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International Chemical Corporation D/Ba/ Innovative Chemical v. Nautilus Insurance Company

December 30, 2011

INTERNATIONAL CHEMICAL CORPORATION D/BA/ INNOVATIVE CHEMICAL CORPORATION, JAMES TIMLIN, AND WOODRIDGE SPECIALTY PRODUCTS CORP., PLAINTIFFS,
v.
NAUTILUS INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: William M. Skretny Chief Judge United States District Court

DECISION AND ORDER

I. INTRODUCTION

Plaintiffs, International Chemical Corp. d/b/a Innovative Chemical Corp. ("ICC"), James Timlin, and Woodridge Specialty Products Corp. ("Woodridge"), commenced this suit in New York State Supreme Court, County of Erie on March 11, 2009. (Docket No. 1.)*fn1 Defendant, Nautilus Insurance Co. ("Nautilus"), with whom ICC had contracted to provide "litigation insurance," removed the action to this Court on April 16, 2009 on diversity grounds. ICC seeks a declaration that Nautilus was required to furnish them a defense, which it refused to do, in an underlying action in the United States District Court for the Northern District of Illinois.*fn2 Each party presently seeks summary judgment as to their rights and obligations under the insurance contract. (Docket Nos. 8, 17.)

II. BACKGROUND

A. Underlying Case

The facts of this case correspond to the facts of the underlying action, Medallion Products, Inc. v. McAlister, No. 6 C 2597, 2008 WL 5046055 (N.D. Ill. Nov. 20, 2008), in which Plaintiffs in this action were defendants. Because the facts and allegations of the complaint in that case determine Nautilus' duty to furnish a defense, those allegations will be recited below in abbreviated form.

Medallion Products Inc. ("Medallion") is a business that designs and markets consumer products through televison infomercials. (Medallion Products, Inc. v. McAlister Fourth Amended Complaint, ¶ 5; docketed in this case at number 8-7.)*fn3 Sometime in 2004 at the request of William McAlister, Medallion created a urine removal product aimed at eliminating pet stains and odors. (Id. ¶ 22.) The product is allegedly a proprietary formulation that contains a chemical which, with the help of a blacklight, allows viewers to see it remove stains. (Id. ¶ 24.) McAlister and Medallion eventually entered into a contract whereby Medallion would serve as the sole manufacturer and McAlister as sole distributor of the product. (Id. ¶¶ 33-36.) Thereafter, they worked together to develop a television infomercial praising the effectiveness of the product and demonstrating its capabilities. (Id. ¶¶ 33, 43-50.) Medallion also played a role in developing the labeling for the new product. (Id. ¶ 42(b).)

Despite Medallion honoring its end of the agreement, McAlister eventually breached the agreement by conspiring with ICC to create a "knock-off" of the Medallion product. (Id. ¶¶ 69, 71.) McAlister provided ICC with a copy of a laboratory report that identified Medallion as the manufacturer of the product, a bottle of the product with labeling, samples of the Medallion solution, and access to the television commercial. (Id. ¶¶ 71-72.) At all times, ICC allegedly knew that McAlister had another supplier but still agreed to develop a similar product. (Id. ¶ 74.)

On June 7, 2005, ICC represented to McAlister that it had reverse engineered the Medallion formulation and that its product was even better than the original. (Id. ¶ 75.) But, in fact, according to Medallion the ICC product contained no special enzyme found in Medallion's product and, unlike the original, it did not make the urine glow under blacklight. (Id. ¶ 95.)

Later, using a template provided by McAlister, ICC created a new label and added the "AS SEEN ON TV" emblem. (Id. ¶ 77) Further, ICC approved a label listing ingredients that it knew its product did not contain. (Id. ¶¶ 78, 80.) In sum, according to Medallion, ICC created a deficient knock-off product and falsely represented to McAlister that it could act as a substitute for the Medallion product. (Id. ¶¶ 97-98.) Medallion alleges that this substitute ICC product was eventually sold fraudulently in place of its product. (Id. ¶¶ 107, 120.)

B. Insurance Agreement

Relevant to this action is a portion of ICC's insurance policy that provides coverage for "personal and advertising injury." It reads in part:

We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal and advertising injury" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "personal and advertising injury" to which this insurance does not apply. (Insurance Policy*fn4 ; Docket No. 1-3.)

It defines personal and adverting injury as "the use of another's advertising idea in your 'advertisement'; or [i]nfringing upon another's copyright, trade dress, or slogan in your advertisement." (Id.) Trade dress is defined as "the total appearance and image of a product, including features such as size, texture, shape, color or color combinations, ...


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