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July 2010

S.B.C.C., Inc. v. St. Paul Fire & Marine Insurance Company ? Insurer had no duty to defend claim of misappropriation of customer lists.

Claims that an insured misappropriated a competitor's client lists and confidential project information did not give rise to a potential for coverage as "advertising injury" or "personal injury."

(2010) __Cal.App.4th__; 10 C.D.O.S. 8620

The California Court of Appeal, Sixth Appellate District, affirmed summary judgment in favor of an insurer and held there was no duty to defend a complaint alleging misappropriation of a competitor's client lists taken by a former employee of the competitor who was hired by the insured.  The claims presented no potential for liability for either an "advertising injury" or "personal injury" offense and an exclusion for intellectual property infringement applied.

South Bay Construction Company ("SBCC") and San Jose Construction, Inc. ("SJC") are competing construction companies.  Richard Faust worked for SJC as a project manager until 2004 when he went to work for SBCC.  SJC sued SBCC for misappropriation of trade secrets, intentional interference with prospective economic advantage, common law unfair competition and related causes of action.  SJC alleged Faust took valuable confidential information about SJC's existing customers and pending projects and SBCC used that information to solicit SJC's customers.

St. Paul Fire & Marine Insurance Company ("St. Paul") insured SBCC under a "Contractor's Commercial General Liability Protection" policy ("the Policy") that provided coverage for "personal injury" and "advertising injury."  SBCC tendered SJC's action to St. Paul, but St. Paul denied coverage. 

SBCC sued St. Paul for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief.  On cross-motions for summary judgment, the trial court granted summary judgment for St. Paul.  The court found there was no potential for coverage under the "personal injury" provisions of the policy.  Although the trial court found there was a triable issue of fact as to whether SJC alleged "advertising injury," it found there was no potential for "advertising injury" covered by the Policy because the Policy excluded claims resulting from intellectual property infringement. 

On SBCC's appeal, the Court of Appeal looked to the definitions of "advertising injury" and "personal injury" in the Policy.  The Policy defined "advertising injury" as injury caused by an "advertising injury offense."  The definition of an "advertising injury" offense included defamation, disparagement of another's work or business, disclosure of covered material that violates a person's right to privacy and the "unauthorized use of any advertising idea or advertising material, or any slogan or title, of others in your advertising." 

The court observed that the undefined term "advertising" has been interpreted by California courts as connoting "widespread promotional activities usually directed to the public at large."  But, unlike many policies in which "advertising" is not a defined term, the St. Paul Policy defined "advertising" as activity "attracting the attention of others by any means for the purpose of: seeking customers or supporters; or increasing sales or business."  The Policy further defined the term "advertising idea" as "a manner or style of advertising that others use and intend to attract attention in their advertising. But we won't consider information used to identify or record customers or supporters, such as a list of customers or supporters to be an advertising idea."  "Advertising material" was defined as "any covered material that is subject to copyright law; and that others use and intend to attract attention in their advertising."

The Court of Appeal rejected SBCC's contention that the definition of "advertising" in the Policy was expansive enough to include Faust's personal solicitations of SJC's customers.  As defined in the Policy, "advertising" involves "attracting the attention of others."  Because SJC's customers knew Faust before he solicited them, SBCC's use of SJC's customer lists was not done to "attract the attention" of the customers.  Faust was simply trying to transfer the customers' business from SJC to SBCC.
The court also found there was no use of "advertising material" which the Policy defined as being both subject to copyright law and used by others to attract attention in their advertising.  There was nothing in the record to suggest the materials Faust took were subject to copyright protection or that they were used by SJC to attract attention.  In addition, the Policy specifically provided that "information used to identify or record customers or supporters, such as a list of customers or supporters" was not an "advertising idea."

The court also concluded SJC's complaint did not allege covered "personal injury."  The only potentially relevant offense required violation of a "person's" right of privacy.  The court rejected SJC's argument that references in other parts of the policy to "person or organization" supported the conclusion that "person" always includes "organization."  The court found that such language actually weakened SBCC's assertion.  Accordingly, the term "person" was not intended to apply to entities.
In addition, the court found coverage was defeated by an exclusion in the policy for injury that "result[s] from any actual or alleged infringement or violation of . . . .intellectual property rights or laws."  The exclusion applied even though only one of SJC's claims was for trade secrets and not all of the information taken was a "work of the mind." The exclusion expressly stated there is no coverage for "any other injury or damage that is alleged in any claim or suit which also alleges any such infringement or violation."

Finding that St. Paul had demonstrated by undisputed facts that SJC's claims could not be covered under any conceivable theory of liability, the court affirmed summary judgment for St. Paul.

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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

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