In CGS Industries, Inc. v. Charter Oak Fire Ins. Co., No. 11-2647-cv (June 13, 2013), the Second Circuit concluded that an insurance policy’s Coverage B did not cover liability alleged in a trademark infringement suit. The Court did, however, conclude that the insurer had a duty to defend because there “sufficient legal uncertainty about the coverage issue” at the time the tender was made. A copy of the decision can be found here.

In the underlying case, CGS Industries, Inc. (“CGS”) supplied jeans to Wal-Mart Stores, Inc. (“Wal-Mart”). Five Four Clothing, Inc. (“Five Four”) sued Wal-Mart for trademark infringement based on the use of a rear-pocket stitching design on the jeans. CGS was later added to the suit and asked its insurer, Charter Oak Fire Ins. Co. (“Charter Oak”), to defend it pursuant to its liability policy that contained coverage for “Advertising Injury,” including infringement of copyright, title or slogan -- but not trademark. CGS later settled the underlying action by payment on behalf of itself and Wal-Mart, and sought indemnification from Charter Oak for the settlement proceeds and for defense costs, including those incurred by Wal-Mart.

The lower court concluded that Charter Oak breached its duty to defend CGS in the underlying action. Accordingly, it went on to hold that Charter Oak was obligated to indemnify CGS for the settlement amount. Charter Oak appealed, arguing that it did not have a duty to defend CGS under the policy because the stitching did not constitute an infringement of “slogan” or “title” within the meaning of the policy.

Those terms were undefined by the policy, so the appeals court looked to federal law to supply the meaning. Federal courts frequently define slogan as “phrases used to promote or advertise a house mark or product mark, in contradistinction to the house or product mark itself.” Likewise, the court observed:

The vast majority of federal cases are clear that in this context—that is, in a list that includes “copyright” and “slogan,” but conspicuously does not include coverage of infringement of “trademarks”—“title” means the name or appellation of a product, and does not cover design elements such as pocket stitching that may serve as a trademark designating the origin of the product.  

Based on these general principles, the Second Circuit held that the stitching design was not a slogan or title, and therefore was not within the scope of “Advertising Injury” so as to trigger coverage. The CGS decision therefore offers another example of how the Second Circuit will approach terms such as “slogan” or “title” in the context of trademark infringement claims, particularly where the alleged infringement constitutes designs incorporated into clothing or other products. The Court noted, however, that there are isolated cases that employ different definitions of “slogan” or “title” that could bring the terms within the scope of coverage. The Court held that these cases created legal uncertainty, which triggered Charter Oak’s broader duty to defend.

Separately, Charter Oak also argued that the underlying action did not allege that CGS had committed a covered offense in the course of advertising, because the first and second amended complaints only referred to advertising by Wal-Mart. The Court rejected this argument because the Four Five’s Third Amended Complaint alleged that both Wal-Mart and CGS advertised the jeans. The Second Circuit stated that, if Charter Oak believed that Four Five did not to intend this allegation, then it should have begun to defend CGS, and served a demand for a bill of particulars to resolve any ambiguity in the pleadings. It did not do so, and therefore waived any argument that the duty to defend had terminated.

The Court held that Charter Oak’s breach of its duty to defend made it liable for GCS’ defense costs, but that the breach of the duty to defend did not create coverage where none otherwise existed – with the result that Charter Oak was found not to have a duty to indemnify. Thus, the Court’s decision presents a reminder to insurers that the duty to defend applies if there is any “residual uncertainty” at the time of tender as to whether a court could find a term in the underlying claim to be ambiguous with regard to whether it came under the scope of coverage.