In AU Electronics, Inc. v. Harleysville Group, Inc., No. 13 C 5947, 2015 WL 1091837 (N.D. Ill. Mar. 10, 2015), the United States District Court for the Northern District of Illinois, addressing cross-motions for summary judgment on a business insurance policy under Illinois law, granted the insurer’s motion and denied the policyholder’s motion. The court held that (1) the insurer had no duty to defend or indemnify the policyholder because the underlying lawsuits against it alleged advertising injury caused by trademark infringement, which was excluded from coverage; and (2) even if the insurer had such a duty, which it did not, the policyholder’s tender was untimely as a matter of law.
The policyholder alleged that the insurer breached its duty to defend and indemnify it in underlying suits that Sprint and T-Mobile brought involving allegations that the policyholder had engaged in a scheme to buy cellphones in bulk, “unlock” them so that they could be used on any cellular network, and “then resell the phones overseas, usually stripped of all packaging and documentation.” Id. at *1-2. Sprint and T-Mobile filed the underlying lawsuits in late 2012, asserting various statutory and common law claims, including a claim that the policyholder’s activities “‘constitute[d] false designation of origin, false descriptions and representations, and false advertising.’” Id. at *2, 7 (quotation omitted).
Critically, the insurance policy provided liability coverage for personal and advertising injury, including trade dress infringement claims, but excluded coverage for trademark infringement claims. See id. at *2. The policyholder sent a tender for defense and indemnity to the insurer on July 31, 2013, after allegedly coming to believe for the first time that Sprint and T-Mobile were not alleging trademark infringement, but rather trade dress infringement, which the policy covered. See id. at *2-3. Although the policyholder had not contacted the insurer about the underlying Sprint and T-Mobile lawsuits prior to sending the July 31, 2013 tender letter, see id. at *3, the policyholder nonetheless argued that the suits were covered and its tender was timely, see id. at *3-4.
The court held that the underlying lawsuits alleged only trademark infringement, not trade dress infringement, because the allegations involved the use of Sprint and T-Mobile “marks,” i.e., their logos, as opposed to allegations that customers might be confused by the “look and feel” of the phones. Id. at *4 (citations omitted). As such, the court held, “[b]ecause none of the conduct described in the underlying complaints, even generously read, could arguably form the basis for claims of trade dress infringement” (or misappropriation of an advertising idea, which was also covered under the policy), the lawsuits were not covered by the policy and thus the insurer had no duty to defend and indemnify. Id. at *7 (citations omitted).
In so holding, the court relied heavily on the notion that, under Illinois law, “‘[t]he factual allegations of the [underlying] complaint, rather than the legal theory under which the action is brought, determine whether there is a duty to defend.’” Id. at *4 (quotation and other citation omitted). The court thus gave little weight to the legal labels of the underlying allegations, focusing instead on whether the alleged conduct fell within one of the categories of wrongdoing listed in the policy. See id. (citation omitted). And the court further rejected the policyholder’s argument that, as long as the underlying complaints did not foreclose the possibility of a trade dress claim, there was coverage under the policy, noting that the policyholder’s position was “a logical fallacy akin to concluding that because all poodles are dogs, all dogs must also be poodles.” See id. at *5(citations omitted).
As to timeliness of notice, the court held that even if the underlying claims were covered by the policy, the tender was untimely. See id. at *7. The court recognized that under Illinois law, “[u]ntimely notice is an absolute bar to insurance liability . . . .” Id. (citations omitted). The policyholder had waited over seven months after the underlying suits had been filed before providing notice to the insurer, despite the policy’s requirement that the insurer receive written notice of a claim or suit “‘as soon as practicable.’” Id. (quotation omitted).
In evaluating whether the notice was timely, the court considered the following factors that the Illinois Supreme Court set forth in a 2010 case involving a “materially identical notice provision” as the one at issue here:
(1) the specific language of the policy’s notice provision; (2) the insured’s sophistication in commerce and insurance matters; (3) the insured’s awareness of an event that may trigger insurance coverage; (4) the insured’s diligence in ascertaining whether policy coverage is available; and (5) prejudice to the insurer.
Id. (quoting W. Am. Ins. Co. v. Yorkville Nat. Bank, 939 N.E.2d 288, 293-94 (Ill. 2010)). Analyzing these factors, see id. at *7-9, the court held that the policyholder’s tender was not given within a reasonable time, and thus there could be no recovery under the policy, even if the insurer had a duty to defend or indemnify the policyholder, see id. at *9.
This case reinforces Illinois’ requirement that the factual allegations in a complaint determine whether there is a duty to defend, and not the legal labels attached to the alleged conduct, even where doing so results in a denial of the duty to defend. It also reinforces Illinois’ strict requirement that untimely notice is an “absolute bar” to insurance coverage.