Sentex Systems, Inc., a California Corporation v. Hartford Accident & Indemnity Company, a Connecticut Corporation
Docket: 95-55980
Court: Court of Appeals for the Ninth Circuit; August 19, 1996; Federal Appellate Court
An insured, Sentex Systems, Inc., sued its insurer, Hartford Accident and Indemnity Company, for breaching its duty to defend in a lawsuit concerning 'advertising injury' under their insurance policy. The case, originating from the U.S. District Court for the Central District of California, involves a dispute over coverage under Connecticut law. The district court granted summary judgment in favor of Sentex, which led to Hartford's appeal.
The underlying issue arose when Electronic Security Services, Inc. (ESSI) accused Sentex and an employee, Paul Colombo, of inducing a breach of a non-competition agreement and misappropriating trade secrets, subsequently leading to a settlement of $35,000. Hartford denied coverage for defense costs despite Sentex's requests, which triggered the lawsuit.
Under Hartford's Commercial General Liability (CGL) policy, coverage for 'advertising injury' applies only if it is caused by offenses committed during the policy period related to advertising goods, services, or products. The district court found that Sentex engaged in advertising activities that caused ESSI's alleged injuries, a conclusion not contested on appeal. Hartford contended that the district court erred in interpreting 'advertising injury' to include actions beyond the text or form of advertisements. The Ninth Circuit reviewed the summary judgment de novo but affirmed the district court's decision on narrower grounds.
Hartford's definition of coverage is based on a precedent from Iolab Corp. v. Seaboard Sur. Co., which ruled that patent infringement does not qualify as 'piracy' under certain insurance policies. However, this case is deemed irrelevant as it involves patent infringement, while the current issue concerns 'misappropriation of advertising ideas.' There are no California cases interpreting the specific policy provisions in question, but California law mandates that policy language be given its ordinary meaning. The language in the policy applies broadly to 'ideas,' not just actual advertising texts. ESSI's complaint against Sentex involves the alleged misappropriation of trade secrets used in marketing, including customer lists and billing methods. ESSI's president indicated that although he had not seen the trade secrets in Sentex's written materials, they were utilized in other marketing efforts, highlighting the evolving nature of advertising beyond written formats. The claims focus on marketing and sales rather than manufacturing secrets. The court distinguishes this from Simply Fresh Fruit, where misappropriation of trade secrets related to processing did not trigger advertising injury coverage. While Hartford argues that merely misappropriating customer lists may not qualify for coverage, ESSI's broader claims do. Therefore, the district court's determination that Hartford breached its duty to defend is affirmed, although the broader conclusion regarding customer lists triggering coverage based on common law unfair competition is not fully endorsed. The court concludes that ESSI's lawsuit raised a potential liability under the offense of 'misappropriation of advertising ideas,' making it unnecessary to explore other potential liabilities.
