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Lemko Corporation v. Federal Insurance Company

United States District Court, N.D. Illinois, Eastern Division

September 30, 2014

LEMKO CORPORATION, Plaintiff,
v.
FEDERAL INSURANCE COMPANY, and CINCINNATI INSURANCE COMPANY, Defendants

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For Lemko Corporation, Plaintiff: Katherine Smith Dedrick, LEAD ATTORNEY, Anthony John Bruozas, Christina M. Phillips, Edward Eshoo, Jr., Michael W. Duffy, Childress Duffy, Ltd., Chicago, IL.

For Federal Insurance Company, Defendant: Devin C. Maddox, Thomas Kevin Hanekamp, LEAD ATTORNEYS, Tressler LLP, Chicago, IL.

For Cincinnati Insurance Company, Defendant: Hope G. Nightingale, LEAD ATTORNEY, Dennis Michael Dolan, Kathleen L Bianco, Litchfield Cavo, Chicago, IL.

For Cincinnati Insurance Company, Counter Claimant: Hope G. Nightingale, LEAD ATTORNEY, Kathleen L Bianco, Litchfield Cavo, Chicago, IL.

For Lemko Corporation, Counter Defendant: Katherine Smith Dedrick, LEAD ATTORNEY, Childress Duffy, Ltd., Chicago, IL.

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MEMORANDUM OPINION AND ORDER

John J. Tharp, Jr., United States District Judge.

In this insurance coverage dispute, the plaintiff, Lemko Corporation, seeks to impose a duty to defend on two of its liability insurers with respect to a lawsuit filed against Lemko bye Motorola, Inc., that has since settled. Lemko, a cellular technology company and competitor of Motorola, was sued for a range of torts and civil statutory violations stemming from the alleged theft of copyrighted material and other confidential information by Motorola employees who were also working (allegedly) for or on behalf of Lemko. The defendant insurers declined coverage, concluding that their policies either did not provide or expressly excluded coverage for the events at issue in the Motorola lawsuit. All parties have now moved for partial or total summary judgment as to their liability. For the reasons that follow, Lemko's motion is denied, and the insurers' motions are granted.

FACTS

Motorola first brought suit against Lemko and five individuals on September 23, 2008. Compl., Dkt. # 1, N.D. Ill. Case No. 08 C 5487. The complaint was amended three times; the third amended complaint (TAC) of July 16, 2010, contains largely the same substantive claims against a total of 16 defendants. The TAC sets forth nineteen counts seeking relief under the following theories: (1) violation of the Computer Fraud and Abuse Act; (2) misappropriation of trade secrets; (3) breach of fiduciary duty; (4) usurpation of corporate opportunity; (5) patent ownership; (6) breach of contract, namely, employment agreements; (7) tortious interference with contract; (8) fraudulent concealment; (9) spoliation of evidence; (10) copyright infringement; and (11) civil conspiracy. TAC, Dkt. # 473, N.D. Ill. Case No. 08 C 5487. All of these counts are based on the same underlying facts--namely, the accessing of Motorola computers without authorization, or in excess of existing authorization, to obtain Motorola's trade secrets and confidential information, including source code, and their transfer to Lemko, during a period running from approximately 2002 to 2007.

When it was sued by Motorola, Lemko turned to its insurers for coverage--to Federal beginning with the original complaint, and to Cincinnati beginning with the Second Amended Complaint. Each denied Lemko's claim. Lemko entered into a standstill agreement with Cincinnati but not Federal; Federal, however, did not seek a declaratory judgment regarding its duty to defend, nor did it defend under a reservation of rights.

The Policies

A. Cincinnati Commercial General Liability and Umbrella Policy

Under the Cincinnati CGL policy, Lemko has coverage for " bodily injury and property damage liability" during the policy period.[1] The coverage applies to the extent Lemko is liable to pay damages because of " bodily injury" or " property damage" that occurs during the policy period and that is " caused by an 'occurrence' that takes place in the 'coverage territory.'" An " occurrence," under the policy, is " an accident, including continuous or

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repeated exposure to substantially the same general harmful conditions." And " property damage" is defined as:

a. Physical injury to all tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the " occurrence" that caused it.
For the purposes of this insurance, " electronic data" is not tangible property.

The property damage coverage is subject to an exclusion for " expected or intended injury," namely: " 'property damage' which may reasonably be expected to result from the intentional or criminal acts of the insured or which is in fact expected or intended by the insured, even if the injury or damage is of a different degree or type than actually expected or intended."

The same Cincinnati policy also covers Lemko for " personal and advertising injury liability." The coverage applies to such injuries committed in " the coverage territory" during the policy period, and " caused by an offense arising out of your business." Personal and advertising injury is injury arising out of, inter alia : " infringing upon another's copyright, trade dress or slogan in [the insured's] 'advertisement.'" And, in turn, an " advertisement" is defined as:

a notice that is broadcast, telecast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters. 'Advertisement' includes a publicity article. For purposes of this definition:
a. Notices that are published include material placed on the Internet or on similar electronic means of communication; and
b. Regarding web-sites, only that part of a web-site that is about your goods, products or services for the purposes of attracting customers or supporters is considered an " advertisement."

As relevant in this case, the advertising injury coverage is subject to three exclusions--for " knowing violation of rights of another," for " breach of contract," and for " infringement." The first of these exclusions applies to " 'personal and advertising injury' caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict 'personal and advertising injury.'" The second excludes coverage for injury " arising out of a breach of contract, except an implied contract to use another's advertising idea in your 'advertisement.'" Finally, the coverage does not apply to " 'personal and advertising injury' arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property ...


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