations of trademark and trade dress infringement inherently
involve advertising activity. In other words, there can be no
trademark/trade dress infringement without advertising having
occurred. This conclusion results from a required element in every
trademark/trade dress case, that the mark or dress is likely to cause
confusion to the consumer or deceive the consumer as to the origin
or manufacturer of the goods. See 15 U.S.C. § 1125(a). To have (or
potentially cause) this effect, one must clearly advertise (announce
to the intended customers) the mark or dress.
However, the Court of Appeals failed to recognize that Poof Toys is readily
distinguishable because the insurance contract at issue in that case did not define
the term “advertisement.” Because the term was left undefined, the United States
5
Justice Cavanagh argues that Flowserve alleged in its complaint that ProSeal used the Flowserve trademark to identify its products as Flowserve products
and, on that basis, “it can be deduced that Pro-Seal was accused of taking actions
that inherently involved notice broadcast or published to the general public or
specific market segments about its goods, products, or services for the purpose of
attracting customers or supporters.” Post at 4. However, the only portion of the
Flowserve complaint relied upon by the Court of Appeals in this case is the
allegation that Pro-Seal “shipped the counterfeit [seals] to the customer in a
shipping crate prominently labeled with the Flowserve label.” Flowserve
complaint at paragraph 22. We should not resolve this case on the basis of
allegations that were not addressed by the Court of Appeals.
8
District Court consulted a dictionary to define the term and concluded on the basis
of that definition that there was coverage under that policy. Because the term
“advertisement” is defined in the instant CGL policy, and that definition is
incorporated into the umbrella policy as well, the Court of Appeals’ reliance on
Poof Toy was inappropriate inasmuch as it potentially subjects plaintiff to a risk
that it did not assume. See, e.g., Westfield Companies v OKL CAN Line, 155 Ohio
App 3d 747, 755; 804 NE2d 45 (2003) (holding that Poof Toy did not apply to an
insurance policy that specifically defined the term “advertisement”).
Thus, in order to determine whether plaintiff had a duty to defend in this
case, we must ascertain whether defendant’s conduct falls within the scope of the
term “advertisement” as written in the CGL policy. This Court interprets the
words used in a contract “in accordance with their commonly used meanings.”
Henderson, supra at 354. Further, when defining a phrase used in a contract, this
Court “read[s] the phrase as a whole, giving the phrase its commonly used
meaning.” Id. at 356. Under the instant policy, an “advertisement” takes place
when there is: (1) a notice; (2) that is broadcast or published; (3) to the general
public or specific market segments; (4) about [the company’s] goods, products, or
services; and (5) for the purpose of attracting customers. “When considering a
word or phrase that has not been given prior legal meaning, resort to a lay
dictionary such as Webster’s is appropriate.” Greene v A P Products, Ltd, 475
Mich 502, 510; 717 NW2d 855 (2006).
The dictionary defines “notice,” in
relevant part, as “a written or printed statement conveying . . . information . . . .”
9
Random House Webster’s College Dictionary (1997) at 895.
The dictionary
defines “broadcast,” in relevant part, as “to speak, perform, or present on a radio
or television program” or “to spread widely; disseminate.” Id. at 166. “Publish”
is defined, in relevant part, as “to announce formally or officially; proclaim;
promulgate” or “to make publicly or generally known.” Id. at 1054. These
definitions are consistent with the common understanding of the term “broadcast
or publish” in the advertising realm as the public dissemination of information
intended to inform potential customers of a company’s availability to do business.
Thus, for example, a business such as Pro-Seal may utilize television, radio,
newspapers, or billboards in order to inform potential customers about the goods
and services they provide and to attract the patronage of such customers.
The Court of Appeals concluded that when defendant shipped one of its
seals to a customer in a Flowserve container, that was an act that “constitute[ed]
notice that is published to the specific market segment in which Pro-Seal and
Flowserve compete about the seals for the purpose of attracting customers or
supporters.” 268 Mich App at 552. Pro-Seal seizes on this argument, claiming
that when it shipped the seal at issue to a distribution center to be forwarded to its
customer, it could be observed by members of the general public visiting that
distribution center. Therefore, according to defendant, the use of the Flowserve
packaging constituted an “advertisement.”
However, both the Court of Appeals and defendant overlook that, under the
terms of the CGL policy, defendant must publicly disseminate information about
10
its goods and services for the purpose of attracting the patronage of potential
customers. Here, defendant sent a seal to a specific customer in a Flowserve
container for the purpose of completing a single transaction. At best, Pro-Seal’s
argument that it expected that other customers might view the package at the
distribution center and, as a result, would be encouraged in doing business with
defendant was an incidental and remote benefit that does not fundamentally alter
the fact that this was a single transaction with a specific customer. We conclude
that the purpose for placing a Pro-Seal label on the Flowserve container in this
instance was to identify for that specific customer the source of the seal to allow
that specific customer to contact defendant with any questions or complaints about
that product.6 Accordingly, we conclude that the harm alleged to have been
6
We do not, as Justice Kelly asserts, hold that a company must engage in
“wide-scale dissemination of information, such as by television or radio, for there
to be an advertisement.” Post at 10. In fact, we agree with Justice Kelly that, in a
limited market such as the Alaskan oil market, a notice broadcast to even a single
customer might constitute “advertising,” as long as that notice was designed to
“attract[] customers or supporters.” However, Justice Kelly overlooks the fact that
the conduct complained of in this case, namely Pro-Seal’s act of shipping the seal
in question to its customer in the original Flowserve container affixed with a ProSeal label, was not undertaken to “attract[] customers or supporters.” Rather, ProSeal shipped the seal in question in order to complete an already agreed-upon
transaction. In other words, Pro-Seal had already “attracted” its customer by the
time the seal in question was shipped in the container provided to Pro-Seal by that
customer. While the complaint alleges that customer was confused about the
origin of the seal at issue in this appeal, there is nothing in the complaint that
could reasonably be construed as an allegation that the Pro-Seal labeling was
designed to “attract” that customer to purchase another seal from Pro-Seal.
Rather, looking at the context of the transaction, the Pro-Seal labeling simply
served to identify the source of the repaired seal and to provide contact
information if the customer had any questions or concerns. Likewise, contrary to
(continued…)
11
caused by Pro-Seal’s act of shipping a seal in a Flowserve container did not “arise
out of an advertisement” and, therefore, plaintiff was not obligated to tender a
defense based on this allegation under the terms of the CGL policy.7
IV. CONCLUSION
In order to constitute an advertisement under the CGL policy, defendant
must publicly disseminate information about its goods and services for the purpose
of attracting the patronage of potential customers.
We conclude that when
defendant shipped the seal in question to its customer in a Flowserve container
affixed with a Pro-Seal label, there was no "advertising injury" under the CGL
policy. Accordingly, we reverse the judgment of the Court of Appeals and remand
this case to the trial court for further proceedings not inconsistent with this
opinion.8
(…continued)
Justice Kelly’s contention, nothing in the Flowserve complaint alleged that ProSeal utilized the container in question in order to “attract[] customers or
supporters.” Rather, Flowserve alleged that the shipping container was used as
part of an attempt by Pro-Seal to lead customers to believe that its seals were
actually Flowserve seals. Accordingly, Pro-Seal’s act of shipping a seal to its
customer in the original Flowserve container is simply not an “advertisement” as
the term is defined by the policy.
7
Because we conclude that no advertising occurred, we find it unnecessary
to decide whether the underlying complaint alleged a “trade dress” or “trademark”
violation, or whether Citizens Insurance was relieved of its duty to defend ProSeal by operation of the policy exclusion for actions taken with knowledge that an
advertising injury would result.
8
Justice Cavanagh argues that a remand to the trial court is inappropriate
because when the trial court held that the policy did not apply to advertising
(continued…)
12
Clifford W. Taylor
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman
(…continued)
injuries that are knowingly made, “it is clear that it found [an advertising injury]
because it determined that the advertising injury was made knowingly.” Post at 4.
We disagree. In granting summary disposition to plaintiff, the trial court
concluded that the Flowserve complaint “alleges an intentional course of conduct
involving fraud, deceit, and counterfeit parts being sold as genuine. Clearly, this
conduct does not fall within the scope of the limited coverage for advertising
injury provided by the policy.” Because the trial court relied wholly on the
intentional nature of Pro-Seal’s conduct, it did not address whether the Flowserve
complaint actually set forth an “advertising injury” as defined by the policy.
Because the trial court never addressed the issue left unresolved in this opinion, it
should do so on remand.
13
STATE OF MICHIGAN
SUPREME COURT
CITIZENS INSURANCE COMPANY,
Plaintiff/Counter-Defendant-
Appellant,
No. 130099
v
PRO-SEAL SERVICE GROUP INC., doing
business as PRO-SEAL INC.,
Defendant/CounterPlaintiff-Appellee,
and
SETH SHORT, RANDY QUINCY,
FLOWSERVE CORPORATION, and
FLOWSERVE MANAGEMENT
COMPANY,
Defendants.
CAVANAGH, J. (dissenting).
I agree with dissenting Justice Kelly that in the underlying complaint in
this action, Flowserve’s allegations amounted to allegations of a violation of its
trade dress. I also agree with her analysis of the terms “advertisement” and
“notice.” However, I would resolve this case simply by reviewing the specific
allegations Flowserve made in its complaint against Pro-Seal Service Group, Inc.,
because as Justice Kelly notes, and as the majority ignores, the question whether
an insurer has the duty to defend must be answered by examining the allegations
in the underlying complaint, rather than by looking at the insured’s specific
actions. In fact, “[i]f the allegations of a third party against the policyholder even
arguably come within the policy coverage, the insurer must provide a defense.”
American Bumper & Mfg Co v Hartford Fire Ins Co, 452 Mich 440, 450-451;
550 NW2d 475 (1996), citing Polkow v Citizens Ins Co, 438 Mich 174, 178, 180;
476 NW2d 382 (1991); Allstate Ins Co v Freeman, 432 Mich 656, 662; 443
NW2d 734 (1989). “This is true even where the claim may be groundless or
frivolous.” Id.
Here,
Flowserve
accused
Pro-Seal’s
individual
employees
of
misrepresenting to the public that they were associated with Flowserve, that they
were capable of performing certified repairs on Flowserve products, and that ProSeal seals were Flowserve seals.
Flowserve further alleged that defendant
“improperly appropriated and used Flowserve’s “P-50” trademark to identify
their inferior seal” to “capitalize on Flowserve’s goodwill and to further confuse
the process industry into believing that [Pro-Seal’s] competitive seals are
Flowserve seals.”
Further, Flowserve accused Pro-Seal of using three of
Flowserve’s trademarks and attached several purchase orders allegedly showing
that customers were ordering Flowserve seals from Pro-Seal and were being sent
Pro-Seal seals. Flowserve attached a photograph of a Flowserve product bearing
Flowserve trademarks and alleged that Pro-Seal had replaced internal parts with
Pro-Seal parts. Flowserve explained that it discovered these internal parts while
2
fixing a pump in which the seal had been installed and that it also discovered
another seal it accused Pro-Seal of altering before it was installed. Another
allegation involved an allegedly improperly labeled crate, which contained
another allegedly altered Flowserve product, and an assembly drawing bearing
the Flowserve name and trademark in the box in which the seal was shipped.
Specific guiding principles governing the determination of an insurer’s
duty to defend were aptly set forth in American Bumper, supra, and bear
repeating here:
“‘An insurer has a duty to defend, despite theories of liability
asserted against any insured which are not covered under the policy,
if there are any theories of recovery that fall within the policy.
Dochod v Central Mutual Ins Co, 81 Mich App 63; 264 NW2d 122
(1978). The duty to defend cannot be limited by the precise
language of the pleadings. The insurer has the duty to look behind
the third party’s allegations to analyze whether coverage is possible.
Shepard Marine Construction Co v Maryland Casualty Co, 73 Mich
App 62; 250 NW2d 541 (1976). In a case of doubt as to whether or
not the complaint against the insured alleges a liability of the insurer
under the policy, the doubt must be resolved in the insured’s favor
14 Couch, Insurance, 2d (rev ed), § 51:45, p 538 (now § 51:49, p
489).’” [American Bumper, supra at 451-452, quoting Protective
Nat’l Ins Co v City of Woodhaven, 438 Mich 154, 159; 476 NW2d
374 (1991), quoting Detroit Edison Co v Michigan Mut Ins Co, 102
Mich App 136, 142; 301 NW2d 832 (1980).]
While the complaint in the present case certainly could have been crafted
more specifically with respect to describing precisely how defendant
accomplished these violations, i.e., how it “advertised,” Flowserve’s allegations
were sufficient to trigger a duty to defend. Flowserve alleged that Pro-Seal used
Flowserve’s trademarks to identify Pro-Seal products and through its actions
3
caused customer confusion regarding the origin or manufacturer of the goods.
From these allegations alone, it can be deduced that Pro-Seal was accused of
taking actions that inherently involved notice broadcast or published to the
general public or specific market segments about its goods, products, or services
for the purpose of attracting customers or supporters. Thus, the Court of Appeals
correctly determined that plaintiff had a duty to defend Pro-Seal.
On that basis, I would affirm the Court of Appeals. But even if I agreed
with the majority’s substantive analysis, I would not remand this case to the trial
court to allow it to determine anew whether plaintiff was required to defend ProSeal. The trial court was presented with this and other issues in the proceedings
on this declaratory judgment action, and it made its ruling accordingly. In its
written opinion and order granting summary disposition for plaintiff, the trial
court described the nature of the claims being made, summarized the various
complaint allegations, and ruled that plaintiff had no duty to defend. In fact, it
ruled that “coverage is excluded for advertising injuries that are ‘knowingly
made.’” See ante at 3. While the trial court did not provide a detailed analysis
with regard to the alleged “advertising injury,” it is clear that it found one
because it determined that the advertising injury was made knowingly. And it
did not use conditional language, such as stating that if there were an advertising
injury, it was knowingly made. Presumably, the trial court is unlikely to change
its mind on remand, making the preliminary “victory” in this case hollow for
4
defendant. Quite simply, the majority’s remand unfairly gives plaintiff a second
opportunity to convince the trial court to again rule in its favor.
Michael F. Cavanagh
Elizabeth A. Weaver
5
STATE OF MICHIGAN
SUPREME COURT
CITIZENS INSURANCE COMPANY,
Plaintiff/Counter-Defendant-
Appellant,
No. 130099
v
PRO-SEAL SERVICE GROUP, INC., doing
business as PRO-SEAL, INC.,
Defendant/CounterPlaintiff-Appellee.
and
SETH SHORT, RANDY QUINCY,
FLOWSERVE CORPORATION, and
FLOWSERVE MANAGEMENT
COMPANY,
Defendants.
KELLY, J. (dissenting).
The majority has decided that plaintiff Citizens Insurance Company had no
duty to defend defendant Pro-Seal Service Group, Inc., in the underlying
trademark infringement action. It asserts that the complaint did not allege an
advertising injury as that term is defined by the parties’ commercial general
liability policy (CGL policy). I believe that the complaint alleges one of the
advertising injury offenses covered by the policy and the injury complained of
does not fall within an enumerated exception to coverage. As a consequence, I
respectfully dissent. I would affirm the judgment of the Court of Appeals.
THE UNDERLYING FACTS
Defendant Pro-Seal is in the business of selling and repairing mechanical
seals used in high-temperature and extreme-pressure environments. It is not a
manufacturer of these seals but a distributor that sells mechanical seal products
manufactured by others and performs repairs on seals, using its own employees.
In the underlying action, a customer of Pro-Seal requested that Pro-Seal
make repairs and modifications to mechanical seals that the customer had
purchased from defendants Flowserve Corporation and Flowserve Management
Company (Flowserve). Flowserve is a large manufacturer of mechanical seals that
also operates a repair business for its seals.
Flowserve and Pro-Seal are
competitors in the Alaskan market in both the sale of new seals and in the repair of
worn seals.
Pro-Seal repaired two Flowserve mechanical seals and shipped them to
Alaska Roteq Corporation, an Alaskan distribution center engaged in the
distribution and sale of mechanical seals, for delivery to Pro-Seal’s client. The
seals were shipped in a distinctive Flowserve reusable container. Pro-Seal’s name
appeared on the outside with a prominent red label that displayed the location of
and contact information for Pro-Seal, a product description, and testing
information. The exterior packaging also displayed the Flowserve trademark.
2
An employee of Flowserve observed the packaging while it sat in the open
on the premises of Roteq. The Flowserve employee knew that the product inside
had been repaired by Pro-Seal because the affixed label displayed Pro-Seal’s
name.
Flowserve intercepted the repaired seal and the box in which it was
contained.
Four months after the incident, Flowserve filed a complaint against ProSeal in the United States District Court in Alaska. It alleged, among other things,
that Pro-Seal created confusion in the marketplace by (1) imitating or infringing
trademarks and product marks, (2) by using trade secrets, blueprints, engineering
drawings, and packaging materials, and (3) by engaging in sales-related conduct,
all of which misrepresented Pro-Seal’s products as being Flowserve products in
violation of Flowserve product trademarks, trade names, and the Lanham Act. 15
USC 1125(a).
The complaint asserted that Pro-Seal unfairly competed with
Flowserve through these devices and misrepresented to particular customers and
the public that Pro-Seal’s products and services were Flowserve products and
services.
Pro-Seal notified its insurer, Citizens Insurance Company, of the lawsuit
and requested that it provide a defense. Citizens Insurance declined and filed this
lawsuit seeking a declaration that it had neither a duty to defend nor an obligation
to indemnify. Both parties moved for summary disposition. The trial court went
directly to an exclusion in the CGL policy. It pertains to injuries caused by acts of
the insured done with knowledge that an injury to another will occur. It decided
3
that the exclusion applied and, as a result, that Citizens Insurance had no duty to
defend.
Pro-Seal appealed to the Court of Appeals, which, in a published opinion,
vacated the trial court’s order. The appellate court determined that the advertising
injury coverage under the CGL policy required Citizens Insurance to defend the
underlying action. It reasoned that the substance of the complaint relied on the
doctrine of “trade dress,” a theory on which recovery could be based. The claimed
injury, the appeals court held, arguably fell within the definition of an advertising
injury. It ruled that the CGL policy exclusion did not apply because the complaint
alleged both intentional and nonintentional acts. Flowserve, it held, could have
recovered without proving that any relevant act was committed intentionally.
STANDARD OF REVIEW
This Court reviews de novo the interpretation given to language in an
insurance contract. Klapp v United Ins Group Agency, Inc, 468 Mich 459, 463;
663 NW2d 447 (2003).
An insurance company’s duty to defend its insured
depends on the allegations the third party makes in the underlying complaint
against the insured. Illinois Employers Ins of Wausau v Dragovich, 139 Mich App
502, 506; 362 NW2d 767 (1984). If the allegations fall even arguably within the
coverage of the policy, the insurer has a duty to defend. American Bumper & Mfg
Co v Hartford Fire Ins Co, 452 Mich 440, 450-451; 550 NW2d 475 (1996).
Where there is doubt about whether the complaint alleges a liability of the insurer
4
under the policy, the doubt must be resolved in favor of the insured. Polkow v
Citizens Ins Co, 438 Mich 174, 180; 476 NW2d 382 (1991).
ADVERTISING INJURY
The issue in this case is whether Citizens Insurance had a duty to defend
under the CGL policy. In resolving this issue, the Court must construe the terms
of the policy. A court will not hold an insurance company liable for a risk that it
did not assume. Henderson v State Farm Fire & Cas Co, 460 Mich 348, 354; 596
NW2d 190 (1999).
The policy provides in section 1(a) that Citizens Insurance “will pay those
sums that the insured becomes legally obligated to pay as damages because of
personal and advertising injury.” In relevant part, “advertising injury” is defined
in Section V, paragraph 14:
“Personal and advertising injury” means injury, . . . arising
out of one or more of the following offenses:
* * *
(g) Infringing upon another’s copyright, trade dress, or slogan
in your “advertisement.”
In order to qualify as an advertising injury under this subsection, two
requirements must be satisfied:
Pro-Seal must have infringed Flowserve’s
copyright, trade dress, or slogan, and the infringement must have occurred in ProSeal’s “advertisement.”
Flowserve alleged that Pro-Seal used Flowserve’s trademark and
represented Flowserve products to be its own, and sent a seal that it had repaired to
5
a customer in distinctive Flowserve packaging. The “trade dress” of a product
refers to the product’s overall image and may include features such as a particular
sales technique. Two Pesos, Inc v Taco Cabana, Inc, 505 US 763, 764; 112 S Ct
2753; 120 L Ed 2d 615 (1992). It is a broad term that is expansive enough to
include Flowserve’s allegations, even though Flowserve never used the term
“trade dress.” Thus, considering the substance of the claim, contrasted with the
language of the complaint, as this Court must do, the complaint alleged that ProSeal infringed Flowserve’s trade dress. See American Bumper, 452 Mich 451452.
The injury must also arise out of an “advertisement” in order to qualify as
an advertising injury. As defined by the CGL policy, an “advertisement” takes
place when the following four elements are satisfied: (1) a notice about the
company’s goods, products, or services, (2) is broadcast or published, (3) to the
general public or specific market segments, (4) for the purpose of attracting
customers.1
The first requirement is that there be notice about the company’s goods,
products or services. The majority opinion defines “notice” as including “‘a
written or printed statement conveying . . . information.’” Ante at 9 (citation
omitted.) In this case, Pro-Seal shipped a package containing a label displaying its
1
“Advertisement” is defined in the CGL policy as “[n]otice that is
broadcast or published to the general public or specific market segments about
your goods, products or services for the purpose of attracting customers or
supporters.”
6
name as well as product information. This satisfied the notice requirement under
the majority’s definition.
The next inquiry concerns whether the notice was broadcast or published.
As defined by the majority, “publish” is “‘to make publicly . . . known.’” Ante at
10 (citation omitted).
The act of providing a member of the public with
information, without more, makes the information public. Since Pro-Seal placed
the label on a package, then sent that package to a customer, there was publication.
The next requirement is that the notice be conveyed to the general public or
to specific market segments. There is no definition in the CGL policy of “specific
market segments.” However, given that “segment” is a synonym for “piece” or
“section,” it can be presumed that “market segments” refers to particular
customers or vendors in the marketplace. Rogets II: The New Thesaurus (3d ed).
Here, as the parties agree, the geographic area where Pro-Seal and
Flowserve competed, the North Slope of Alaska, contains few customers. Because
the market is so restricted, communication with one customer or vendor would be
communication with a market segment. Accordingly, I conclude that, the sending
of the package to Roteq for delivery to a specific customer constituted giving
notice to a specific market segment.
The final requirement is that the notice be for the purpose of attracting
customers. Flowserve’s complaint alleges that Pro-Seal unfairly competed because
its communications in the marketplace about its products and services caused ProSeal products and services to be confused with those of Flowserve. The essence
7
of Flowserve’s claim is that, by shipping a seal in a Flowserve package with a
label containing Pro-Seal’s contact information, Pro-Seal unfairly sought to attract
customers. This allegation satisfies the final requirement.
Since the allegation is that Pro-Seal infringed Flowserve’s trade dress in
Pro-Seal’s “advertisement,” I believe that the complaint asserted an advertising
injury, as the policy defines that term.2 Accordingly, Citizens Insurance had a
duty to defend unless a specific policy exclusion excused it.
The majority disagrees and holds that Citizens Insurance had no duty to
defend. It claims that the purpose of the notice must be to attract “potential”
customers. Ante at 10. According to the majority, since the package was sent to a
specific customer, the purpose of its label was to “allow that specific customer to
contact defendant with any questions or complaints about the product,” not to
attract potential customers. Ante at 11.
The majority claims that I disregard the fact that the conduct complained of
“was not undertaken to ‘attract[] customers or supporters.’” Ante at 11 n 6.
disagree.
I
Actually, it is the majority that errs by improperly ignoring the
complaint in deciding that there is no duty to defend. See Protective Nat'l Ins Co
of Omaha v Woodhaven, 438 Mich 154, 159; 476 NW2d 374 (1991).
2
Subsection f provides another means by which there could be an
advertising injury. That subsection indicates that there is an advertising injury
when the injury arises out of “[t]he use of another’s advertising idea in your
‘advertisement.’” However, because coverage is available for an advertising
injury as defined in subsection g, it is unnecessary to determine if an advertising
injury was alleged as defined by subsection f.
8
A closer look illustrates that the majority’s decision is contrary to crucial
allegations in the complaint. Paragraph 22 of the complaint alleges that Pro-Seal’s
actions have led to customer confusion and lists specific examples of such acts.
Subpart e of that paragraph discusses the particular act at issue in this case.
Paragraphs 34 through 37 assert the unfair competition claim. Paragraph 34
repeats and realleges the allegations of the prior 33 paragraphs. Paragraphs 35
through 37 contain the substance of the unfair competition claim, which is that
Pro-Seal created confusion in the marketplace and this confusion caused
Flowserve to lose business.
Though the complaint never explicitly states that the particular act at issue
was done to “attract[] customers or supporters,” the duty to defend cannot be
limited by the precise language in the pleadings. American Bumper, 452 Mich
450-451. Rather, the insurer has a duty to look beyond the allegations to analyze
whether coverage is required. Id. at 452 By asserting that the particular act at
issue was done to cause confusion in the marketplace at Flowserve’s expense,
Flowserve alleged that the particular act was done to attract customers.
The majority appears to agree that the act at issue was done to cause
confusion in the marketplace but still concludes that it was not performed to attract
customers. This conclusion ignores reality. The only reason for Pro-Seal to cause
confusion in the marketplace would be to draw customers to itself and away from
Flowserve. Flowserve’s complaint alleges as much by asserting that Flowserve
has lost business as a result of this confusion. The majority errs by failing to look
9
beyond the precise language used in the pleading to determine whether there is a
duty to defend
The majority also errs by relying on the fact that the container was sent to
an existing customer in order to conclude that the notice was not sent to attract
customers. This fact is irrelevant. The policy says nothing about “potential”
customers. As long as the complaint alleges that the notice was meant to attract
customers, be they existing or potential, the requirement is satisfied. Here, the
complaint alleges that the container was sent to an existing customer. It further
alleges that this act was done to cause confusion. Flowserve claims that this
marketplace confusion made it lose business. We should consider the substance of
this claim: Flowserve accused Pro-Seal of confusing this customer so that in the
future the customer would conduct business with Pro-Seal under the mistaken
belief that he was conducting business with Flowserve. By making this allegation,
Flowserve clearly accused Pro-Seal of acting with the intent to attract future
business from this particular customer.
By deciding as it does, the majority would seem to require wide-scale
dissemination of information, such as by television or radio, for there to be an
advertisement. I believe that it is error to impose such a requirement. There is
nothing in the policy that precludes a finding that giving notice to a specific
customer can qualify as an advertisement.3 If the notice is published to the general
3
The policy does require that the notice be sent to the general public or
specific market segments. However, this language does not preclude situations,
(continued…)
10
public or to a specific market segment for the purpose of attracting customers,
there is no requirement that it be widely disseminated.
Rather, any such
requirement is one of this Court’s own making.
It is improper to read a nonexistent limitation on coverage into an insurance
policy. This is especially true where, as here, the party benefiting from the
limitation drafted the policy.
If Citizens Insurance had intended to require
dissemination through the public airwaves or communication with a large number
of people, it easily could have imposed such a requirement. It did not do so. It is
the insurance company’s obligation to define the coverage to be provided. The
courts should not save an insurance company from the plain meaning of terms that
it used in its policy or artificially limit the scope of coverage, as the majority does
here.
EXCLUSIONS
As discussed above, I believe that the complaint alleged an advertising
injury as that term is defined by the policy. Accordingly, Citizens Insurance has a
duty to defend Pro-Seal unless a specific exclusion excuses it from this duty. See
Protective Nat’l Ins Co, 438 Mich at 159.
The CGL policy’s “personal and advertising injury” coverage is subject to
the following exclusion:
(…continued)
like this one, where the market is so restricted that one customer would constitute
a specific market segment.
11
2. Exclusions
This insurance does not apply to:
(a) “Personal and advertising injury”:
(1) Caused by or at the direction of the insured with the
knowledge that the act would violate the rights of another and would
inflict “personal and advertising injury[.]”
By requiring knowledge that the acts would violate the rights of another,
this exclusion applies only to claims of intentional wrongdoing. Here, several of
the allegations in Flowserve’s complaint contain no reference to intent and seek
recovery for conduct that was innocent, inadvertent, negligent, or reckless. As a
result, even though Citizens Insurance correctly points out that the complaint also
alleged intentional wrongdoing, the exclusion does not excuse it from its duty to
defend Pro-Seal. An insurer must defend its insured even if theories of liability
asserted are not covered under the policy, if any asserted theories of recovery fall
within the policy coverage. American Bumper & Mfg Co, 452 Mich at 451.
CONCLUSION
Since the complaint alleged that Pro-Seal infringed Flowserve’s trade dress
in its “advertisement,” and no specific policy exclusion excused Citizens
Insurance from its duty to defend, I must dissent. I would affirm the judgment of
the Court of Appeals.
Marilyn Kelly
Elizabeth A. Weaver
12
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