An e-cigarette vendor has defense coverage because an Illinois federal judge found that the party suing it “has a very thin reed on which to rest a disparagement claim that is potentially separate and distinct from its trademark infringement claims.” The Court recently found in favor of the e-cigarette vendor seeking coverage for the defense of trademark related claims against it, construing ambiguities in the policy in favor of the insured. The language at issue is typical of language in the personal and advertising injury coverage in commercial general liability policies.

Brent Duke and 21 Century Smoking, Inc. (the e-cigarette vendor) were sued by DR Distributors, LLC, CB Distributors, Inc., and Carlos Bengoa in a trademark infringement and unfair competition lawsuit. 21 Century put its insurer, Diamond State Insurance Company, on notice and Diamond defended the insured pursuant to a reservation of rights. After some time, the insurer filed a declaratory judgment action seeking a determination that the underlying lawsuit is not covered by the insured’s policies and reimbursement of defense costs. Century 21 filed a counterclaim for seeking continued coverage of its defense and reimbursement of defense costs. The parties brought cross-motions for summary judgment.

21 Century’s CGL policies contained language standard to personal and advertising injury coverage, which obligated Diamond State to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’” to which the insurance applies. Insurance is applicable to injury “arising out of . . . [o]ral or written publication, in any manner, of material that . . . disparages a person’s or organization’s goods, products, or services,” as well as any injury arising out of slogan infringement. However, exclusions barred coverage for any injury “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights” and injury “arising out of the unauthorized use of another’s name or product in your email address, domain name or metatag, or any other similar tactics to mislead another’s potential customers.” Illinois courts regard “arising out of” as broad and vague and construe it in favor of the insured. Claims for relief are excluded only if they would not have arisen “but for” the excluded conduct.

Diamond State argued that the intellectual property exclusion bars coverage for the complaint against 21 Century because it was almost entirely premised on 21 Century’s alleged infringement of DR Distributors’ trademark. 21 Century argued that several allegations in the underlying complaint of false or misleading statements could constitute elements of disparagement separate from trademark infringement.

The Court observed that disparagement is not defined by the policy and whether the allegations pointed to by 21 Century could constitute a claim of disparagement is unsettled law in Illinois, but that the underlying complaint and counterclaim adequately allege the prospect of a disparagement claim. It reasoned that “because the underlying complaint alleged that 21 Century actively contacted customers of DR Distributors and made false and misleading statements regarding its affiliation with DR Distributors in order to sell those customers its competing products, it is conceivable that DR Distributors pleaded disparagement under the terms of the insurance policy.”

The policyholder prevailed in this case because the Court ultimately concluded that the potential disparagement claim triggered Diamond State’s duty to defend 21 Century. The decision affirmed Illinois precedent that “the insurer bears the burden of the underlying plaintiffs’ broad drafting.”