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WINKLEVOSS CONSULTANTS, INC. v. FEDERAL INS. CO.

January 23, 1998

WINKLEVOSS CONSULTANTS, INC. and HOWARD WINKLEVOSS, Plaintiffs,
v.
FEDERAL INSURANCE CO., Defendant.



The opinion of the court was delivered by: CASTILLO

 An insurance company's duty to defend intellectual property claims under the rubric of "advertising injury" is the subject of countless lawsuits -- indeed, a recent litigation explosion -- throughout the country. This Court is no exception to the phenomenon, having before it three cases that raise this very issue. In this case, the Winklevoss plaintiffs ("Winklevoss") seek a declaratory judgment that defendant Federal Insurance Company has a duty to defend it against a suit alleging Illinois Trade Secrets Act violations, tortious interference with contractual and business relationships, conversion of propriety subject matter, and unfair competition. The plaintiff in the underlying suit claims Winklevoss misappropriated its trade secrets to develop a competing software product -- a product Winklevoss later helped promote to some of the plaintiff's customers. These allegations, Winklevoss asserts, claim "advertising injury," an accusation that Winklevoss claims Federal has agreed to defend. Federal, however, vigorously disputes that these allegations trigger a duty to defend under its "advertising injury" provisions. Before the Court are the parties' cross-motions for summary judgment on this issue.

 RELEVANT FACTS *fn1"

 I. The Lynchval Suit

 In March 1995, Lynchval Systems, Inc. filed an eight-count complaint in the Northern District of Illinois against Winklevoss and an actuarial consulting firm, Chicago Consulting Actuaries, Inc. ("CCA"). See Lynchval Systems, Inc. v. Chicago Consulting Actuaries et al., Complt. at 1 ("Lynchval Complt."). The original complaint *fn2" directed six counts at Winklevoss: Count II, tortious interference with Lynchval and CCA's contractual relationship; Count IV, wrongful interference with Lynchval and one of its customer's contractual relationships; Count V, tortious interference with Lynchval's prospective business relationships; Count VI, violation of the Illinois Trade Secrets Act; Count VII, conversion of propriety subject matter; and Count VIII, unfair competition. CCA was named along with Winklevoss in all counts except the second, and was accused separately of breach of contract and fiduciary duty.

 These causes of action are premised on Lynchval's allegations that Winklevoss and CCA misappropriated trade secrets from Lynchval's actuarial software programs, developed a competing product, and then promoted it to some of Lynchval's customers. Lynchval designed two software programs, "LynchVal" and "LVmed," which actuaries use to determine the cost of their clients' employee benefit plans. Lynchval Complt. PP 7-9. The programs perform complex calculations on raw data, such as age and gender, and incorporate variables, such as mortality tables and interest rates, to project costs for a particular benefit scheme. Id. P 10. Lynchval considers the mathematical formulas for these calculations, as well as the questions prompting the user to input raw data, to be trade secrets. Id. PP 12, 57, 59. Because any software user has ready access to these trade secrets, Lynchval requires each prospective customer to sign a confidentiality agreement promising not to develop competing products and to keep this proprietary information confidential. Id. P 18.

 In 1993, Winklevoss asked to lease these programs from Lynchval. Lynchval refused when it learned that Winklevoss planned to develop a competing product. Id. PP 21-24. CCA, which used the LynchVal/LVMed products and had signed Lynchval's confidentiality agreement, later allegedly provided Winklevoss access to the LynchVal software. Id. PP 24-28, 66. Together, CCA and Winklevoss allegedly devised a rival product, "Proval." Id. PP 28, 105, 111, 119, 121. Proval, Lynchval claims, was "improperly developed with reference . . . to trade secret information of Lynchval Systems." Id. P 86. Beginning in 1994, CCA and Winklevoss allegedly began marketing Proval as a team to Lychval's existing and potential customers. Id. PP 29, 67, 86. These marketing efforts allegedly led one of Lynchval's customers to cancel its contract and switch from LynchVal to the "illicitly developed software, Proval." Id. P 87.

 To remedy these alleged torts and trade secret violations, Lynchval sought several types of damages. It also requested that CCA and Winklevoss be enjoined from, inter alia, using Lynchval's software, "providing any information obtained for the running of any Lynchval Systems software to non-client third parties," and promoting "any software which has been developed or modified through the unauthorized use of Lynchval Systems' software." Id. at 21 P A. Lynchval's suit is still pending before the Honorable Blanche Manning in federal district court. Pls.' 12(M) Statement P 9.

 II. Federal's Insurance Policies

 Winklevoss tendered the original Lynchval complaint to Federal for a defense on April 6, 1995. Pls.' 12(M) Statement P 11. Federal refused the tender, denying that it had a duty to defend the original complaint under Winklevoss' insurance policies. Def.'s 12(N) Response P 11.

 Winklevoss had purchased from Federal two policies, the Financial Institutions General Liability Insurance policy ("CGL policy") and the Commercial Umbrella Liability Insurance Policy ("Umbrella Policy"). Both were effective April 5, 1994 through April 5, 1995. The CGL policy pledges to

 
pay damages the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract because of: . . . personal injury or advertising injury to which this insurance applies . . . . This insurance applies: . . . 2. to personal injury or advertising injury only if caused by an offense committed during the policy period.

 CGL policy "Coverage" section at 1. With respect to defense obligations, the policy states, "We will defend any claim or suit against the insured seeking such damages. We will pay in addition to the applicable Limit of Insurance the defense expense. Our obligation to defend and pay for defense expense is limited as described under DEFENSE OF CLAIMS OR SUITS." Id. The CGL policy goes on to define "advertising injury" as

 
injury arising solely out of one or more of the following offenses committed in the course of advertising your goods, products or services:
 
2. oral or written publication of material that violates a person's right of privacy;
 
3. misappropriation of advertising ideas or style of doing business; or
 
4. infringement of copyrighted advertising materials, titles or slogans.

 CGL policy "Common Policy Conditions" section at 9-10. The policy does not define these "offenses" in any more detail.

 Winklevoss' Umbrella policy comprises two insuring agreements: an "Excess Follow Form Liability coverage," or "Coverage A"; and "Umbrella Liability coverage," or "Coverage B." The Umbrella policy's cover sheet defines these two types of coverage and describes the relationship between them:

 
Excess Follow Form Liability adds excess limits over scheduled underlying coverages.
 
Umbrella Liability adds a broadening measure of coverage against many of the gaps in and between the underlying coverages.
 
Together, these separate coverages share the Limits of Insurance.

 Coverage A provides coverage "in excess of the total applicable limits of underlying insurance." It incorporates the underlying CGL policy's terms and conditions "except with respect to: A. any contrary provision contained in this policy; or B. any provision in this policy for which a similar provision is not contained in the underlying insurance. With respect to the exceptions above, the provisions of this policy will apply." Umbrella policy at 1. Coverage A also explains, "Notwithstanding anything to the contrary contained above, if underlying insurance does not cover loss . . . then we will not cover such loss." Id.

 Coverage B is as follows:

 
Under Coverage B, we will pay on behalf of the insured, damages the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract because of . . . advertising injury covered by this insurance which takes place during the Policy Period of this policy [sic] and is caused by an occurrence. We will pay such damages in excess of the Retained Limit Aggregate specified in Item 4 d. of the Declarations or the amount payable by other insurance, whichever is greater.
 
Coverage B will not apply to any loss, claim or suit for which insurance is afforded under underlying insurance . . . .

 Umbrella policy at 2. Coverage B defines an "occurrence . . . with respect to personal injury or advertising injury, [as] a covered offense." Id. at 14.

 Finally, the umbrella policy is subject to two endorsements: an amended definition and an exclusion. Endorsement 2 amends the definition of advertising injury for both Coverage A and Coverage B by replacing it with the advertising injury definition in the underlying CGL policy. Endorsement 3, however, excludes advertising injury from Coverage B: "It is agreed that, with respect to Coverage B, all references in the policy to advertising injury are deleted and no coverage is provided."

 Winklevoss contends that the CGL and Umbrella policies' provisions on "advertising injury" trigger a duty to defend Lynchval's original allegations.

 III. Procedural History

 About a year after Federal's April 1995 refusal to defend the original Lynchval complaint, Winklevoss tendered Lynchval's Second Amended Substitute Complaint to Federal for a defense. Winklevoss Complt. P 18. Because the second amended complaint added allegations that Winklevoss disparaged Lynchval's software products, Federal conceded that the amended complaint held the potential for liability under the listed offense "oral or written publication of material that . . . disparages a person's or organization's goods, products or services." Id. Ex. 4. Consequently, Federal agreed to defend the Lynchval action based on the second amended complaint, subject to a reservation of rights. Id. P 21.

  On March 10, 1997, Winklevoss filed a two-count complaint in this Court seeking a declaratory judgment that Federal had a duty to defend Winklevoss against the original Lynchval complaint, and that its refusal to defend the original complaint breached Winklevoss' insurance contract. *fn3" Winklevoss claimed that Federal's "advertising injury" *fn4" provisions activated defense obligations. *fn5" Id. P 27. After the parties filed cross-motions for summary judgment on the issue of Federal's duty to defend the original complaint, Federal filed a counterclaim seeking to withdraw its defense under the second amended complaint, claiming that the second amended complaint's defense-triggering allegations had been dismissed from the case. Winklevoss filed a motion to stay any consideration of Federal's counterclaim, pointing out that it would be moot if this Court rules that Federal had a duty to defend the original allegations -- all of which remain in the second amended complaint. See Maryland Cas. Co. v. Peppers, 64 Ill. 2d 187, 194, 355 N.E.2d 24, 28 (1976) (duty to defend "extends to cases where the complaint alleges several causes of action . . . one of which is within the coverage of a policy while the others may not be."). This Court granted Winklevoss' motion to stay.

 Cutting through this rather convoluted history, the Court discerns the following issues and implications. First, we must decide whether Federal had a duty to defend Winklevoss against Lynchval's original complaint under the policies' advertising injury provisions. If so, then Federal breached its contract to defend Winklevoss, and its counterclaim is moot. A determination of Federal's indemnity obligations, if any, would be left for a later day. If, on the other hand, we find that Federal had no duty to defend the original complaint, we would still need to resolve Federal's counterclaim, that is, whether the second amended complaint still ...


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