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CGS Industries, Inc. v. Charter Oak Fire Insurance Co.

United States Court of Appeals, Second Circuit

June 11, 2013

CGS Industries, Incorporated, a Florida corporation, Plaintiff-Appellee,
v.
Charter Oak Fire Insurance Company, a Connecticut corporation, Defendant-Appellant.

Argued: October 1, 2012

Defendant-appellant Charter Oak Fire Insurance Company ("Charter") appeals from a judgment of the Eastern District of New York (Jack B. Weinstein, Judge) holding it liable to plaintiff-appellee CGS Industries, Inc. for CGS's defense and settlement costs in an underlying trademark infringement lawsuit. We hold that Charter breached its duty to defend CGS and is liable for its defense costs, but that it did not have a duty to indemnify CGS and is not liable for its settlement costs. We therefore VACATE the judgment and REMAND to the district court for further proceedings consistent with this opinion.

David A. Gauntlett (Andrew M. Sussman, on the brief), Gauntlett & Associates, Irvine, California, for Plaintiff-Appellee.

William Thomas Corbett, Jr. (Laura A. Brady, on the brief), Drinker Biddle & Reath LLP, Florham Park, New Jersey, and Stuart M. Bodoff, Cheryl F. Korman, and Celeste M. Butera, Rivkin Radler, LLP, Uniondale, New York, for Defendant-Appellant.

Before: Newman, Lynch and Lohier, Circuit Judges.

Gerard E. Lynch, Circuit Judge:

This case requires us to revisit the world of "advertising injury" insurance coverage. Defendant-appellant Charter Oak Fire Insurance Company ("Charter") appeals from a judgment of the United States District Court for the Eastern District of New York (Jack B. Weinstein, Judge), holding it liable to plaintiff-appellee CGS Industries, Inc. ("CGS") for its expenses in defending and settling a trademark infringement suit. CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 777 F.Supp.2d 454 (E.D.N.Y. 2011). We conclude that the relevant insurance policy did not cover the liability alleged in the trademark action, and that Charter is therefore not liable for the settlement amount. We also conclude, however, that at the time CGS asked Charter to defend the trademark lawsuit, there was sufficient legal uncertainty about the coverage issue to oblige Charter to defend the action. We therefore affirm the district court's ruling insofar as it holds Charter liable for defense costs, but reverse insofar as it holds Charter liable for the settlement. We accordingly vacate the judgment of the district court and remand for further proceedings consistent with this opinion.

BACKGROUND

I. Facts

On December 23, 2009, Five Four Clothing, Inc. ("Five Four") sued Wal-Mart Stores, Inc. ("Walmart") for trademark infringement based on CGS's use of Five Four's distinctive rear pocket stitching design (the "FF stitching") on jeans that CGS supplied to Walmart, which Walmart then sold.[1] CGS was later added as a named defendant. CGS asked Charter to defend it pursuant to its liability insurance policy (the "Policy"). Charter refused, claiming that the Underlying Action was not covered by the Policy. Eventually, CGS settled the Underlying Action by agreeing to pay $250, 000 to Five Four on behalf of both CGS and Walmart.[2]

The Policy, effective from August 31, 2009 to August 31, 2010, provides, in relevant part, that Charter:

will pay those sums that the insured becomes legally obligated to pay as damages because of . . . "advertising injury" . . . to which this insurance applies. [Charter] will have the right and the duty to defend the insured against any "suit" seeking those damages, even if the allegations of the "suit" are groundless, false or fraudulent. However, [Charter] will have no duty to defend the insured against any "suit" seeking damages . . . to which this insurance does not apply.

Joint App'x 164. The Policy covers "'[a]dvertising injury' caused by an offense committed in the course of advertising your goods, products or services." Id. It defines "advertising injury" as injury arising out of one or more specifically listed offenses, including "[i]nfringement of copyright, title or slogan." Id. at 167. The Policy excludes coverage for advertising injury: (1) "caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict . . . 'advertising injury'"; or (2) "arising out of oral, written or electronic publication of material, if done by or at the direction of the insured with knowledge of its falsity." Id. at 164. It also excludes advertising injury "for which the insured has assumed liability in a contract or agreement." Id. at 165. That exclusion, however, does not apply to advertising injury liability "that the insured would have in the absence of the contract or agreement." Id.

II. Procedural History

On July 13, 2010, CGS sued Charter for breach of its duty to defend. The parties cross-moved for summary judgment.[3] On November 16, 2010, the district court granted CGS's motion for partial summary judgment and denied Charter's cross-motion, finding that Charter had breached its duty to defend CGS in the Underlying Action. CGS Indus., Inc. v. Charter Oak Fire Ins. Co., 751 F.Supp.2d 444, 453 (E.D.N.Y. 2010). After further discovery, Charter moved for partial summary judgment, seeking a declaration that CGS was not entitled to indemnification for Walmart's defense costs or for the portion of the settlement that resolved Walmart's liability. On April 15, 2011, the district court granted the motion in part and denied it in part, holding that Charter was not obliged to reimburse CGS for Walmart's defense costs, but was obliged to indemnify CGS for damages. CGS Indus., 777 F.Supp.2d at 456-57, 462.

On June 3, 2011, rather than go to trial to determine the amount of damages, the parties stipulated that damages were $396, 342.53, calculated as the $250, 000 settlement plus CGS's defense costs in the Underlying Action. In the stipulation, Charter reserved its rights to appeal all issues except the reasonableness of the defense costs and settlement ...


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