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McDonald's Corporation v. American Motorists Insurance Company

May 02, 2001


Appeal from the Circuit Court of Du Page County. No. 97--L--0144 Honorable Hollis L. Webster, Judge, Presiding.

The opinion of the court was delivered by: Justice Grometer

This appeal involves an insurance coverage dispute. Plaintiff-insured, McDonald's Corporation (McDonald's), appeals from an order of the circuit court of Du Page County granting summary judgment in favor of defendants-insurers, American Motorists Insurance Company, Century Indemnity Company & Indemnity Insurance Company of North America, and St. Paul Surplus Lines Insurance Company (collectively, insurers). The trial court determined that the advertiser's coverage part of the "Media Special Perils" policies issued to McDonald's by insurers did not require insurers to indemnify McDonald's in the settlement of an underlying federal lawsuit alleging, inter alia, violation of the Illinois Trade Secrets Act (765 ILCS 1065/1 et seq. (West 1994)). McDonald's also appeals from a trial court order denying its motion to compel discovery, an issue we discuss in the nonpublished portion of this opinion. We affirm.


The parties are already familiar with the long and complex factual background of this case. Accordingly, we recite only those facts necessary for an understanding of the issues raised on appeal.

At the time of the events giving rise to the underlying federal litigation, McDonald's was a named insured under the advertiser's coverage part of a "Media Special Perils" (MSP) policy issued by First National Insurance Company of America (Safeco). To secure additional protection, McDonald's also purchased excess insurance from insurers, with defendant-insurer American Motorists Insurance Company (AMICO) being the lead umbrella carrier. The purpose of the MSP policies was to insure McDonald's against the cost of defending lawsuits arising out of its advertising, publicity, or promotional activities and to indemnify McDonald's for the adverse judgments that may result from any such lawsuits. The AMICO policies contained "broad as primary" endorsements. The "broad as primary" endorsements provided that AMICO agreed to be bound by the terms of the underlying primary policy, notwithstanding any more restrictive terms in the excess policy. The AMICO policy listed Safeco as the primary carrier for the MSP policy. The remainder of the excess insurance policies indicated that they "follow form" to the AMICO policy. In other words, coverage under the excess carriers was also provided on the same terms as the Safeco policy and was to be implicated once the underlying layers of coverage were exhausted. The instant dispute concerns the excess insurance policies. Safeco is not a party to this appeal.

On February 7, 1997, McDonald's filed a complaint against insurers in the circuit court of Du Page County. The second amended complaint consisted of six counts. Relevant here are those counts in which McDonald's sought a declaration that insurers were required to indemnify it for the settlement of a complaint filed in federal court and captioned as Thermodyne Food Service Products, Inc. v. McDonald's Corp., originally filed as No. 95 CV 0232 (D. Ind.), later transferred and redocketed as No. 95 C 6747 (N.D. Ill.) (Thermodyne litigation).

The Thermodyne litigation stemmed from the development of a product known as the "Thermodyne" oven. The appeal of this product to McDonald's was its ability to heat frozen food to serving temperature and hold it for extended periods of time without affecting the quality or taste of the food. The technology used in the Thermodyne oven was developed principally by an engineer named Benno Liebermann. Liebermann developed this technology while he was the owner of a company called Advanced Food Technology, Inc. (AFTEC). Eventually, Vincent Tippman purchased a majority of the stock in AFTEC and formed Thermodyne Food Service Products, Inc. (Thermodyne). AFTEC researches and develops food service equipment, which Thermodyne then manufactures and markets. Liebermann refined the technology used in the Thermodyne oven while working for Tippman. As part of the purchase agreement for AFTEC, Liebermann executed a five-year employment contract with Tippman, which included a covenant not to compete. For a period of time, McDonald's worked with Thermodyne and AFTEC in developing products for McDonald's restaurants using the Thermodyne oven. McDonald's eventually purchased a Thermodyne oven. Shortly after the purchase, a representative from McDonald's told Tippman that McDonald's was no longer interested in the Thermodyne oven.

Liebermann eventually became unhappy with his relationship with Tippman and resigned from Thermodyne. Liebermann began working for Beltec, a partnership between himself and OSI Industries, Inc. (OSI). OSI was a meat supplier for McDonald's. Thereafter, Beltec developed a product known as the "Temperfect" oven. Beltec licensed the right to manufacture the Temperfect oven to Taylor Company (Taylor), a division of Specialty Equipment Companies, Inc. (Specialty Equipment). Specialty Equipment was one of McDonald's equipment suppliers. Taylor began to manufacture the Temperfect oven for McDonald's use. Soon thereafter, McDonald's began developing products prepared using the Temperfect oven. Once the Temperfect oven was installed in a restaurant, representatives from other companies, including competitors of McDonald's, visited the restaurant to observe the Temperfect oven in use. McDonald's also showcased the Temperfect oven to owner-operators of its restaurants as well as various equipment and food suppliers. In addition, at McDonald's request, Taylor developed for distribution a specification sheet and a brochure for the Temperfect oven. The specification sheet stated that "THE INFORMATION SHOWN ON THIS SPECIFICATION SHEET IS FOR THE EXCLUSIVE USE OF LICENSEES OF McDONALD'S SYSTEMS, INC."

Eventually, Thermodyne and AFTEC (collectively, the Thermodyne plaintiffs) became aware of the development of the Temperfect oven. On July 20, 1995, the Thermodyne plaintiffs initiated their lawsuit in federal district court. The Thermodyne plaintiffs claimed that McDonald's and others misappropriated their trade secret to develop a competing product called the "Temperfect" oven. The Thermodyne plaintiffs alleged that McDonald's and the other named defendants "engaged in a course of conduct designed to misappropriate [p]laintiffs' employees, technology, and trade secrets." The complaint further alleged that "[d]efendants' promotion of the 'Temperfect Oven' exposed [p]laintiffs' trade secrets to the market place."

The Thermodyne plaintiffs' amended complaint consisted of eight counts, the following six of which were directed against McDonald's. Count I alleged violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West 1994)). Count II alleged a violation of the Illinois Trade Secrets Act. Count III alleged unfair competition. Count IV alleged breach of confidence. Count V alleged interference with contractual relations. Count VIII alleged conspiracy. On McDonald's motion, the district court dismissed with prejudice counts I, III, and IV on the basis that they were preempted by the Illinois Trade Secrets Act. As the litigation progressed, the parties to the Thermodyne litigation prepared a "Final Pretrial Order" pursuant to Rule 16 of the Federal Rules of Civil Procedure (Fed. R. Civ. P. 16).

The Thermodyne plaintiffs also sought to recover for damages, unjust enrichment, exemplary damages, attorney fees, and a "reasonable royalty for [d]efendants' past or future use of or profits from the sale of [p]laintiffs' trade secret or the application thereof." In addition, attached to the final pretrial order was a "Statement of Special Damages." Among other things, the Thermodyne plaintiffs alleged that they lost between $54.3 million and $97.9 million in lost profits as a result of "Market Opportunity Due To Uncertainty As To Ownership Of The Thermodyne Technology Plus Prejudgment Interest."

Meanwhile, McDonald's attempted to tender the Thermodyne litigation to Safeco. Safeco denied coverage. However, McDonald's eventually reached a settlement with Safeco, and the insurer agreed to pay $725,000 of the $850,000 owed on its policy. Insurers, however, denied coverage, and McDonald's initiated the instant litigation. Thereafter, McDonald's settled the Thermodyne litigation for $25 million. The entire settlement was paid solely by McDonald's. At the time of settlement, the only theories pending against McDonald's with respect to the Thermodyne litigation were misappropriation of trade secrets (count II), interference with contractual relations (count V), and conspiracy (count VIII).

On December 17, 1998, insurers filed a motion for summary judgment in this insurance coverage litigation. Insurers argued that they did not have a duty to indemnify McDonald's in the Thermodyne litigation. Insurers explained that the MSP policies required a "causal connection" between the commission of an offense covered by the policies (enumerated offense) and the content of McDonald's promotional activity. Here, insurers argue, there was no coverage because there was no "causal connection" between the content of McDonald's promotional activity and the commission of an enumerated offense. The trial court denied insurers' motion without prejudice, and the parties proceeded with discovery.

On January 5, 2000, insurers filed a renewed motion for summary judgment. The trial court granted insurers' motion. The court concluded that, as a matter of law, there was no "causal connection" between the content of McDonald's promotional activity and the commission of an enumerated offense. The trial court found that only count II, misappropriation of trade secrets, could arguably fall within the MSP policies. However, the court explained that the theft of the trade secret occurred before any promotion commenced. Accordingly, the promotion could not have caused the misappropriation of trade secrets. Thus, the court concluded that this offense was not committed "within the four corners of the promotion." McDonald's now appeals.


As a preliminary matter, we address the insurers' joint motion to strike from McDonald's opening brief "irrelevant and inadmissible material regarding the non-party primary insurance carrier's settlement." We ordered the motion as well as McDonald's objections thereto taken with the case. After careful consideration, we now deny insurers' motion.

A. Duty to Indemnify

McDonald's argues that the trial court erred in granting insurers' renewed motion for summary judgment. According to McDonald's, while the trial court correctly began its analysis by examining the Thermodyne plaintiffs' amended complaint, it was required to examine also the final pretrial order to determine exactly what transpired in the Thermodyne litigation. Looking beyond the labels of the amended complaint, McDonald's asserts, reveals that the Thermodyne plaintiffs' most significant claim against McDonald's is a claim for "cloud on title." According to McDonald's, this theory implicates the Thermodyne plaintiffs' allegations that McDonald's had "misled the market into believing that Tippman was not the rightful owner of the technology in the Thermodyne oven by promoting the Temperfect oven as incorporating technology that was owned exclusively by McDonald's." McDonald's contends that the "cloud on title" theory arose directly out of its promotion of the Temperfect oven. McDonald's further maintains that this "cloud on title" theory was actionable as an "unfair competition" claim or a "slander of title" claim.

Insurers respond that the trial court properly granted their renewed motion for summary judgment. Examining the causes of action actually asserted by the Thermodyne plaintiffs reveals that there is no causal connection between the acquisition and use of technological trade secrets and McDonald's promotion of the Temperfect oven. McDonald's attempt to assert that the Thermodyne plaintiffs pursued a "cloud on title" theory is flawed because the "cloud on title" theory was a damages theory, and the plain language of the MSP policies permits coverage only if an offense is caused by promotion, not if damages are caused by the promotion. Insurers finally contend that McDonald's improperly attempts to recast the Thermodyne litigation as one involving unfair competition or slander of tile.

In appeals from summary judgment rulings, this court conducts a de novo review. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 102 (1992). Summary judgment is a drastic measure and should be granted only if the movant's right to judgment is clear and free from doubt. Missouri Pacific R.R. Co. v. American Re-Insurance Co., 286 Ill. App. 3d 129, 133 (1996). Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. International Insurance Co. v. Rollprint Packaging Products, Inc., 312 Ill. App. 3d 998, 1007 (2000). A reviewing court may affirm a trial court's ruling granting summary judgment on any grounds that appear in the record, regardless of whether the trial court relied on them. International Insurance Co., 312 Ill. App. 3d at 1007. We further note that the construction of an insurance contract is a question of law, and an interpretation of an insurance contract provision is appropriate on a motion for summary judgment. International Insurance Co., 312 Ill. App. 3d at 1007.

This case involves whether insurers had a duty to indemnify McDonald's in the settlement of the Thermodyne litigation. The duty to indemnify is much narrower than the duty to defend. Atlantic Mutual Insurance Co. v. American Academy of Orthopaedic Surgeons, 315 Ill. App. 3d 552, 559 (2000). Unlike the duty to defend, the duty to indemnify cannot be determined simply on the basis of whether the factual allegations of the underlying complaint potentially state a claim against the insurer. Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill. 2d 178, 203 (1991) (supplemental opinion on denial of rehearing). The duty to indemnify arises only when the facts alleged actually fall within the coverage of the policy at issue. Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384, 398 (1993).

In accordance with the above principles, we must analyze the underlying complaint in light of the applicable policy provisions to determine whether the complaint actually falls within the coverage of the policy at issue. In federal litigation, the final pretrial order supercedes the complaint. See, e.g., Ash v. Wallenmeyer, 879 F.2d 272, 274 (7th Cir. 1989) (noting that the effect of the pretrial order is to supersede the pleadings); Ghandi v. Police Department, 823 F.2d 959, 962 (6th Cir. 1987) (same); Hoagburg v. Harrah's Marina Hotel Casino, 585 F. Supp. 1167, 1175 (D. N.J. 1984) (same). Therefore, in addition to examining the allegations of the underlying complaint, we will consider also the allegations as set forth in the final pretrial order. Moreover, we note that, at the time McDonald's settled the Thermodyne litigation, three counts were pending against it. Of those three counts, only count II, violation of the Illinois Trade Secrets Act, is implicated here.

Our analysis necessarily begins with the language of the insurance policies in dispute. Pursuant to the advertiser's coverage part of the MSP policies issued to McDonald's, insurers agreed:

"[t]o pay on behalf of the insured all loss and claim expense which the insured shall become legally obligated to pay because of liability imposed by law or assumed under contract as a result of one or more claims arising out of:

A. any form of defamation or other tort related to disparagement or harm to the character, reputation or feelings of any natural person or organization, including but not limited to libel, slander, product disparagement, trade libel, ...

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