IDG, Inc. v. Continental Casualty Co.

UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
Byron White United States Courthouse
1823 Stout Street
Denver, Colorado 80257
(303) 844-3157
Patrick J. Fisher, Jr. Jane B. Howell
Clerk Chief Deputy Clerk
January 3, 2002

TO: ALL RECIPIENTS OF THE OPINION

RE: 01-5011, IDG, Inc. and R. Brent Johnson v. Continental Casualty, et al.
Filed on December 26, 2001

The opinion filed December 26, 2001, contains a clerical error. On page 1
of the slip opinion, Linda J. Burgess, appearing for the appellees, is a member of
the firm of Winstead, Sechrest & Minick, Austin, Texas.

Please make the correction to your copy of the opinion.

Sincerely,

Patrick Fisher, Clerk of Court

By: Belinda Begley
Deputy Clerk
 F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
DEC 26 2001
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
_____________________________________________

IDG, INC. and R. BRENT JOHNSON,

Plaintiffs-Appellants

v. No. 01-5011

CONTINENTAL CASUALTY
COMPANY, TRANSPORTATION
INSURANCE COMPANY, and
VALLEY FORGE INSURANCE
COMPANY,

Defendants-Appellees

Appeal from the United States District Court
for the Northern District of Oklahoma
(D.C. No. 99-CV-111-B)
__________

Steven M. Harris (Michael D. Davis with him on the brief) of Doyle Harris Davis
& Haughey, Tulsa, Oklahoma for Plaintiffs-Appellants.

Linda J. Burgess of Winstead, Sechrest & Minick, Austin, Texas (Frances E.
Patton of Pierce, Couch, Henrickson, Baysinger & Green, L.L.P., Oklahoma City,
Oklahoma with her on the brief) for Defendants-Appellees.
___________

Before TACHA, Chief Judge, EBEL and GARTH, 1 Circuit Judges
___________

1
Honorable Leonard I. Garth, United States Circuit Judge, United States Court of
Appeals for the Third Circuit, sitting by designation.
GARTH, Circuit Judge
___________

In the 1990s, plaintiffs-appellants IDG, Inc. and R. Brent Johnson, the

majority stockholder and executive officer of IDG (together, “IDG”), purchased

commercial insurance policies from defendants-appellees Continental Casual

Company, Transportation Insurance Company and Valley Forge Insurance

Company (collectively, “CNA”). Among other things, these policies provided

liability and defense coverage in the event IDG was sued for “advertising

injuries” by third-parties. In January 1999, IDG filed suit against CNA, claiming

CNA was obligated to provide a legal defense under those policies for two

lawsuits commenced against IDG by a former employee named Darrell Burson

(the “Burson Lawsuits”). The district court granted summary judgment in favor

of CNA, and IDG appealed. For the reasons discussed below, we will affirm.

I.

During the relevant time period, IDG was insured under the following

insurance policies: (1) Valley Forge Insurance Company’s commercial general

liability (“CGL”) policies, Policy Nos. P1 27819677 (effective September 1993

to September 1994) and B1 31455338 (effective September 1994 to September

1996); (2) Transportation Insurance Company’s CGL policies, Policy No. B1

57115402 (effective September 1996 to September 1999); and (3) Continental

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Casualty Company’s commercial umbrella policies, Policy No. B1 56852312

(effective September 1996 to September 1999).

The relevant portions of the CGL policies issued to IDG state the

following:

COVERAGE B. PERSONAL AND ADVERTISING INJURY
LIABILITY

1. Insuring Agreement.

a. We will pay those sums that the insured becomes legally
obligated to pay as damages because of “personal injury” or
“advertising injury” to which this insurance applies. We will
have the right and duty to defend any “suit” seeking those
damages . . .

b. This insurance applies to: . . .

(2) “Advertising injury” caused by an offense committed in
the course of advertising your goods, products or services ; but
only if the offense was committed in the “coverage territory”
during the policy period. . . .

* * *
1. “Advertising injury” means injury arising out of one or more of
the following offenses:

a. Oral or written publication of material that slanders or libels a
person or organization or disparages a person’s or organization’s
goods, products or services;
b. Oral or written publication of material that violates a person’s
right to privacy;
c. Misappropriation of advertising ideas or style of doing
business; or
d. Infringement of copyright , title or slogan.

The commercial umbrella policies issued to IDG provide that CNA will pay

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“all sums that the insured becomes legally obligated to pay as ‘ultimate net loss’

because of . . . ‘advertising injury,’ caused by an ‘incident’ which takes place

during the policy period and in the policy territory.” The definition of

“advertising injury” under the umbrella policies is identical to that of the CGL

policies.

II.

On March 11, 1994, Darrell Burson, a former employee of IDG, filed suit

against IDG and Johnson in state court (the “State Lawsuit”). Among other

claims, Burson sought royalty and ownership rights to a series of computer

programs known as SuperVision. Essentially, Burson alleged that he owned part

or all of SuperVision, and that Johnson and he “entered into an agreement

[regarding] the division of gross process from the sale of . . . SuperVision” and

that “Johnson breached [that] agreement by concealing information regarding

sales of SuperVision and by withholding and causing IDG to withhold [Burson’s]

share of the proceeds from the sales.” Burson’s First Amended State Complaint

at ¶¶ 5-6. In addition, Burson sought unpaid wages and unpaid royalties, alleging

conversion of SuperVision, breach of fiduciary duty, fraud, and breach of a

stockholder agreement.

IDG notified CNA of the State Lawsuit on March 28, 1994, two weeks

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after the suit was filed, seeking defense coverage under its insurance policies.

On May 10, 1994, CNA declined to provide any defense or indemnity coverage

of the suit on the ground that Burson’s state action did not allege “advertising

injuries” as covered by the policies. No additional information was sent to CNA

until three years later in May 1997, when IDG requested that CNA re-evaluate

coverage. On August 21, 1997, CNA denied IDG’s request upon re-evaluation.

The state court eventually dismissed the ownership causes of action on the

basis of federal preemption over copyright claims, and abated all the state law

claims until the copyright related issues were resolved. The State Lawsuit was

ultimately settled for approximately $50,000, but the copyright claims were

decided in a federal lawsuit.

In September 1997, Burson filed suit in the United States District Court for

the Northern District of Oklahoma alleging copyright infringement against IDG

and others (the “Federal Lawsuit”). Burson contended that he was the author and

owner of the copyrighted SuperVision program, and that IDG infringed his

copyright by “cop[ying] some or all of the computer programs authored and

copyrighted by Burson and . . . prepar[ing] unauthorized derivative software from

Burson’s computer programs.” Federal Lawsuit Complaint at ¶ 3 . IDG

ultimately prevailed on the merits of this suit when the court – pursuant to a

bench trial – agreed with IDG’s “works made for hire” defense and found Burson

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to have no ownership interest in the copyrighted works.

On September 3, 1998, one year after the Federal Lawsuit was filed and six

weeks after it was tried before a federal judge, IDG notified CNA of the Federal

Lawsuit, seeking coverage under its insurance policies. This was the first time

CNA was informed of the existence of the Federal Lawsuit. CNA denied

coverage for the Federal Lawsuit on September 22, 1998 and again on November

18, 1998 (upon reconsideration). In its November 18, 1998 letter, CNA

informed IDG that it did not believe that the Federal Lawsuit involved claims

that fell within the ambit of an “advertising injury” as contemplated under the

insurance policies.

IDG filed suit against CNA on January 15, 1999 in Oklahoma state court,

alleging breach of insurance contract and bad faith for failing to provide a

defense to both Burson lawsuits. According to IDG, it incurred legal expenses

totaling over $270,000 in defending the lawsuits, as well as $50,000 in settling

the State Lawsuit. In February 1999, CNA removed the action to the U.S.

District Court in the Northern District of Oklahoma.

The parties cross-moved for summary judgment in July 1999. By Order on

December 26, 2000, the District Court found in favor of CNA. In so ruling, the

district court found that there was no “advertising injury” as contemplated under

the insurance policies. In particular, the court held that the method of promotion

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utilized by IDG – providing trial copies of SuperVision to potential customers for

their evaluation – was not an advertising activity because the product could not

be an advertisement for itself. The district court also ruled that even if

SuperVision could serve as an advertisement for itself, IDG failed to demonstrate

the requisite causal nexus between Burson’s alleged injuries and advertising

activity.

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 III.

We review the district court’s grant of summary judgment de novo ,

applying the same standard used by the court below. V-1 Oil Co. v. Means , 94

F.3d 1420, 1422 (10 th
Cir. 1996). “Summary judgment is appropriate only ‘if the

pleadings, depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment as a matter of

law.’” Novell, Inc. v. Federal Ins. Co. , 141 F.3d 983, 985 (10 th
Cir. 1998)

(quoting Fed. R. Civ. P. 56(c)). “We examine the factual record and reasonable

inferences therefrom in the light most favorable to the nonmoving party.”

Applied Genetics Int’l, Inc. v. First Affiliated Sec., Inc. , 912 F.2d 1238, 1241

(10 th Cir. 1990). If there is no genuine issue of material fact in dispute, we must

determine whether the district court correctly applied the law.” Novell , 141 F.3d

at 985.

IV.

In this diversity action, state law must be utilized in defining the terms of

the insurance policies and in articulating the scope of CNA’s duty to defend

under those policies. See Novell , 141 F.3d at 985 ( citing Barrett v. Tallon , 30

F.3d 1296, 1300 (10 th
Cir. 1994)). The parties do not dispute the application of

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Oklahoma law to this matter and, accordingly, Oklahoma law is controlling. See

Mauldin v. Worldcom, Inc. , 263 F.3d 1205, 1212 (10 th
Cir. 2001) (holding that

parties may waive choice of law arguments by failing to adequately brief them);

see also Gross v. Burggraf Constr. Co. , 53 F.3d 1531, 1547 (10th Cir.1995).

The Supreme Court of Oklahoma has stated that while an insurer’s duty to

defend its insured is broader than its duty to indemnify, this duty “is not

unlimited.” First Bank of Turley v. Fidelity and Deposit Ins. Co. of Maryland ,

928 P.2d 298, 303 (Ok. 1996) (footnote omitted). Rather, “the defense duty is

measured by the nature and kinds of risks covered by the policy as well as by the

reasonable expectations of the insured.” Id. (footnote omitted) Accordingly, “an

insurer has a duty to defend an insured whenever it ascertains the presence of

facts that give rise to the potential of liability under the policy.” Id. (emphasis in

original) (footnote omitted). To have the “potential of liability,” the “‘complaint

[must] state a cause of action that gives rise to the possibility of a recovery under

the policy; there need not be a probability of recovery.’” Id. at 303 n. 14

(quoting 7C Appleman, Insurance Law & Practice § 4683.01 at 67 (Berdal ed.

1979)). This determination is made “on the basis of information gleaned from

the petition (and other pleadings), from the insured and from other sources

available to the insurer at the time the defense is demanded (or tendered) rather

than by the outcome of the third-party action.” Id. at 303-04.

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 Keeping these standards in mind, the question in this appeal becomes

whether the Burson Lawsuits gave rise to the “possibility of” coverage under the

insurance policies at the times IDG requested a defense from CNA. Because the

only basis for coverage under the policies is for “advertising injury,” the answer

to this question necessarily entails an analysis of the meaning of that contractual

term under Oklahoma law. 2

In Novell, Inc. v. Federal Ins. Co. , we analyzed very similar language of

an insurance policy involving the interpretation of “advertising injury.” In our

analysis, we utilized a two-part structure: (1) “we first examine whether [the

underlying plaintiff’s] complaint alleged a predicate offense, i.e. , one of the

offenses specifically listed in the definition of ‘advertising injury.’ [(2)] We then

2
Under Oklahoma law, an “insurance policy constitutes a contract,” subject to
general interpretation principles of ordinary contract law. See First Bank of Turley, 928
P.2d at 303 n. 6 (citing Silver v. Slusher, 770 P.2d 878, 883 (Ok. 1988); Christian v.
Metropolitan Life Ins. Co., Okl., 366 P.2d 445, 488 (Ok. 1977); 12 Appleman,
Insurance Law & Practice § 7004 at 34-56 (1981 & Supp. 1995)). Insurance contracts
are to be interpreted “according to the plain meaning of the language in the policy,”
VBF, Inc. v. Chubb Group of Insurance Co., 263 F.3d 1226, 1230 (10 th Cir. 2001), and
“must be accepted in their plain, ordinary and popular sense.” Torres v. Sentry Ins., 558
P.2d 400, 401 (Ok. 1976) (internal quotations omitted); see also Max True Plastering
Co. v. United States Fidelity and Guaranty Co., 912 P.2d 861, 865 (Ok. 1996) (“[the
terms of an insurance contract] are given effect according to their ordinary or popular
meaning.”). If a policy term is ambiguous – i.e., where it is susceptible to two or more
different meanings – “it will be construed against the insurer.” VBF, 263 F.3d at 1230-
31 (internal quotations omitted). “In addition, Oklahoma recognize[s] the “reasonable
expectations doctrine’ when the policy is ambiguous or contains unexpected exclusions
arising from technical or obscure language or which are hidden in policy provisions.”
Id. at 1231 (internal quotations omitted). Under this doctrine, “coverage exists, if the
insurer or agent has created a reasonable expectation in the insured that coverage
exists.” Id.

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examine whether there was any causal connection between [the underlying

plaintiff’s] alleged injuries and [the instant] plaintiff’s advertising activities.”

Novell , 141 F.3d at 986. While we substantively applied Utah law in answering

these questions, there is no reason why we should not utilize the same two-part

structure in answering this question under Oklahoma law.

A. Predicate Offense

Under the first prong of the Novell test (predicate offense), we must

determine whether the Burson Lawsuits alleged one of the four offenses

specifically listed in the definition of “advertising injury” in § 1(d) of the

insurance policies. 3
CNA concedes the existence of a predicate offense, and

does not dispute that the Burson’s Lawsuits alleged copyright infringement as

enumerated therein.

3
As previously mentioned, ¶ 1(d) of the CGL policies issued to IDG states that
“‘[a]dvertising injury’ means injury arising out of one or more of the following
offenses:

a. Oral or written publication of material that slanders or libels a person or
organization or disparages a person’s or organization’s goods, products or
services;
b. Oral or written publication of material that violates a person’s right to
privacy;
c. Misappropriation of advertising ideas or style of doing business; or
d. Infringement of copyright, title or slogan.”

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 B. Causal Connection

At issue here, therefore, is whether the second prong of the Novell test has

been fulfilled — whether there was a “causal connection” between the injuries

alleged by Burson (the copyright infringement) and IDG’s advertising activities.

IDG contends that Burson’s alleged injuries arose out of the course of

IDG’s advertisement of SuperVision. At the heart of this contention is IDG’s

reliance upon its promotional practice whereby it would distribute copies of

SuperVision to potential customers for their evaluation with the hopes that they

might buy it. IDG argues that this activity was indeed advertising activity and

that Burson’s alleged injuries were caused by it. As its evidentiary support of

this assertion, IDG refers only to the following testimony adduced in the instant

litigation: (1) Johnson’s response to an interrogatory by CNA; 4
(2) Johnson’s

deposition testimony dated June 17, 1999, wherein he explained the purported

“advertising” nature of certain activities by IDG concerning SuperVision; 5
and

4
Johnson’ response to Interrogatory No. 9 states:

Mr. Burson’s pleadings make claims related to copyright infringement for
goods sold by Johnson/IDG which in turn were advertised for sale. From Mr.
Burson’s testimony such alleged conduct occurred as early as June 1993, some in
September and October 1993, and at various times thereafter. The claims of
Burson and the underlying facts present a potential for coverage when considered
broadly under the policy. Because there is an allegation of placing the product
on the market for sale, there was a potential that the infringement related to or
was connected to advertising.
5
Johnson testified at his deposition as follows:
(continued...)

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(3) Johnson’s affidavit testimony provided on July 27, 1999, approximately one

month after his deposition. 6

Notwithstanding Johnson’s self-serving characterizations of Burson’s

claims, a careful examination of Burson’s underlying lawsuits belies IDG’s

contention. Even assuming that a product can advertise itself and that the

5
(...continued)
Q: . . . Tell me why – further why you contend that the State or Federal Lawsuit
involved an assertion by Burson that he – the acts of which he complained, his
injuries were caused by Johnson/IDG advertising its goods, products or services.

A: I mean, that’s the whole thing of what we were doing. I mean, we were – we
were making copies of programs which he claimed that were his. . . . That he
had – that he at a later date filed copyright on, that we were – we were copying
those and delivering those to customers so that they could evaluate them and to
see whether or not they wanted to use them. We were – this is the manner in
which – the manner in which we advertise our product is by providing people
with free trials. We copy the programs. We send them out on some sort of
electronic media and they install them, evaluate them, see how they work,
observe them, and make a decision. . . . That is our method of operation, a
method of advertising.

Q: So before you provide it to a customer for a demo, you’ve already copied what
Mr. Burson claims was his proprietary interest?

A: Yes
6
In ¶ 12 of his affidavit, Johnson stated:

Independent of the policy provisions that establish coverage, IDG and I
have and had a “reasonable expectation” of coverage for defense and
indemnity for the claims made in the “Burson Cases.” This reasonable
expectation comes in part from policy provisions that state that the insurer
will defend claims made against IDG and me if they involve copyright
infringement that occurs in the course of advertising. IDG and I copied
Burson created source and object code in the course of and as part of
IDG’s advertising program for its products. Burson claims that IDG and I
had infringed his copyright by copying the programs.

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activity described by IDG is, in fact, “advertising” activity as broadly construed

under the insurance policies, the record clearly reveals that Burson sued IDG for

copyright infringement arising out of IDG’s copying and sale of SuperVision,

and not out of its promotional activity .

First, the gravamen of Burson’s complaints is that IDG converted his

portion of the copyright in SuperVision by “cop[ying] some or all of the

computer programs authored and copyrighted by Burson and [by preparing]

unauthorized derivative software from Burson’s computer programs.” See

Federal Lawsuit Complaint ¶ 3. As a consequence, Burson contended that he

“has suffered, and will continue to suffer, substantial money damages and

impairment of his ownership rights in the computer programs. . . . [as a result of

IDG] deriving illegal profits at Burson’s expense.” Id. at ¶ 4.

In the State Lawsuit, Burson sought “royalties due [to him] on the

SuperVision project,” First Amended State Complaint at ¶ 14, claiming that

“Johnson breached the parties’ agreement by concealing from [Burson]

information regarding sales of SuperVision and by withholding and causing IDG

to withhold [Burson’s] share of the proceeds from the sales.” Second Amended

State Complaint at ¶ 6. These infringement claims do not contemplate, and

certainly do not depend upon, the kind of promotional activity which Johnson

described in his affidavits and deposition testimony. See , e.g. , Farmington

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Casualty v. Cyberlogic Tech. , 996 F.Supp. 695, 704 n. 17 (E.D. Mich. 1998)

(“when the claim for infringement exists irrespective of the advertising activities,

the claim for defense must fail.”).

Second, moving beyond the complaints – as we are required to do under

Oklahoma law – IDG’s points to no place in Burson’s Federal or State Lawsuit

pleadings or any other relevant source wherein any connection was made linking

IDG’s “advertising” practice with the injuries allegedly suffered by Burson. Nor

is there any place in the proceedings of Burson’s lawsuits supporting the

proposition that the claims alleged by Burson were the result of any advertising

activity by IDG, let alone from IDG’s promotion of SuperVision. Indeed, at oral

argument, IDG conceded that at no time during the federal trial or during the

state proceeding did Burson make any reference to the promotional activity relied

upon by IDG here.

Third, IDG fails to demonstrate that CNA was ever made aware of – or that

CNA should have been aware of – IDG’s practice of distributing free samples at

the time coverage was requested. See First Bank of Turley , 928 P.2d at 303-04

(noting that insurer’s duty to defend is determined “on the basis of information

gleaned from the petition (and other pleadings), from the insured and from other

sources available to the insurer at the time the defense is demanded (or

tendered).”) (emphasis added). Indeed, the affidavit and deposition testimony of

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Johnson was procured during the course of this litigation, well after IDG’s

requests for coverage were tendered to CNA. See id. at 304 n. 19 (“the

correctness of an insurer’s decision to (or not) defend cannot be determined by

‘later revealed facts’ of which the insurer had no knowledge or notice.”).

Moreover, IDG fails to demonstrate that it made any information available to

CNA at the time it requested coverage which could have led CNA to conclude

that there was a possibility that Burson’s alleged injuries had anything to do with

advertising. Id. at 304 (“It is the insured’s [IDG’s] sole duty to give its insurer

[CNA] timely and adequate notice of a third party claim to aid the insurer in the

discovery of facts bearing on coverage.”) (emphasis added) (footnote omitted).

The mere fact that SuperVision was advertised or distributed at some point

in time is not sufficient to transform Burson’s ownership infringement claims

into advertising injury. See Novell , 141 F.3d at 988 (“The fact [the insured] may

have advertised the competing product to consumers simply did not cause [the

underlying plaintiff’s] injuries”); see also Microtec Research, Inc. v. Nationwide

Mut. Ins. Co. , 40 F.3d 968, 971 (9 th
Cir. 1994) (“If the [insured] does some

wrongful act and then advertises it, harm caused by the wrongful act alone is not

within the scope of the term advertising injury.”); Farmington , 996 F.Supp. at

702 (holding that causal connection between alleged injuries and advertising

activity cannot be satisfied by “a mere showing that the allegedly infringing

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product was advertised.”). “Otherwise, advertising injury coverage would apply

whenever an advertised product or service is alleged to have caused harm,

rendering the coverage applicable with respect to most claims against an insured

business.” Advance Watch Co., Ltd. v. Kemper National Ins. Co. , 99 F.3d 795,

806 (6 th Cir. 1996); see also National Union Fire Ins. Co. v. Siliconix Inc. , 729

F.Supp. 77, 80 (N.D. Ca. 1989) (“Taken to its extreme, this argument would lead

to the conclusion that any harmful act, if it were advertised in some way, would

fall under the grant of coverage merely because it was advertised. Under this

rationale, for instance, injury due to a defective product which is sold as a result

of advertising activity and which later harms a consumer, may fall within the

coverage grant. . . . Thus, a great many acts may fall within the ambit of

advertising, extending injury coverage far beyond the reasonable expectations of

the insured.”).

In addition, the simple fact that Burson sought to enjoin the “distribution”

of SuperVision in the federal complaint 7
or that he may have been entitled to

statutory damages if he had prevailed on his copyright claims does not change the

nature of Burson’s alleged injuries. Those issues relate to the remedies available

to Burson and do not change the nature of the injuries alleged in Burson’s

7
In the Federal Lawsuit, Burson sought the “[i]ssuance of a permanent
injunction enjoining Defendants and all other persons working in concert from in any
way copying or distributing copies of the programs.” Federal Lawsuit Complaint at *3
(emphasis added).

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lawsuits from “copyright” to “advertising.” Nor do they address IDG’s failure to

demonstrate here that CNA was ever made aware of any connection between

Burson’s purported injuries and advertising activity at the time a defense was

requested.

V.

There is nothing on this record to suggest that Burson’s alleged injuries

were sufficiently related to “advertising activity” on the part of IDG so as to

invoke defense and/or liability coverage under the insurance policies at issue.

For the foregoing reasons, the district court’s judgment in favor of CNA will be

AFFIRMED.

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