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March 18, 2003


The opinion of the court was delivered by: Joan B. Gottschall, United States District Judge


Plaintiff Nancy Flodine, who manufactures and sells "Southwestern-style" arts and crafts under the business name Natural Wonders, was insured by State Farm Fire and Casualty Company ("State Farm") pursuant to a business liability insurance policy. Flodine was named as a third-party defendant by J.C. Penney Co, Inc. ("Penney") in a lawsuit brought by Native American Arts, Inc. ("NAA") entitled Ho-Chunk Nation, et al., v. J. C. Penney Co., No. 98 C 3924 (N.D. Ill.) ("Penney litigation"). Flodine tendered to State Farm Penney's second amended third-party complaint ("SATPC") and State Farm denied coverage, asserting that the SATPC did not allege an "advertising injury" under the policy. After State Farm refused coverage, Flodine filed this declaratory judgment action seeking a determination that her insurance policy covered Penney's claims against her and that State Farm owed her duties of defense and indemnity with respect to the Penney litigation. On cross motions for judgment on the pleadings, this court held that State Farm had a duty to defend Flodine in the Penney litigation. Both parties now move for summary judgment on the issue of indemnity. For the reasons explained below, plaintiffs motion for summary judgment is granted in part and denied in part. Defendant State Farm's motion for summary judgment is denied.


The Policy

State Farm refused to defend Flodine on the ground that the SATPC did not involve an "advertising injury" as defined in the insurance contract. The policy was issued to Nancy Flodine d/b/a Natural Wonders in Harlingen, Texas, by State Farm's Greeley, Colorado, division. (Def.'s Ans. and Aff. Def to Compl. For Decl. J., Ex. A.) Section II of the policy provides comprehensive business liability coverage for sums that Flodine becomes obligated to pay "as damages because of bodily injury, property damage, personal injury or advertising injury" (Id. at 20.) According to the pertinent policy definition, "advertising injury" means an injury arising out a "misappropriation of advertising ideas or style of doing business." (Policy at 30.) Regarding such injuries, the policy states that it applies only to "advertising injury caused by an occurrence committed in the coverage territory during the policy period," and that the "occurrence" (defined as "the commission of an offense, or a series of similar or related offenses, which results in personal injury or advertising injury") causing the advertising injury "must be committed in the course of advertising your goods, products, or services." (Id.)

The Penney Litigation and the Declaratory Judgment Action

In the Penney litigation, NAA sought compensatory and injunctive relief for Penney's violations of the Indian Arts & Crafts Act ("IACA"), 25 U.S.C. § 305 et seq., the Illinois Consumer Fraud & Deceptive Business Practices Act ("Consumer Fraud Act"), 815 ILCS 505/2. and the Illinois Deceptive Trade Practices Act ("Deceptive Trade Practices Act"), 815 ILCS 505/2. NAA claimed that Penney's advertising, marketing, display, offer for sale, and sale in its stores and catalogue of "Southwestern-style" arts and crafts products, including those made by Flodine, violated the IACA by falsely suggesting "that they are authentic Indian products made by a Native American." (Ho-Chunk/NAA Compl. ¶¶ 9-42; ¶ 51; Am. Compl. Id. 2-10.) Many of the tags attached to the offending products contain the words "Indian" or "Native American," the names of specific Indian tribes, and/or traditional Indian-style artwork and drawings. (Ho-Chunk/NAA Compl. Exs. A through 11; Am. Compl. Exs. A-I through N-I.) NAA alleged both that the tags falsely stated or created the impression that the products were Indian-made, and that other products lacked any tag to distinguish them from authentic Indian-made products. (See, e.g., Ho-Chunk/NAA Compl. ¶¶ 5, 44-55.) NAA also brought statutory unfair competition claims against Penney, alleging that Penney's activities injured them in both their capacity as sellers of competing goods and as purchasers of the goods from Penney.

Penney, in turn, sued Flodine and other arts and crafts suppliers as third-party defendants. In its SATPC, Penney alleged that Flodine and other suppliers breached both Penney's Wholesale Contract and Listing Sheet agreement and the implied warranty of merchantability, and violated the Consumer Fraud Act by misrepresenting the origin and nature of their goods and representing that the goods complied with all applicable laws. In addition to its direct claims against Flodine and other arts and crafts suppliers, Penney sought contribution from them under the IACA, the Consumer Fraud Act and the Deceptive Trade Practices Act for any liability Penney incurred to NAA on the underlying complaint.

In its SATPC, Penney alleged that the suppliers of the goods in question determined whether to attach tags to the goods and that the supplier and outside vendor representative (who purchased the goods for Penney) knew the origin and the producer of the goods, attached tags to the goods, and played a role in selecting the text or drawings included on tags attached to the goods. (SATPC ¶¶ 18-19.) Penney's SATPC denied that Penney violated any law or breached any duty to NAA, but stated that if the court found it violated the IACA, Consumer Fraud Act, and/or the Deceptive Trade Practices Act, as alleged by NAA, then Flodine "is liable to J.C. Penney for all or part of [NAA]'s claim against" Penney. (Id. at ¶ 127.)

On July 2, 1999, the court dismissed with prejudice Penney's claim that the third-party defendant suppliers violated the Consumer Fraud Act as well as Penney's claim for contribution under the IACA. Ultimately, a settlement was reached between NAA and Penney and certain third-party defendants (but not Flodine). The terms of the settlement agreement included a payment of $1,000,000 to NAA, as well as assignments to NAA of Penney's rights against those third-party defendants who refused to settle, including Flodine. Further, NAA and Penney agreed to an allocation of settlement damages with respect to each non-settling third-party defendants of the $1,000,000 paid by Penney, $50,000 was attributed to Flodine's liability of the total amount paid by Penney (the $1,000,000 payment plus the value of the assignments), NAA and Penney determined that $2,160,000 would be attributed to Flodine as a fair settlement amount for her liability to Penney was $2,160,000.

Flodine filed the instant declaratory judgment action against State Farm on November 16, 1999 seeking a determination that State Farm owed Flodine a duty to defend and indemnify her. State Farm filed counterclaims against Flodine asking this court to find that it does not have a duty to indemnify Flodine.

On March 1, 2001, this court determined that State Farm had a duty to defend Flodine in the SATPC under the "advertising injury" coverage provided by her insurance policy. NAA v. State Farm Ins. Co., No. 99 C 7466, 2001 WL 204786, *6-11 (N.D. Ill. Mar. 1, 2001). In that opinion, this court reasoned that the claims relating to the IACA were analogous to claims for trademark or trade dress infringement because the IACA protects Indian sellers of arts and crafts by preventing non-Indians from exploiting the market value and goodwill associated with authentic, Indian-made products. Id. "[P]assing off one's goods as those of another and trademark and trade dress infringement all constitute advertising injury because the offenses involve the wrongful use of marks, packaging, and/or other means by which competitors identify and promote their products to consumers." Id. at *7. The court found that the tags attached by Flodine to her products "functioned as mini-ads that were tied to the products, clearly promotional in nature yet distinct from the products themselves." Id. at *10. For these reasons, the court determined that State Farm had a duty to defend Flodine against Penney's third-party claims. Further, this court determined that certain policy exclusions did not bar coverage of any advertising injury that may have occurred. Id. at *12-13.

While the motions for judgment on the pleadings were pending in this court, Penney's third party claims against Flodine in the SATPC were dismissed without prejudice on July 12, 2000. At the time Flodine was dismissed from the Penney litigation, Flodine had not paid any money in judgment or settlement of the third-party claims. After the dismissal, NAA, as assignee of Penney's third-party claims against Flodine, entered into settlement negotiations with Flodine. As a result, a settlement was reached between NAA and Flodine, whereby Flodine paid to NAA $500 and assigned to NAA her rights of indemnification against her insurer, State Farm.*fn2 As part of the settlement with NAA, Flodine agreed not to contest an action brought against her by NAA. On October 12, 2000, NAA sued Flodine (the "second lawsuit" or "NAA complaint"). As a related case, that lawsuit was assigned to Judge Kocoras, the same judge who had presided over the Penney litigation. The NAA complaint was based on the same transactions as the SATPC and sought recovery on three theories: (1) breach of contract; (2) breach of express warranty by delivering nonconforming goods; and (3) breach of the implied warranty of merchantability. Judge Kocoras approved the Flodine settlement and entered a consent judgment in favor of NAA for $2,160,000. The consent judgment mirrored the amount agreed to between NAA and Penney in their original ...

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