Federal Unfair Competition Violations

 AMCO Ins. Co. v. Inspired Techs., Inc., ___ F. Supp. 2d ___, 2010 WL 597048 (D. Minn. 2010)

The suit alleged false and misleading advertising by ITI in the suit against it by 3M. The lawsuit asserted federal unfair competition violations under the Lanham Act, 15 U.S.C. § 125(a) and state unfair competition laws under the Minnesota Uniform Deceptive Trade Practices Act (“MDPTA”), Minn. Stat. § 325D.44.

The particular fact allegations follow: (a) ITI’s marketing brochures are false, misleading and deceptive because, among other reasons, the purported “Actual Photo” of 3M Tape does not in fact depict an actual photo but instead has been manipulated in a false and deceptive manner in order to depict 3M tape in an unfavorable way;(b) ITI’s product packaging is false, misleading, and deceptive because the purported “Actual Photo” of 3M Tape is misrepresented in order to depict 3M Tape in manner that is contrary to its typical use and effectiveness.

The allegations note ITI’s testing and demonstration of 3M Tape in video, internet, and comparative advertising for Frog Tape. These are set forth in subheading (c), (d) and (e). There were objections that the AMCO representative was not given access to information requested in connection with its evaluation of the defense. Nevertheless,

On August 18, ITI received a letter from AMCO, which stated that AMCO would pay WW’s attorney’s fees from May 22, 2008, to the present at Johnson & Condon’s billing rate; that it would pay for ITI’s defense through Johnson & Condon (Kuderer); that if ITI rejected Kuderer as defense counsel and retained WW, ITI “will be responsible for all expenses incurred”; and that “AMCO[‘s] … acceptance of [ITI’s’] defense has to date been without reservation of rights.”

Id. at *3.

Upon completion of its evaluation, however, AMCO on October 1, 2008 advised that there were certain exclusions that might bar coverage and that it was conserving rights in the consequence.

An eventual settlement with 3M included AMCO’s funding of same on ITI’s behalf. Thereafter AMCO filed a declaratory relief action on October 16, 2008 claiming it had no duty to defend or indemnify ITI and that 3M’s claims fell within the scope of exclusionary provisions of the policy. The action addresses whether AMCO is responsible for paying WW’s attorneys’ fees.

The specific exclusions relied upon were that for “Knowledge of Falsity” and for “Defects or Errors in Testing,”

Both exclusions barred a defense.

The Court agrees with AMCO that “[i]t would defy logic to interpret th[e complaint’s] language as alleging anything other than [that] ITI acted falsely and with knowledge of that falsity.” . . . (citing Callas Enters., Inc. v. Travelers Indem. Co. of Am., 193 F.3d 952, 957 (8th Cir.1999)). That is, in the first two factual allegations in the complaint and in the answers to ITI’s interrogatories about those allegations, 3M clearly asserts that ITI intentionally altered, or “manipulated,” photos of 3M Tape in an attempt to deceive consumers about Frog Tape’s comparative merits. Accordingly, 3M’s first two factual allegations fall squarely within the Policy’s knowledge of falsity exclusion.

Id. at *5.

Contrary to the court’s analysis, the claim of manipulation could be successful without “knowledge of falsity” because there is no specific statement but rather an image which purports to be that of an actual photograph which was not misstated under one scenario but simply manipulated. In this sense, the term manipulated is analogous to the term misleading which can be established despite negligence or even gross negligence.

The court rejected the arguments which were preferred in a slightly different manner by noting, “[b]y presenting manipulated images of 3M Tape, ITI intended to deceive and confuse, and did deceive and confuse, potential customers for 3M tapes.” Id. at *6.

Here, the court is evaluating a factual issue as to whether there was liability for the asserted claim, making the determination that the only basis asserted appears to be consistent with the finding under which ITT would be libel and thus finding the exclusion applicable.

This approach intermixes a focus on the merits with a question of whether there is a potential for coverage under the asserted facts. As the case was not adjudicated, this ruling is inconsistent with the Aearo decision (Aearo Corp. v. American Int’l Specialty Lines Ins. Co., 676 F. Supp. 2d 738 (S.D. Ind. 2009)), which was neither distinguished nor cited by the parties to this case. Therein, Judge Hamilton, sitting by designation from the Seventh Circuit noted,

The majority of those courts have determined that the exclusion does not apply if the plaintiff in the underlying lawsuit could have succeeded without proving intentional misconduct. See Orlando Nightclub Enterprises, Inc. v. James River Ins. Co., 2007 WL 4247875, at *8 (M.D.Fla. Nov. 30, 2007) (collecting cases). These courts reason that, if the insured were to proceed to trial without the defense of its insurer, it could be found liable under a theory that did not require a showing of intentional conduct and was otherwise covered under the insurance policy. In such a case, the insurer would have a duty to indemnify the insured for its losses. Because the duty to defend is broader than the duty to indemnify, the insurer is thus required to defend the insured if the underlying lawsuit could succeed on any theory without proof of intentional conduct. Id. at *8-9. These cases are persuasive and are consistent with principles of Indiana law.

Aearo, 676 F. Supp. 2d at 748-49.

The court suggested that subsequent interrogatory answers also clarified that the statements were only capable of being understood in a sense that would preclude a defense. Again, the court was in effect anticipating adjudication of the underlying action and improper focus on the underlying merits.

The court also rejected the argument that the allegations were, in the alternative, negligently made with reckless disregard and that that would not prove the knowledge of falsity exclusion.

The court contends that there are no such alternative allegations though implicitly suggests had they been made that then the exclusion would not bar a defense. It distinguished Amerisure Co. v. Laserage Technology Corp., 2 F. Supp. 2d 296, 304 (W.D.N.Y. 1998) (applying Illinois law) because there the court concluded that coverage was not excluded because certain paragraphs in the complaint did not plead defendants’ knowledge of falsity. Laserage, 2 F. Supp. 2d at 304. Id. at *6.

The court also rejected the notion that the knowledge of falsity exclusion is limited to the offenses of libel, slander and invasion of privacy, citing Adolfo House Distrib. Corp. v. Travelers Prop. & Cas. Ins. Co., 165 F. Supp. 2d 1332, 1341 (S.D. Fla. 2001). Id. at *6.

The court relied on Callas, which was subsequently disavowed by the Supreme Court of Minnesota for a number of propositions in General Cas Co. of Wis. v. Wozniak Travel, Inc., 762 N.W.2d 572, 576 (Minn. 2009).

The logic of the court’s analysis does not consider the fact that the term “advertising injury” defined imports all elements of same and so as applied to the pertinent knowledge of falsity exclusion it is 4 – 2 = 2, not 4. Since only those offenses with oral or written publication or material are among the four, defined within the advertising injury offenses put into controversy by the reference to advertising injury.

At minimum, this construction is a plausible, contextually viable one rendering the phrase “ambiguous” and requiring its construction against the insurer – a proposition the court does not consider. The case is therefore not authority for any such proposition.

The “Defects or Errors in Testing” exclusion applied to subheading (c), (d) and (e) wherein 3M alleged that ITI’s testing data was deficient because (1) the data “did not accurately depict the performance of 3M Tape under conditions similar to typical usage in the marketplace or under any test protocol sufficiently reliable or scientific to support ITI’s claims.” Id. at *7.

The pertinent defects for errors and testing exclusion provided that the exclusion would bar otherwise coverage suits arising out of:

a) An error, omission, defect, or deficiency
     (i) In any test performed, or any evaluation, consultation or advice given by or on behalf of you [or] any insured; or
     (ii) In experimental data or the insured’s interpretation of that data
b) The reporting of or reliance upon any such test, evaluation, consultation or advice.

Id. at *7.

The court determined that the final three factual claims in 3M’s complaint were premised in ITI’s testing and demonstration of the 3M Tape.

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