FIFTH CIRCUIT FINDS NO COVERAGE FOR BUSINESS TORTS IN LIABILITY POLICY’S ADVERTISING COVERAGE

July 25, 2011

Recently,  the  Fifth  Circuit  ruled  that  claims  for  misappropriation  of  trade  secrets,  unfair  business practices, intentional interference with prospective economic advantage, breach of fiduciary duty, constructive trust, unjust enrichment, demand for an accounting, and interference with an at-will employment relationship fell outside a liability policy’s “advertising injury” coverage.  Continental Cas. Co. v. Consolidated Graphics, Inc., F.3d,  2011 WL 2644736 (5th  Cir. 2011).    Daniels, an employee and relation of a family-owned company, devised a scheme to re-direct business to another company when the owners refused to give him an ownership interest in the company in exchange for a job.  When the company learned of the scheme, it sued the former employee and the companies that were complicit in the scheme, Consolidated Graphics and its related entities, in California state court.  The jury awarded $5.698 million in compensatory damages and $8.1 million in punitive damages collectively. Continental sued the Consolidated Graphics defendants for a declaratory judgment in federal court in Texas, seeking a determination that it had no duty to defend or indemnify the California case.

Continental argued that an “advertising injury” had not occurred within the meaning of the coverage, and won a summary judgment on that basis.  The court noted that the policy did not define “advertising injury.”  It noted that Texas decisions on point have held that the term “contemplates dissemination to the public.”  In affirming the lower court, the court held that the coverage “requires a measure of public dissemination” and, here, all the transactions were private and direct.  The court held that the insurers did not have to defend or indemnify the Consolidated Graphics defendants on the claims.