Axelrod v Magna Carta Cos.

[*1] Axelrod v Magna Carta Cos. 2007 NY Slip Op 52165(U) [17 Misc 3d 1127(A)] Decided on November 7, 2007 Supreme Court, New York County Moskowitz, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 7, 2007
Supreme Court, New York County

Harvey Axelrod d/b/a Axelrod Co., Plaintiff,

against

Magna Carta Companies, Public Service Mutual Insurance Company and Paramount Insurance Company, Defendants,



602783/2006

Karla Moskowitz, J.

This is an insurance declaratory judgment action relating to a federal copyright infringement lawsuit. Defendants Magna Carta Companies ("Magna Carta"), Public Service Mutual Insurance Company ("PSMIC") and Paramount Insurance Company ("Paramount") move for summary judgment (CPLR 3212) declaring that they have no obligation to defend or indemnify plaintiff Harvey Axelrod d/b/a S. Axelrod Co. ("Axelrod") in connection with the action entitled Quest Beads & Cast Inc. v S. Axelrod Co., 04-CV-7130 (SD NY) (the "Underlying Action" or the "Quest Action") on the ground that the alleged infringement did not occur in the course of advertising as the relevant insurance policy required. Defendants also seek summary judgment regarding other damages that allegedly the policy does not cover and alternatively seek dismissal of defendants Magna Carta and Paramount on the grounds that they did not issue a policy to plaintiff. To the extent the court finds they issued a policy, defendants deny coverage for the Underlying Action. Plaintiff cross-moves for a declaration of coverage under the policy and seeks $138,182.38 in defense costs, indemnification for a $100,000 settlement paid in the Underlying Action, $87,562.50 in legal fees on this motion, plus pre-judgment interest on all those sums.

Facts/Background

In the Underlying Action, Quest Beads & Cast Inc. ("Quest") alleged that it manufactures and sells charms and costume jewelry, creating and designing virtually all of its products. Quest asserted that the majority of its products were works of art embodying copyrightable subject matter. Sometime in 2000-2002, Quest created original charms that constituted sculptural expressions. In compliance with the provisions of the Copyright Act, the company secured exclusive copyrights for those works and applied for registrations from the U.S. Copyright Office. Quest alleges that without its consent Axelrod "infringed such copyrights by reproducing, manufacturing, and/or distributing, charms which are copies of the Works of Plaintiff and/or by preparing derivative works based on the Works," and that Axelrod "sold charms embodying Plaintiff's copyrighted Works." Quest further alleged that it notified Axelrod of the infringing acts, and that, although Axelrod asserted that it had discontinued the infringing sales, it refused to provide a full accounting of past infringing sales. In the prayer for relief, Quest sought an entry of judgment as follows: [*2]

that Defendant . . . be enjoined permanently from infringing Plaintiff's aforesaid copyrights in any manner including . . . manufacturing, displaying, distributing, offering for sale, selling, shipping, or delivering, infringing copies of Plaintiff's copyrighted designs in the possession or under the control of Defendant.

That Defendant . . . be ordered to deliver to Plaintiff any and all originals, copies, facsimiles, or duplicate of the Works and any and all plates, molds, matrices, masters or other articles by means of which copies of the Works may be produced, in [its] possession, custody or control;

That Defendant be required to pay to Plaintiff such damages as Plaintiff has sustained in consequence of Defendant's infringements of Plaintiff's copyrights and to account for all gains, profits and advantages derived by Defendant from said infringements, and that such award for damages be trebled due to the willful and wanton nature thereof;

Awarding Plaintiff exemplary and/or punitive damages;

Awarding Plaintiff its costs and reasonable attorney's fees incurred in the prosecution of this action pursuant to 17 U.S.C. § 505.

PSMIC issued a Commercial General Liability insurance policy (the "Policy") to Axelrod effective February 25, 2000, and, as relevant here, in effect through February 2005. In Section I, "COVERAGE B. PERSONAL AND ADVERTISING LIABILITY," the Policy provided:

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 coverage part applies. We will have the right and duty to defend any "suit" seeking those damages.

b. This insurance applies to:

(1) "Personal injury" caused by an offense arising out of your business, excluding advertising, publishing, broadcasting or telecasting done by or for you.

(2) "Advertising injury" caused by an offense committed in the course of advertising your goods, products or services; but only if the offense was committed in the "coverage territory" during the policy period.

Under Section V, the Policy defined "advertising injury" as follows:

"Advertising injury" means injury arising out of one or more of the following offenses:

a. 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;

b. Oral or written publication of material that violates a person's right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or [*3]

d. Infringement of copyright, title or slogan.

Axelrod's broker timely provided PSMIC with a copy of the Quest complaint in September 2004. By letter dated October 7, 2004, PSMIC disclaimed coverage on the ground that the complaint did not assert any claims for personal injury or advertising injury. The letter further asserted that the disclaimer was based on the information then-available to PSMIC and invited the submission of any additional information relevant to the coverage determination. PSMIC agreed to provide counsel for the limited purpose of securing an extension of time to answer the Quest complaint and advised the insured that it would thereafter need to provide for its own defense. Axelrod thereafter retained independent counsel to defend the Underlying Action.

Quest served an amended complaint in the Underlying Action on December 9, 2004. The new pleading was unchanged except for the addition of the following allegation:

Upon information and belief, Defendant has infringed the copyright rights of Plaintiff in the Works by advertising unauthorized copies of the Works and by offering such unauthorized copies for sale. Defendant's advertising has consisted, inter alia, of catalogs which Defendant distributed to customers and potential customers.

Axelrod's counsel concedes that Quest added this language after he advised Quest that PSMIC had declined coverage based upon the failure to plead an advertising injury. However, Axelrod never forwarded a copy of the amended pleading to PSMIC; nor did Axelrod seek reconsideration of the coverage determination or communicate with PSMIC about the Quest litigation. The parties settled, and the court dismissed the Underlying Action in early 2006.

Plaintiff commenced this declaratory action on August 22, 2006 seeking coverage for defense and indemnification costs in the Underlying Action. The Verified Complaint in this action constituted the first notice that PSMIC received about the settlement of the Underlying Action. The Verified Complaint does not refer to or annex a copy of the amended complaint in the Underlying Action. PSMIC first learned of the existence of the amended complaint in the Underlying Action on the day it received the Verified Complaint in this action.

In their answer, defendants counterclaimed for a declaratory judgment that defendants owe no insurance coverage to the plaintiff for the Underlying Action, are not obligated to reimburse plaintiff for defense costs or indemnity payments and are not liable for any other damages alleged in its complaint. Defendants also counterclaimed for costs, attorney's fees and disbursements.

Discussion

The court grants the motion to dismiss in its entirety. When a complaint suggests a "reasonable possibility of coverage," it triggers an insurer's "exceedingly broad" duty to defend. (BP Air Conditioning Corp. v One Beacon Ins. Group, 8 NY3d 708, 714 [2007]; see Frontier Insulation Contractors, Inc. v Merchants Mut. Ins. Co., 91 NY2d 169 [1997]). In determining coverage, "the court's duty is to compare the allegations of the complaint to the terms of the policy." (A. Meyers & Sons Corp. v Zurich Am. Ins. Group, 74 NY2d 298, 302 [1989]; Great Northern Ins. Co. v Kobrand Corp., 40 AD3d 462 [1st Dept 2007]). However, "[w]hile the insurer's burden is a heavy one, the court should not impose a duty to defend on an insurer through a strained, implausible reading of the complaint that is linguistically conceivable but tortured and unreasonable." (Atl. Mut. Ins. Co. v Terk Tech. Corp., 309 AD2d 22, 30 [1st Dept 2003]). [*4]

Here, no reasonable reading of the first complaint in the Underlying Action suggests that Quest charged Axelrod with a covered "advertising injury." To trigger defendants' duty to defend under the Policy, the injury alleged in the Underlying Action must (1) constitute one of the offenses enumerated in the policy's definition of "advertising injury" and (2) have arisen out of the activities of the insured "in the course of advertising [its] goods, products or services." (See A. Meyers & Sons Corp., 74 NY2d at 303). It is undisputed that the Underlying Complaint charged Axelrod with one of the qualifying offenses listed in the Policy,i.e., "infringement of copyright."

Accordingly, the relevant question is whether the complaint also sufficiently alleges that such infringement was committed "in the course of advertising." It is not sufficient to allege that infringement occurred merely in connection with the manufacture and sale of goods. (Quitman Mfg. Co., Inc. v Northbrook Nat. Ins., Co., 266 AD2d 105 [1st Dept 1999]). Nor does an allegation that the insured engaged in advertising activities with respect to the infringing goods suffice to trigger coverage (Jerry Madison Enters., Inc. v Grasant Mfg. Co., 1990 WL 13290 [SD NY 1990]), absent additional allegations that the advertisements themselves infringed copyrights and thereby caused some injury (see e.g. Amer. Mfrs. Mut. Ins. Co. v Quality King Distribs., Inc., 287 AD2d 527 [2d Dept 2001] [underlying federal complaint expressly alleged that insured's advertisements for counterfeit shampoo used and thereby violated federal plaintiff's trademark]; GRE Ins. Group v GMA Accessories, Inc., 180 Misc 2d 927 [Sup Ct NY Co 1998] [complaint "clearly claim(ed) that defendant committed copyright infringement specifically by means of those advertisements and in the course of its advertising activities"]).

A careful reading of the complaint in the Quest Action does not reveal or suggest any claim for damages arising out of infringing advertisements Axelrod placed. The pleadings are expressly limited to damages from the manufacture and distribution of infringing works. The cases that plaintiff relies on are all distinguishable in that they all involved pleadings that directly or impliedly identified infringing advertising activity. (See Century 21, Inc. v Diamond State Ins. Co., 442 F3d 79, 81 [2d Cir 2006] [complaint alleged that insured "marketed . . . goods in connection with a colorable imitation and simulation of the Gucci Trademarks"]; Technaoro v U.S. Fid. & Cas., 2006 WL 3230299 [SD NY 2006] [allegation of the "promotion or sale of jewelry items in connection with the PANTHERE mark or a colorable imitation" that "create(d) a likelihood of confusion such that the purchasing public is likely to believe that Defendants' jewelry items are Cartier items or are in some manner sponsored, approved or authorized by, or otherwise connected with Cartier"]; Energex Sys. Corp. v Fireman's Fund Ins. Co., 1997 WL 358007, at *3-4 [SD NY 1997] [complaint alleged trademark or trade dress infringement which necessarily involves advertising communication with consumer]; Mass. Bay Ins. Co. v Penny Preville, Inc., 1996 WL 389266, at *6 [SD NY] [affidavit submitted with complaint "included a specific and direct reference to the advertising activity"]; Ben Berger & Son, Inc. v Amer. Motorist Ins. Co., 1995 WL 386560, *3 [SD NY 1995] [trade dress claim alleged that catalog was used as a "commercial advertisement"]). Plaintiff's suggestion that the Second Circuit's determination in Century 21, supra, eliminated the requirement that the underlying pleadings allege infringement through advertising or "overruled" the holdings of Quitman and Jerry Madison in that regard is erroneous. While the court in Century 21 found that there could be a broad enough interpretation of the term "marketing" to embrace "advertising" activity, it did not dispense with the requirements that the pleadings (1) refer or allude to that activity and (2) allege that the activity itself constitutes infringement giving rise to injury. [*5]

The Quest pleading does not meet those requirements. Plaintiff's reliance on the complaint's reference to and incorporation of Axelrod's catalog is misplaced. Fully accepting plaintiff's premise that the catalog was a form of "advertising," the complaint fails to allege that the catalog itself constituted or contained infringing material or that some distinct injury arose from that material. Rather, Quest attached the catalog merely to evidence the sale of charms that infringed Quest's copyrights, a purpose that does not serve to bring the complaint within the Policy's coverage. (See A. Meyers & Sons Corp., 74 NY2d at 304). Contrary to plaintiff's suggestion, nothing but an outright misreading of the complaint could result in the conclusion that Quest was asserting a claim that the catalog itself or the product depictions were infringing "derivative works."

Plaintiff's further argument that Quest's demand to enjoin plaintiff from "offering [the charms] for sale" constitutes an advertising injury also fails. Assuming that "offering for sale" denotes "advertising" in the same way that the terms "marketing" or "promoting" do, there is once again no allegation that the alleged "offering" methods involved copyright infringement. Also without merit is plaintiff's reliance on the complaint's demand for the return of "matrices." Read in context, Quest sought the "matrices" that defendant used to manufacture plaintiff's products, not to prepare the catalog. Even if the catalog was implicated, there is still no allegation that the catalog was an infringing work or that the course of advertising inflicted some qualifying injury.

Accordingly, PSMIC was justified in disclaiming coverage of the Underlying Action. As for the amended complaint in the Underlying Action, it is undisputed that Axelrod never served the amended Quest pleading upon PSMIC despite ample opportunity to do so after Quest's retention of independent counsel. Therefore, plaintiff's arguments regarding whether the later pleading triggered coverage are unavailing. (See Argo Corp. v Greater New York Mut. Ins. Co., 4 NY3d 332, 338 [2005]). Finally, to the extent that plaintiff has not abandoned its claims against defendants Paramount and Magna Carta, it has raised no colorable opposition to defendants' showing that those entities did not issue any policies relevant to this dispute.

Accordingly, it is

ORDERED that the court grants defendants' motion for summary judgment; and it is further

ORDERED, ADJUDGED and DECLARED that defendants Magna Carta Companies, Public Service Mutual Insurance Company and Paramount Insurance Company are not obligated to defend or indemnify defendant Harvey Axelrod d/b/a Axelrod Co. in the action entitled Quest Beads & Cast Inc. v. S. Axelrod Company, 04-CV-7130 (SD NY); and it is further

ORDERED that the court denies plaintiff's claims for defense costs, legal fees on this motion and pre-judgment interest; and it is further

ORDERED that the court denies plaintiff's cross-motion for summary judgment; and it is further

ORDERED, ADJUDGED and DECLARED that plaintiff is not entitled to coverage under the policies.

That part of defendants' counterclaim seeking costs, disbursements and attorney's fees is severed and continues for an assessment in Part 03.

Defendants are directed to file a Note of Issue and contact the Clerk in Part 03 at 646-386-3300 for a date for the assessment.

The Clerk is directed to enter judgment accordingly. [*6]

Dated: November __, 2007

ENTER:

_______________________

J.S.C.