When insureds get sued for things such as advertising injury or defamation, the allegations in the complaint are usually pretty severe.  One usually doesn’t accuse someone of defaming them, or ripping off their intellectual property, using niceties.  It is often alleged that the offenses were committed intentionally or knowingly or maliciously or willfully or some combination of these.  

This is why, when reviewing whether a defense is owed to an insured, for one of these “personal and advertising injury” offenses, it may seem reasonable for an insurer to conclude that no defense is owed, on account of the exclusion for “‘Personal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”     

However, some courts have concluded that, despite what may appear appropriate, based on a comparison between the allegations in the complaint and policy, the “Knowing Violation of Rights of Another” exclusion does not serve as a basis for an insurer to disclaim a defense.  A disclaimer for a duty to indemnify at some point down the road?  Perhaps.  But a duty to defend now?  No can do. 

This is the story of the Supreme Court of Wisconsin’s decision in West Bend Mutual Ins. Co. v. Ixthus Medical Supply, Inc., No. 2017AP909 (Wis. Feb. 28, 2019).  While Ixthus Medical is not  the first court to demonstrate this point, I included it here, as a top 10 coverage case of 2019, as there aren’t many in this category from state high courts.  In addition, Wisconsin is a strict “four corners” state for purposes of the duty to defend.  If any state was going to go in this direction, one would think that it would be a state that uses an extrinsic evidence test for purposes of duty to defend.

At issue was coverage for Ixthus Medical Supply, for a suit brought against it, and dozens of other companies, by Abbott Laboratories, alleging that Ixthus imported, advertised and distributed boxes of Abbott’s blood glucose test strips, intended for international markets, in the United States.  The test strips are sold in the international markets at much lower prices than the U.S.       

Abbott asserted claims for (1) Federal Trademark Infringement under Section 32 of the Lanham Act; 15 U.S.C. § 1114(1); (2) Federal Unfair Competition under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a)(i)(A); (3) Common Law Unfair Competition (New York law); (4) Federal Trademark Dilution under Section 43(c) of the Lanham Act, 15 U.S.C. § 1125(c); (5) State Law (New York) Trademark Dilution; (6) State Law (New York) Deceptive Business Practices; (7) Unjust Enrichment; (8) Violation of Federal RICO, 18 U.S.C. § 1962(c); (9) Conspiracy to Violate Federal RICO, 18 U.S.C. § 1962(d); (10) Importation of Goods Bearing Infringing Marks under 15 U.S.C. § 1124; (11) Fraud and Fraudulent Inducement; (12) Aiding and Abetting Fraud; and (13) Contributory Trademark Infringement.

Ixthus sought coverage for the Abbott suit from West Bend Mutual under a commercial general liability policy.  West Bend denied a defense and filed an action against Ixthus seeking a determination that it had no duty to defend or indemnify.  At issue was the potential applicability of the “Knowing Violation of Rights of Another” exclusion.  The trial court granted West Bend’s motion for summary judgment and the appeals court reversed.   

The case landed in the Wisconsin Supreme Court, which affirmed the decision of the court of appeals. 

At the outset, the Supreme Court did not have any trouble concluding that the initial hurdles for coverage were cleared.  Rejecting the insurer’s argument that Ixthus was sued as a “distributing” defendant, and not an “advertising” defendant, the court held that “[t]he complaint says the ‘Defendants’ (including Ixthus) engaged in advertising activity that caused a variety of injuries to Abbott.  The complaint alleges the defendants used Abbott’s trademarks and trade dress in advertising to consumers and the marketplace through websites, emails, facsimiles, point-of-sale displays and other media.  The complaint alleges the defendants caused a variety of serious injuries to Abbott including loss of millions of dollars in rebates, great damage to Abbott’s goodwill and valuable trademarks, and consumer confusion, mistake, and disappointment.”

The principal issue before the court was the applicability of the exclusion for “‘Personal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”     

West Bend argued that “the knowing violation exclusion applies to preclude its duty to defend because the complaint alleges Ixthus acted intentionally and with knowledge that it was defrauding Abbott by buying international test strips at the lower price and selling them domestically to increase profit.  West Bend points to the repeated allegations in the complaint that the defendants knew what they were doing and that Ixthus had done this before.”

This is a common argument, made by insurers, why it has no duty to defend a claim for advertising injury.  The insurer points to the complaint allegations stating, not-surprisingly, that the insured committed an intentional and knowing advertising injury, then points to the “Knowing Violation of Rights of Another” exclusion, and concludes that a comparison between them can lead to just one conclusion.  It has no duty to defend.

While this argument seemingly makes sense, especially in a state that has a strict “four corners” test for purposes of duty to defend, the Wisconsin high court rejected it.

In simple terms, the court examined the causes of action at issue in the complaint and concluded that, for certain of them, it was not necessary for Abbott to establish that Ixthus acted knowingly or intentionally.  For example, the court stated: “Abbott’s claim for trademark dilution under Section 43(c) of the Lanham Act, 15 U.S.C. § 1125(c)(1)—a strict liability statute—does not require proof that Ixthus acted knowingly or intentionally. . . . Likewise, Abbott’s claim for trademark dilution under New York General Business Law § 360-l does not require Abbott to prove Ixthus acted knowingly or intentionally.”  Therefore, “despite Abbott’s general allegations of knowing violations, Abbott could prevail on several covered advertising injury claims without establishing that Ixthus knowingly violated Abbott’s rights. It is this possible coverage that triggers West Bend’s duty to defend.”

So, notwithstanding that Wisconsin is a “four corners” state, and a strict one at that, the court’s duty to defend decision seems to have included an examination of information outside the complaint, namely, the law books that list the elements of the causes of action alleged. 

Based on West Bend Mutual Ins. Co. v. Ixthus Medical Supply, Inc., an insurer may have a difficult time disclaiming a duty to defend a complaint, alleging an advertising injury, based on the “Knowing Violation of Rights of Another” exclusion, despite lots of allegations that the insured knew what it was doing and that it was impermissible.  At least one of the various state or federal causes of action, that involves this type of advertising injury, may not require the plaintiff to establish that the insured knew that its acts would violate the rights of another.

This rationale, for concluding that a defense is owed, may also apply to other “personal and advertising injury” offenses, if, despite the intentional and knowing allegations in the complaint – and a “four corners” standard controlling -- the court can look to the elements of the tort.  In doing so, it may conclude that a defense is owed, based on the possibility, as a matter of law, that liability can be established on grounds that do not require the insured’s intentional or knowing conduct. 

For example, a complaint may allege, as you might expect, that an insured’s defamation of the plaintiff was committed intentionally.  However, using the Ixthus Medical rationale, a court may conclude that a defense is owed, despite the “Knowing Violation of Rights of Another” exclusion, if defamation can be committed negligently.  See Axiom Ins. Managers, LLC v. Capitol Specialty Ins. Corp., 876 F.Supp.2d 1005 (N.D. Ill. 2012) (“Even though the Texas Suit alleges intentional and knowing conduct, the exclusions do not negate the duty to defend since plaintiffs could have been held liable for defamation without proof of intent and knowledge.”) (addressing exclusion for “‘personal  and advertising injury’ arising out of oral or written publication, in any manner, of material, if done by or at the direction of the insured with knowledge of its falsity”).

As I noted above, while Ixthus Medical is not the first court to conclude that a duty to defend is owed, for a complaint that alleges an intentional or knowing “personal and advertising injury,” despite the Knowing Violation of Rights of Another” exclusion, there aren’t many in this category from state high courts.  In addition, Wisconsin, being a strict “four corners” state for purposes of duty to defend, adds to the significance of the decision, given that the court seemingly had a way to rule otherwise.