The Michigan Supreme Court, in a per curiam decision, held that an alleged trade dress infringement arising out of a policyholder’s shipping a product in a competitor’s packaging with the policyholder’s label affixed to it is not an “advertisement” and, thus, not an advertising injury under a general liability contract. See Citizens Ins. Co. v. Pro-Seal Service Group, Inc., No. 130099 (Mich. April 25, 2007).

Factual and Procedural Background The policyholder, Pro-Seal Service Group, Inc., sells and repairs mechanical seals used in oil production facilities in Alaska. Pro-Seal’s major competitor for mechanical seal sales in the Alaskan market is Flowserve Corporation, which manufactures, sells and refurbishes mechanical seals.

A dispute between Flowserve and Pro- Seal arose when Flowserve discovered that two Flowserve mechanical seals, which had been repaired by Pro-Seal, were shipped to a customer in the original Flowserve container with the name “Pro-Seal” affixed to the outside of the container. Flowserve filed suit against Pro-Seal in federal court in Alaska, claiming that Pro-Seal created confusion in the marketplace by imitating or infringing trademarks or product marks, and by using trade secrets, blueprints, engineering drawings, packaging materials, and sales practices that misrepresented Pro-Seal seals as being Flowserve seals.

Citizens Insurance Company issued a general liability contract and an umbrella contract to Pro-Seal. Pro-Seal requested a defense from Citizens for the Flowserve lawsuit under both contracts. Citizens disclaimed coverage and filed a declaratory judgment action in Michigan state court.

The trial court granted summary judgment to Citizens on the ground that the Flowserve lawsuit alleged “an intentional course of conduct involving fraud, deceit, and counterfeit parts being sold as genuine.” The intermediate appellate court reversed and held that the trade dress claim constituted a covered advertising injury that alleged some non-intentional acts. The intermediate appellate court relied, in part, on the reasoning of Poof Toy Products, Inc. v. United States Fidelity & Guaranty Co., 891 F. Supp 1228, (E.D. Mich. 1995), which found that “allegations of trademark and trade dress infringement inherently involve advertising activity.” Poof Toy, 891 F. Supp. at 1235-36. Citizens appealed to the Michigan Supreme Court.

Holding

The Michigan Supreme Court reversed and concluded that Pro-Seal’s shipping of the repaired seals in a competitor’s packaging affixed with Pro-Seal’s label did not involve advertising under the liability contracts at issue.

The Michigan Supreme Court stated that an insurance contract must be enforced in accordance with its terms as written and that the intermediate appellate court had failed to do that. The Court stated that the general liability contract, to which the umbrella contract followed form, defined “advertisement” as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The intermediate appellate court, however, rejected this definition in favor of a different one articulated by the Poof Toy court. According to the Michigan Supreme Court, the Poof Toy decision was “readily distinguishable” because the contract in Poof Toy did not define “advertisement” and, consequently, the Poof Toy court relied on the dictionary to define the term.

The Michigan Supreme Court next analyzed the definition of “advertisement” contained in the liability contract and reasoned that an “advertisement” takes place when there is: (1) a notice; (2) that is broadcast or published; (3) to the general public or specific market segments; (4) about [the company’s] goods, products, or services; and (5) for the purpose of attracting customers.

The intermediate appellate court concluded that Pro-Seal’s shipping of seals in a Flowserve container “‘constitute[ed] notice that is published to the specific market segment in which Pro-Seal and Flowserve compete about the seals for the purpose of attracting customers or supporters’” and thus was an advertisement. The Michigan Supreme Court disagreed, explaining that the intermediate appellate court’s conclusion “overlooked the requirement that Pro-Seal must publicly disseminate information about its goods and services for the purpose of attracting the patronage of potential customers.”

The Michigan Supreme Court focused on the fact that Pro-Seal sent a seal to a “specific customer” for “the purpose of completing a single transaction,” and any advertising associated with the transaction was “an incidental and remote benefit” that was not intended to attract potential customers. The Court concluded that because Pro-Seal was not attempting to market to new customers, the harm alleged to have been caused by Pro-Seal’s act of shipping a seal in a Flowserve container did not “arise out of an advertisement.” The Court thus reversed the intermediate court of appeals and remanded the case to the trial court.

Two justices dissented and stated that based on the allegations of the Flowserve lawsuit, they would have held that there was an advertising injury that triggered Citizens’ defense obligation.

Implications

This decision shows that a Michigan court will not assume that trade dress or trademark infringement or similar allegations inherently allege advertising and, instead, will analyze the specific allegations of a complaint to determine whether an advertising injury has taken place under the terms of the insurance contract at issue. It also shows that a Michigan court will interpret an insurance contract as written and according to its ordinary meaning. This decision also highlights the importance of reviewing prior decisions to confirm whether those decisions may be distinguished because they involved different contract language.