On January 5, 2022, the United States Court of Appeals for the Third Circuit found that Evanston Insurance Company ("Evanston") owed Vitamin Energy, LLC ("Vitamin Energy") a duty to defend a lawsuit brought by the owner of the 5-hour Energy brand, reversing a district court decision that had found no duty to defend as a matter of law. The case was decided under Pennsylvania law. See Vitamin Energy, LLC v. Evanston Ins. Co., Case No. 20-3461 (Jan. 5, 2022).
The Evanston insurance policy provided advertising injury coverage for the "publication of material that libels or slanders a person's or organization's products, goods or operations or other defamatory or disparaging material, occurring in the course of the Named Insured's Advertisement." In federal court in Michigan, 5-hour Energy had asserted claims against Vitamin Energy under the Lanham Act for trademark infringement, false designation of origin, false advertising, and trademark dilution. It also made claims under Michigan law for trademark infringement, indirect trademark infringement, and unfair competition.
There are five key takeaways from the Third Circuit's decision finding a duty to defend.
The Duty to Defend Is Broad
The Third Circuit began its unanimous opinion with a simple statement: "Pennsylvania law imposes on insurers a broad duty to defend lawsuits brought against those they insure." Then, the court explained what that means in practice.
The court quickly honed in on the factual allegations of "comparative advertising," particularly paragraph 40 of the 5-hour Energy Complaint which included a chart that compared Vitamin Energy to its competitors, including 5-hour Energy. The parties agreed that the term "disparaging material," as used in the Evanston insurance policy, includes, at a minimum, an injurious false statement of fact about another's goods. Although the allegedly false statement was that Vitamin Energy contains 1000 MG of Vitamin C and 100% Daily Value of Vitamin B, the allegation was that this allegedly false statement left the false impression that Vitamin's Energy's products were superior to 5-hour Energy in that regard, thereby disparaging 5-hour Energy with regard to its vitamin content. The crux of the allegation was that Vitamin Energy had more vitamin B than 5-hour Energy. That was not mere puffery about the superiority of Vitamin Energy, but an alleged disparagement based on a false comparison of fact.
The court construed the 5-hour Energy Compliant liberally in favor of coverage to say that the allegations are "best read" as saying not only that Vitamin Energy's own products contain 100% of the daily recommended value of vitamin B, but also that 5-hour Energy's products do not. Because the comparison was alleged to have disparaged 5-hour Energy, the allegations fell within the advertising injury coverage.
The Gravamen of the Complaint Does Not Matter When Considering the Duty to Defend
The court rejected Evanston's argument that coverage should be denied because the "gravamen" of 5-hour Energy's complaint is that Vitamin Energy's slogan promoting "up to 7 HOURS of Energy" amounts to trademark infringement. The court found that, even assuming 5-hour Energy is more concerned with trademark infringement than its other claims, the question established by Pennsylvania Supreme Court precedent is "whether a claim against an insured is potentially covered[,]" not whether the most salient claim is potentially covered.
The Term "Unfair Competition" As Used in an Exclusion Is Limited By Context
The Third Circuit considered the exclusions raised by Evanston even though the District Court had not reached them (because the District Court had found no coverage). One exclusion would eliminate coverage for any Claim "based upon or arising out of Personal Injury or Advertising Injury arising out of piracy, unfair competition, the infringement of copyright, title, trade dress, slogan, service mark, service name or trademark, trade name, patent, trade secret or other intellectual property right."
The court found that the term "unfair competition" in the exclusion gains meaning from its neighbors – "piracy, … the infringement of copyright, title, trade dress, slogan, service mark, service name or trademark, trade name, patent, trade secret or other intellectual property right[.]" The court reasoned that "[a]s used in the Policy, those terms refer narrowly and consistently to intellectual property rights, and so should 'unfair competition[.]'"
This is an appropriate use of noscitur a sociis to narrow the meaning of exclusionary language based on its context. Twenty years ago, the Third Circuit declined to apply the same doctrine to narrowly construe an insuring agreement. In New Castle County v. National Union Fire Insurance Company, 243 F.3d 744, 755 (3d Cir. 2001), the court noted that while the term "invasion of the right of private occupancy" had been repeatedly used in insurance policies for over twenty years, courts had not identified a uniform definition of the term and had repeatedly found the term to be ambiguous; yet, insurance companies continued to use it. So the court construed that insuring agreement term broadly. In dissent, Judge Scirica reasoned that because the term "invasion of the right of private occupancy" was used in connection with the terms "wrongful eviction" and "wrongful entry," he would have limited the term "invasion of the right of private occupancy" to situations involving possessory interests in real property rather than to deprivations of the right to use and enjoy land (like the denial of a building permit, the voiding of a development plan, and the rezoning of land). Because insuring agreements must be construed broadly, noscitur a sociis cannot be used to narrow ambiguous language in an insuring agreement. The majority in New Castle County properly applied the ambiguity rule to construe ambiguous language against the insurance company and to broadly construe an insuring agreement. When considering exclusionary language, however, which must be construed narrowly, the Third Circuit in Vitamin Energy appropriately applied noscitur a sociis to strictly construe exclusionary language in light of the context in which it is used.
The Third Circuit Interpreted the Insurance Policy In Light of Its Purpose
The court further noted that if the intellectual property exclusion did bar coverage for unfair competition based on commercial disparagement, it would arguably render the insurance policy's coverage of injury from "disparaging material" a nullity, which the court doubted the parties intended. The Third Circuit could have sloppily concluded that the entire case arose out of trademark infringement, but instead, the court carefully looked at the legal and factual allegations to find at least one claim that was potentially covered. Read as a whole, the insurance policy reflected the parties' mutual intent that allegations of product disparagement would be covered, so it would have been wrong to broadly construe an exclusion in a manner that swallowed that coverage whole.
Knowledge of Falsity for One Claim is Not Knowledge of Falsity for All
The Third Circuit rejected Evanston's assertion that the knowledge of injury exclusions removed any potential for coverage. Evanston cited 5-hour Energy's allegation that Vitamin Energy infringed on 5-hour Energy's trademarks with actual knowledge that it was doing so. But the court noted that Vitamin Energy seeks coverage based on a different claim: its allegedly false or misleading representation about the vitamin content of 5-hour Energy's products. Vitamin Energy's alleged knowledge of trademark infringement did not eliminate coverage for a disparagement claim, and so does not eliminate the duty to defend.
Conclusion
Although many intellectual property claims are excluded from standard-form general liability insurance policies, comparative allegations that disparage a competitor's business or product have long been covered by the personal and advertising injury coverage. In addition, an exclusion for "unfair competition" will not reach allegations of product disparagement because, while the disparagement of a competitor's product might fit the general meaning of unfair competition, when that term is used in an exclusion, it must be construed narrowly in light of its surrounding context.
Timothy P. Law is a partner in the insurance recovery group in the Philadelphia office of Reed Smith, LLP. Tim represents businesses, universities, and non-profits in disputes with property and liability insurance companies.