Violation of an Intellectual Property Law or Right is Not Covered Defamation
Various states apply the law interpreting insurance contracts differently. Some apply coverage decisions to the four corners of the policy and the four corners of the suit while others allow extrinsic evidence to make a determination of coverage for defense or indemnity. The difference becomes important when one state’s law will allow for coverage and another will not.
In Tela Bio, Inc., a Delaware corporation; Antony Koblish; Maarteen Persenaire, an Individual v. Federal Insurance Company, an Indiana Corporation, No. 18-1717, United States Court Of Appeals For The Third Circuit (January 16, 2019) TELA Bio, Inc. and its founders sued Federal after TELA was sued by its competitor LifeCell Corporation. In the District Court, the parties vigorously disputed which substantive law should apply, with TELA advocating for New Jersey law and Federal arguing for Pennsylvania law. After applying New Jersey’s choice-of-law rules, the District Court agreed with Federal that Pennsylvania substantive law applied, which led to the conclusion that Federal had no duty to defend TELA.
CHOICE OF LAW
This case originated in federal court in New Jersey and was transferred to the United States District Court for the Eastern District of Pennsylvania. Accordingly, the District Court applied New Jersey’s choice-of-law rules. Because the laws of the two states presented a true conflict, the District Court assessed “the interests each state has in applying its own law” to determine “which state has the most significant relationship to the parties and the event.”
When a dispute involves insurance coverage courts first look to “the place that the parties understood . . . to be the principal location of the insured risk” and apply that state’s law “unless some other state has a more significant relationship . . . to the transaction and the parties.” [Pfizer Inc. v. Emp’rs Ins. of Wausau, 712 A.2d 634, 638 (N.J. 1998)] The District Court applied Pennsylvania law because the principal location of the risk insured by the policy appears to be Pennsylvania and New Jersey does not bear a more significant relationship to the parties or the matter.
Federal’s principal place of business is in New Jersey, and the alleged acts triggering coverage happened in New Jersey. Even though the policyholders are Pennsylvania residents, Appellants insist Pennsylvania does not have an interest in applying its law to acts and injuries that did not occur within its borders. Applying New Jersey law would conform more closely to the interests of the parties and aid judicial administration.
In determining which state has the most significant relationship to the parties and claim, courts must consider four factors:
- the competing interests of the relevant states;
- the national interests of commerce among the several states;
- the interests of the parties; and
- the interests of judicial administration.
The District Court explained that because the policy was issued to Pennsylvania insureds through a Pennsylvania broker, New Jersey does not have a significant interest in its law applying to TELA’s duty to defend claim.
In response, TELA emphasizes LifeCell’s connections to New Jersey in the underlying case. But those connections are irrelevant here because this case is concerned with the Pennsylvania insureds (Appellants) and the policy Federal issued to them in Pennsylvania. Since the insureds are not New Jersey residents, the application of Pennsylvania law does not frustrate New Jersey’s interests.
Finally, applying New Jersey law would not aid judicial administration as TELA suggests because the site of the litigation of the underlying case, is not pertinent to adjudicating this coverage dispute.
For these reasons, the Third Circuit agreed with the District Court that Pennsylvania law applies because it is the principal location of the insured risk and has the most significant relationship to the parties and their dispute.
Coverage was claimed under the policy’s “Advertising Injury and Personal Injury Liability Coverage” provision. That provision covers, in relevant part, “damages and claimant costs that the insured becomes legally obligated to pay . . . for . . . personal injury that is caused by an offense to which the coverage applies.” The policy provides coverage for several offenses, including libel and slander, defined as “electronic, oral, written or other publication of material that . . . libels or slanders a person
LifeCell did not sue for libel or slander. Nevertheless, Appellants contend that the underlying suit involves defamation because LifeCell alleged that TELA:
- marketed its product as an improvement on LifeCell’s product;
- exploited LifeCell’s reputation and Good will; and
- induced several LifeCell employees to work for TELA by making negative statements about LifeCell.
The Third Circuit agreed with the District Court that the policy does not provide TELA with coverage under the libel and slander provision because LifeCell’s complaint in the underlying case does not implicate either tort. Under Pennsylvania law, the insurer has a duty to defend the insured only if the factual allegations of the complaint against the insured state a claim which would potentially fall within the coverage of the policy.
Libel and slander require defamatory statements which tend to harm a person’s reputation. Yet none of the allegations Appellants cite from LifeCell’s complaint are defamatory because they do not involve harm to LifeCell’s reputation. In fact, LifeCell’s complaint alleges that TELA sought to benefit from LifeCell’s good reputation. The Third Circuit concluded that the District Court rightly concluded that LifeCell’s allegations pertain to a business dispute over stolen employees and confidential trade secrets and, as a result, coverage under the libel and slander provision of the policy was not triggered.
The District Court also held that even if LifeCell’s allegations triggered coverage under the libel and slander provision, Federal still would have no duty to defend because the underlying suit falls under the intellectual property rights exclusion.
As the Court noted, the broad language of this exclusion’s paragraph B states: “[T]his insurance does not apply to the entirety of all allegations in any claim or suit, if such claim or suit includes an allegation of or a reference to an infringement or violation of an intellectual property law or right, even if this insurance would otherwise apply to any part of the allegations in the claim or suit.” (emphasis added)
The expansive language just quoted clearly and unambiguously excludes from coverage all allegations within a suit, if that suit contains any allegations of intellectual property rights violations. This exclusion plainly applies to LifeCell’s suit, which asserts that TELA misappropriated its trade secrets and proprietary information.
Applying the law of Pennsylvania and reading the clear and unambiguous language of the exclusion and the failure of the underlying action to seek damages for defamation, there could be no coverage for the suit against TELA because it alleged intellectual property rights violations.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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