No coverage because exception to IP exclusion not applicable due to inclusion of trademark and copyright claims

An Illinois federal district court, applying Illinois law, held that an intellectual property exclusion relieved an insurer of its defense obligations for an underlying suit regarding trademark infringement and unfair competition, because the exclusion clearly excluded coverage for entire suits that allege intellectual property claims and the exception to the exclusion only applied when copyright was the only allegation in a claim.

Sentinel Insurance Company (“Sentinel”) sought a declaratory judgment concerning its duty to defend and cover Beach for Dogs Corporation, Beach for Dogs Aurora, and Steve Holland, individually and d/b/a/ Beach for Dogs (collectively, “Beach for Dogs”) in an underlying lawsuit.  The underlying lawsuit stemmed from a dispute about the appearance of two logos used on door hanger marketing materials: one utilized by Woofbeach, Inc. and one utilized by Beach for Dogs.  Count I of the underlying lawsuit is a trademark infringement claim and it requests relief for Beach for Dogs’ alleged current and continued infringement “upon Woofbeach’s Service Marks by the continued operation of [the] business under the name ‘Beach for Dogs’” and “the promotion of its dog training and grooming business through the use of confusing similar ‘Beach for Dogs’ name and logo containing design elements, namely the silhouette of a dog and palm tree….”  The remainder of the claims in the underlying lawsuit are as follows: Count II alleges a violation of 815 ILCS 510/2, the Illinois Uniform Deceptive Trade Practices Act; Count III alleges a violation of 815 ILCS 505/2, the Illinois  Consumer Fraud and Deceptive Trade Practices Act; and Count IV alleges tortious interference with prospective economic advantage.

Sentinel insured Beach for Dogs under a liability policy which includes an Intellectual Property Exclusion (“IP Exclusion”).  The IP Exclusion excludes coverage for claims “[a]rising out of any actual or alleged infringement or violation of any intellectual property right,” such as copyright, service mark, or trademark; or “[a]ny injury or damages alleged in any claim or ‘suit’ that also alleges an infringement or violation of any intellectual property right.” However, the IP Exclusion “does not apply if the only allegation in the claim or suit involving any intellectual property right is limited to: (1) Infringement, in your ‘advertisement’, of (a) Copyright, (b) Slogan; or (c) Title of any literary or artistic work; or (2) Copying, in your ‘advertisement’, a person’s or organization’s ‘advertising idea’ or style of ‘advertisement.’”

The parties filed cross-motions for summary judgment regarding Sentinel’s duty to defend.  Sentinel contended that the policy’s IP exclusion precluded coverage for the entire underlying lawsuit.  Beach for Dogs argued that the exception applied, because, in addition to its other claims, Woofbeach alleged a claim for copyright infringement.  The court disagreed with Beach for Dogs and found that the exception to the IP Exclusion did not apply because the exception only applied when “’the only allegation in the claim or suit’ flows from a copyright violation,” and per Beach for Dogs own concession, the underlying lawsuit also alleged trademark infringement.  The court also held that by the express language of the IP Exclusion, the existence of trademark allegations precluded coverage for the entire underlying lawsuit: “At the risk of repeating ourselves one time too many, the IP Exclusion states that the ‘insurance does not apply … to any claim or ‘suit’ that also alleges infringement or violation of any intellectual property right.’” Sentinel Ins. Co. v. Beach for Dogs Corp., No. 17 C 1501 (N.D. Ill. Dec. 21, 2017).