Seventh Circuit Finds Insurance Company Has Duty to Defend Against Trademark Infringement

In Santa’s Best Craft, LLC. v. St. Paul Fire & Marine Ins. Co., 2010 U.S. App. LEXIS 13470 (7th Cir. July 1, 2010), Santa’s Best Craft, LLC (SBC) sought a decision requiring its insurance company St. Paul Fire & Marine Ins. Co. (St. Paul) to defend SBC against a charge of trademark infringement brought by JLJ.  JLJ alleged that SBC copied JLJ’s “Stay Lit” lights packaging design, and specifically that SBC sold Stay-On lights using false and deceptive language.  As such, JLJ sued SBC for trademark infringement, false designation of origin, false advertising, trademark dilution and deceptive trade practices. SBC asked its insurer, St. Paul, for a defense citing the coverage for advertising injuries included in its Commercial General Liability (CGL) policy.

St. Paul initially denied coverage, but continued investigating whether coverage should apply.  During St Paul’s investigation of whether the insurance policy covers the defense cost, SBC filed a suit arguing that St. Paul owed the defense cost under the CGL policy. St. Paul responded that the CGL policy did not cover the false representation claims because there were two policy exclusions, which meant that it owed no defense for the remaining claims.

The District Court held that St. Paul had a duty to defend because the allegations may potentially give rise to a claim for unauthorized use of a slogan. See Cincinnati Ins. Co. v. Zen Design Group, Ltd., 329 F.3d 546, 553-57 (6th Cir. 2003).  Thus, the JLJ complaint created a claim for infringement of slogan, which was covered as an “advertising injury offense.” See Santa’s Best Craft v. St. Paul Fire & Marine Ins. Co. (Santa’s Best I), 1:04-cv-01342, 2004 U.S. Dist. LEXIS 14760, 2004 WL 1730332, at *10 (N.D. Ill. July 28, 2004).  Lastly, the District Court found that the CGL policy’s intellectual property exclusion did not apply, and to extent that it did, the allegations in the complaint could be construed as an infringement of a trademarked slogan, which was an exception to the exclusion. See 2004 U.S. Dist. LEXIS 14760, [WL] at **7-8.

On appeal, the Court of Appeals for the Seventh Circuit basically agreed with the conclusion of the District Court. The Seventh Circuit held that St. Paul’s CGL policy covers “unauthorized use” of a “slogan,” which suggests that the claims underlying this conduct include as an element the ownership or, at least, control, over the slogan. JLJ’s complaint contains allegations that SBC copied certain JLJ slogans, suggesting that JLJ had some claim of ownership over the slogans.

Next, the Seventh Circuit looked at whether the IP exclusion excused St. Paul from having to defend against allegations of unauthorized use of a slogan.  Specifically, St. Paul had alleged that the slogan was not trademarked by JLJ, and instead the complaint is related to trade dress which fits within the IP exclusion of the CGL policy.

The Seventh Circuit held that “unless a slogan infringement claim would not have arisen but for the trade dress violation claim (or necessarily arises out of the trade dress violation claim)–clearly not the case here–we cannot find that the exclusion for trade dress claims excuses St. Paul from a duty to defend the underlying action.” Moreover, the Seventh Circuit held that to the extent that the IP exclusion applies, “the differences between trade dress and trademark have so narrowed that, if the IP exclusion applied, the exception for (IP exclusion provision) trademarked slogans likely did as well.”  Thus, the Seventh Circuit found that the type of trademark infringement caused by the alleged use of JLJ’s slogan fit within the exception to the IP exclusion provision.

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