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Capitol Indemnity Corp. v. Elston Self Service Wholesale Groceries

March 13, 2008

CAPITOL INDEMNITY CORPORATION, A WISCONSIN CORPORATION, PLAINTIFF,
v.
ELSTON SELF SERVICE WHOLESALE GROCERIES, INC., AN ILLINOIS CORPORATION, LORILLARD TOBACCO COMPANY, A DELAWARE CORPORATION, CANSTAR (U.S.A.) INC., A FLORIDA CORPORATION, CAM-KAT, INC., AN ILLINOIS CORPORATION, MASHOUR "MIKE" DUKUM, IBRAHIM DUKUM, AND DAVID DUKUM, DEFENDANTS.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Plaintiff, Capitol Indemnity Corporation ("Capitol Indemnity"), seeks a declaratory judgment that it has no obligation to defend its insured, Elston Self Service Wholesale Groceries, Inc. ("Elston"), in a lawsuit alleging trademark infringement and fraud. In the underlying dispute, Lorillard Tobacco Company ("Lorillard") brought claims related to Lorillard's federally-registered trademarks against Elston; Elston's owner, Mashour Dukum ("Mike"); and two of Elston's employees, Ibrahim Dukum ("Ibrahim") and David Dukum ("David"). Capitol Indemnity filed its Third Amended Complaint for Declaratory Judgment ("Third Amended Complaint") on October 4, 2006, seeking certain declarations regarding its obligations under the parties' insurance contract. On March 6, 2007, Capitol Indemnity, on the one hand, and Elston, Mike, Ibrahim, and David (together the "Moving Defendants"), on the other hand, filed cross-motions seeking summary judgment. For the reasons explained below, each side's motion is granted in part and denied in part.

FACTUAL BACKGROUND

I. The Underlying Litigation

The facts are taken from the parties' Rule 56.1 statements and are largely undisputed. Elston is in the business of distributing wholesale merchandise, including cigarettes. (Defs.' Resp. to Pl.'s 56.1 ¶ 17.) Between 1983 and 2003, Elston advertised and sold Newport cigarettes. (Id. ¶ 18.) In what the parties refer to as the underlying litigation, Lorillard alleges that certain of the cigarettes sold by Defendants were counterfeits--that is, cigarettes purporting to be genuine Newport brand cigarettes that were, in fact, knock-offs. (Pl.'s Resp. to Defs.' 56.1 ¶¶ 19-20.) To understand the parties' arguments that such a lawsuit is (or is not) covered by the insurance policy issued by Capitol Indemnity, a brief description of Defendants' marketing activities is useful. Between 1983 and 2003, Elston routinely sent advertising fliers to its customers. (Defs.' Resp. to Pl.'s 56.1 ¶¶ 19-20.) Those fliers, which always included an advertisement for Newport cigarettes, were sent as often as once every twelve days. (Id. ¶¶ 20-21.) Elston's printing contractor, Rapid Press, created these advertising fliers, using a list of product names and prices furnished by Elston and then printing that information and stock clip art on the fliers. (Id. ¶ 22.) The stock clip art Rapid Press supplied included an image of a Newport cigarette box, which was featured on the fliers in identical form between 1983 and 2003. (Id. ¶¶ 22-23.)

In early July 2003, federal marshals raided Elston and seized cigarettes. (Defs.' Resp. to Pl.'s 56.1 ¶ 12.) On or about July 9, 2003, Lorillard filed suit against Elston, alleging various violations of the Lanham Act, state trademark law, the common law of unfair competition, and state law of deceptive trade practices. (Pl.'s Resp. to Defs.' 56.1 ¶¶ 10, 12; see also Complaint, Lorillard Tobacco Co. v. Elston Self Serv. Wholesale Groceries, Inc., No. 03 C 4753 (N.D. Ill. July 9, 2003).)*fn1 According to the parties in this insurance coverage dispute, Lorillard's claims arise from the alleged sale and offer for sale of counterfeit cigarettes bearing Lorillard's federal trademark registration: NEWPORT(r). (Pl.'s Resp. to Defs.' 56.1 ¶ 13.) On October 20, 2004, Lorillard filed an Amended Complaint ("Lorillard Amended Complaint"), naming Mike, David, and Ibrahim (the owner of Elston and his two sons) as additional defendants. (Lorillard Am. Compl., Ex. 4 to Pl.'s 56.1; Defs.' Resp. to Pl.'s 56.1 ¶¶ 4-6.)*fn2 Lorillard contends that its cigarettes are held to strict quality control standards, contributing to Lorillard's reputation among smokers for quality and consistency. (Lorillard Am. Compl. ¶ 9.) Lorillard has allegedly spent "substantial time, effort and money in advertising and promoting cigarettes" under its federally registered trademarks, which it obtained to protect its reputation and investments. (Id. ¶¶ 10-11.) Lorillard accuses Elston and the Dukums of misappropriating Lorillard's federally registered trademarks as well as the goodwill associated with them. (Id. ¶ 14.) By selling and offering for sale counterfeit products bearing Lorillard's marks, Lorillard contends, Elston and the Dukums induced the public to purchase goods in the erroneous belief that they are authentic Lorillard goods, thus depriving Lorillard of sales. (Id. ¶¶ 15-17.) The Lorillard marks to which Lorillard refers in the underlying litigation include NEWPORT(r), NEWPORT(r) (stylized), LORILLARD(r), Spinnaker Design(r), and NEWPORT and Design(r). (Id. ¶ 11.)

In its Amended Complaint, Lorillard asserts that Elston and the Dukums infringed Lorillard's marks in violation of 15 U.S.C. § 1114(1) (Count I); falsely designated or misrepresented goods being sold in violation of 15 U.S.C. § 1125(a) (Count II); diluted Lorillard's marks in violation of 15 U.S.C. § 1125(c) and 765 ILCS 1036/65 (Counts III and IV, respectively); engaged in unfair competition in violation of Illinois common law (Count V); engaged in deceptive trade practices in violation of 815 ILCS 510/2 (Count VI); engaged in common law fraud (Count VII); and induced third parties, including other retailers, to commit fraud (Count VIII). (Lorillard Am. Compl. ¶¶ 26-77.) In the underlying litigation, Elston filed a third-party complaint, naming as third-party defendants Canstar and Cam-Kat and alleging that it purchased the allegedly counterfeit cigarettes from those two suppliers. (Third Am. Compl. ¶ 17.)

To remedy these alleged wrongs, Lorillard first seeks equitable relief: an injunction prohibiting further wrongful conduct by Elston and the Dukums and an order requiring Elston and the Dukums to deliver to Lorillard for destruction anything in their possession that bears the Lorillard marks, other than genuine Lorillard cigarettes. (Lorillard Am. Compl. ¶¶ 78-79.) Lorillard asks the court to direct Elston and the Dukums to file and serve upon Lorillard a report setting forth the manner and form of their compliance with these injunctive orders. (Id. ¶ 87.) In addiiton, Lorillard seeks an accounting and disgorgement of Elston's and the Dukums' profits from their allegedly wrongful conduct. (Id. ¶¶ 80, 84.) Lorillard also requests monetary relief: an award of attorneys' fees pursuant to 15 U.S.C. § 1117(a); treble damages as provided by 15 U.S.C. § 1117(b); statutory damages in lieu of actual damages as provided in 15 U.S.C. § 1117(c); and taxable costs of the action, including attorney's fees and interest. (Id. ¶ 81-83, 85.) And finally, Lorillard seeks an award of punitive damages, on the ground that Elston and the Dukums acted with oppression, fraud, or malice. (Id. ¶ 86.)

II. Insurance Coverage Dispute

This action involves only insurance coverage claims. Capitol Indemnity issued insurance policy number BP00044456 to Elston for the period from July 14, 2002 to July 14, 2003 (the "Policy"). (Defs.' Resp. to Pl.'s 56.1 ¶ 15; Certified Copy of Policy, Ex. 6 to Pl.'s 56.1.) On April 22, 2004, Elston submitted a claim for coverage under Capitol Indemnity's policy. (Defs.' Resp. to Pl.'s 56.1 ¶ 11.) Capitol Indemnity disclaimed any duty to indemnify or defend Elston in the underlying lawsuit on May 5, 2005. (Pl.'s Resp. to Defs.' 56.1 ¶ 27.) This disagreement gave rise to the instant litigation.

In the Policy, Capitol Indemnity committed to "pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury', 'property damage', 'personal injury' or 'advertising injury' to which this insurance applies." (Certified Copy of Policy at Form BP 00 06 01 97, p. 1 of 15.) The Policy affords Capitol Indemnity the right and duty to defend Elston against any suit seeking such damages but explicitly limits that right and duty to claims to which the insurance does apply. (Id.) The Policy defines advertising injury to include:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

b. Oral or written publication of material that violates a person's right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title or slogan. (Id. at 11 of 15.)*fn3 The parties focus on the third and fourth definitions of an advertising injury and whether either is relevant to this dispute.

The Policy also contains three exclusions that may be relevant here. First, the Policy contains an "intentional conduct" restriction, which dictates that the Policy's coverage does not apply to advertising injury "[a]rising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity." (Certified Copy of Policy at Form BP 00 06 01 97, p. 6 of 15.) Second, the Policy includes a "first publication" restriction: the insurance does not apply to advertising injury "[a]rising out of oral or written publication of material whose first publication took place before the beginning of the policy period." (Id.) Finally, the Policy contains a relief exclusion, specifying that it "covers only compensatory damages," and specifically excludes punitive damages, exemplary damages, or statutory damages. (Certified Copy of Policy at Form CBP 179 (12-00).) The relief exclusion recognizes that statutory damages can include multiple damages, costs, expenses, or attorneys' fees. (Id.) There is, however, one exception noted to this exclusion: if a suit brought against an insured seeks both compensatory and punitive or exemplary damages, Capitol Indemnity will "afford a defense" without rendering itself liable for the excluded punitive or exemplary damages. (Id.)

The parties disagree as to whether the underlying litigation is covered by the Policy protections. In its Third Amended Complaint, Capital Indemnity seeks six declarations: (1) The underlying lawsuit does not contain allegations that constitute advertising injury under the Policy; (2) The underlying lawsuit does not contain allegations that constitute personal injury under the Policy; (3) There is no coverage in the underlying lawsuit because every count of Lorillard's Amended Complaint alleged intentional acts or false publications; (4) The Policy contains no coverage for the punitive or statutory damages Lorillard seeks; (5) The Policy contains no coverage for the equitable relief Lorillard seeks; and (6) The Policy's first-publication exclusion precludes coverage in this case. (Third Am. Compl.)

Now, Capitol Indemnity, on the one hand, and the Moving Defendants, on the other hand, have filed cross motions for summary judgment. For the reasons explained below, the court grants the Moving Defendants' motion for partial summary judgment and grants in part ...


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