American States v. Capital Assoc Jackso

In the
United States Court of Appeals
For the Seventh Circuit
____________

No. 04-1659
AMERICAN STATES INSURANCE COMPANY,
Plaintiff-Appellant,
v.

CAPITAL ASSOCIATES OF JACKSON COUNTY, INC., et al.,
Defendants-Appellees.

____________
Appeal from the United States District Court
for the Southern District of Illinois.
No. 02-00975-DRH—David R. Herndon, Judge.
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ARGUED NOVEMBER 8, 2004—DECIDED DECEMBER 23, 2004
____________

Before BAUER, EASTERBROOK, and KANNE, Circuit Judges.
EASTERBROOK, Circuit Judge. According to a complaint
filed in state court, Capital Associates of Jackson County
sent an unsolicited advertisement to the fax machine of JC
Hauling Company, thus violating 47 U.S.C. §227(b)(1)(C).
JC Hauling launched a class action on behalf of all recipi-
ents of Capital Associates’ junk faxes. Capital Associates
tendered the defense to American States Insurance Co.,
which had issued a policy covering “advertising injury,”
among other harms. American States, which has under-
taken the defense under a reservation of rights, filed this
2 No. 04-1659

federal suit seeking a declaratory judgment that the policy
does not call for either defense or indemnity.
“Advertising injury” is defined to include “[o]ral or written
publication of material that violates a person’s right of
privacy.” Another portion of the policy excludes injury that
is “expected or intended from the standpoint of the insured.”
American States contended that sending unsolicited adver-
tising by fax does not cause “advertising injury” and that,
if it does, the recipient’s loss is “expected or intended from
the standpoint of the insured.” But the district judge held
that an unsolicited fax invades the recipient’s “privacy” and
that American States therefore must defend its insured.
The judge did not discuss the policy’s exclusion of expected
or intended consequences and left several items dangling.
Some of the omissions are understandable. For example,
the judge thought it premature to decide whether American
States must indemnify Capital Associates (and, if so, in
what amount), given the unresolved status of the under-
lying suit. Other omissions are harder to appreciate. For
example, Capital Associates filed a counterclaim seeking
punitive damages on the ground that American States has
vexatiously and wilfully refused to defend or indemnify its
insured. That absurd claim should have been dispatched
promptly. American States has not refused to defend; it has
provided a defense under a reservation of rights. It has not
refused to indemnify; the time to pay has not arrived. It has
not acted vexatiously; this suit represents an effort to clear
up an interpretative disagreement. Presenting a dispute to
a court for resolution is hardly a reason to award punitive
damages! But instead of resolving all claims that were
ready for decision, the district court dismissed them
“without prejudice”—indeed, it dismissed the whole suit
“without prejudice,” even though its resolution of the duty-
to-defend issue is conclusive.
By dismissing everything without prejudice, without dis-
tinguishing between claims that had been fully addressed
No. 04-1659 3

and those whose resolution had been postponed, the district
judge created a jurisdictional problem for the parties and
this court. Dismissals without prejudice are canonically
non-final and hence not appealable under 28 U.S.C. §1291.
See, e.g., Brown v. Argosy Gaming Co., 360 F.3d 703 (7th
Cir. 2004). The prospect facing American States, however,
is that, if Capital Associates should win the state suit, there
would be no further dispute about indemnity and no reason
to renew the federal litigation. That would leave American
States without a means to obtain appellate review of the
duty-to-defend question, for by then it would be too late to
appeal the federal judgment. A duty-to- defend issue will
survive the state case whether or not Capital Associates
prevails, for if American States is right it is entitled to
reimbursement from its client for the expenses of putting on
the defense. But if American States may appeal now in light
of the risk that a dispute about who pays for the defense
will evade appellate resolution later, there is a substantial
chance that the dispute will return to this court if Capital
Associates loses the state case and the parties dispute the
amount of required indemnification, or Capital Associates
reasserts its demand for punitive damages.
It would have been better had the district court stayed
proceedings until the underlying suit reached a conclusion.
The loser or losers in the federal litigation then could have
appealed from a truly final disposition. That would have
avoided any risk that Capital Associates could be deprived
of effective appellate review, while avoiding all risk that
this court would have to grapple with the same dispute more
than once. But unless we treat the district court’s actual
disposition as “final,” we lack authority even to remand for
entry of such a stay. A corollary to the norm that dismissals
without prejudice are non-final is recognition that when the
district judge misdescribes as “without prejudice” a dis-
position that is conclusive in practical effect, the court of
appeals possesses jurisdiction. See, e.g., Dixon v. Page, 291
4 No. 04-1659

F.3d 485 (7th Cir. 2002). Our situation calls the corollary
into play. And because the parties have fully briefed the
duty-to-defend question, and it turns out to be dispositive
of all issues, we resolve it now rather than simply direct the
district to put the case on ice. See Crum & Forster Corp. v.
Resolution Trust Corp., 156 Ill. 2d 384, 398, 620 N.E. 2d
1073, 1081 (1993) (where there is no duty to defend, there
is also no duty to indemnify).
“Privacy” is a word with many connotations. The two prin-
cipal meanings are secrecy and seclusion, each of which has
multiple shadings. See Restatement (Second) of Torts §652
(1977); Richard S. Murphy, Property Rights as Personal
Information, 84 Geo. L.J. 2381 (1996). A person who wants
to conceal a criminal conviction, bankruptcy, or love affair
from friends or business relations asserts a claim to privacy
in the sense of secrecy. A person who wants to stop solicitors
from ringing his doorbell and peddling vacuum cleaners at 9
p.m. asserts a claim to privacy in the sense of seclusion.
Some other uses of the word “privacy” combine these senses:
for example, a claim of a right to engage in consensual
sexual relations with a person of the same sex, or to abort
an unwanted pregnancy, has both informational (secrecy)
and locational (seclusion) components, with an overlay of
substance (the objection to governmental regulation).
American States contends that its advertising-injury cov-
erage deals with secrecy rather than seclusion. The language
reads like coverage of the tort of “invasion of privacy,”
where an oral or written statement reveals an embarrass-
ing fact, see Briscoe v. Readers’ Digest Association, Inc., 4
Cal. 3d 529 (1971), overruled on first amendment grounds
by Gates v. Discovery Communications, Inc., 2004 Cal. Lexis
11656 (S. Ct. Cal. Dec. 6, 2004), or as in Time, Inc. v. Hill,
385 U.S. 374 (1967), brings public attention to a private
figure, or casts someone in a false light through publication
of true but misleading facts. See Lovgren v. Citizens First
National Bank, 126 Ill. 2d 411, 417-18, 534 N.E. 2d 987, 989
No. 04-1659 5

(1989). See also Curtis-Universal, Inc. v. Sheboygan Emer-
gency Medical Services, Inc., 43 F.3d 1119, 1124 (7th Cir.
1994); Hayes v. Alfred A. Knopf, Inc., 8 F.3d 1222 (7th Cir.
1993) (Illinois law). Perhaps the language reasonably could
be understood to cover improper disclosures of Social
Security numbers, credit records, email addresses, and
other details that could facilitate identity theft or spam-
ming. See Reno v. Condon, 528 U.S. 141 (2000) (rejecting
constitutional challenge to a federal statute limiting access
to information in drivers’ records). See also Leopold v. Levin,
45 Ill. 2d 434, 259 N.E. 2d 250 (1970) (recognizing identity
misappropriation as a tort). Cf. Kyllo v. United States, 533
U.S. 27 (2001) (discussing privacy interest in thermal
emissions from homes); Jeffrey Rosen, The Unwanted Gaze
(2000).
JC Hauling does not allege that Capital Associates pub-
lished any information about it, and the district judge did
not directly address whether the policy is limited to publi-
cation of secret information. Indeed the judge did not remark
the difference between secrecy and seclusion. Instead the
judge stated that §227(b)(1)(C) has been understood to pro-
tect privacy—see International Science & Technology
Institute, Inc. v. Inacom Communications, Inc., 106 F.3d
1146, 1150 (4th Cir. 1997) (dictum) (quoting from legislative
history)—and deemed that observation conclusive. Interna-
tional Science & Technology Institute used the word in the
sense of seclusion: an unexpected fax, like a jangling
telephone or a knock on the door, can disrupt a house-
holder’s peace and quiet, even though it is easy to throw a
junk fax, like a piece of junk mail, in the trash without any
risk that someone will observe activities that occur inside
one’s home. Section 227(b)(1)(C) doubtless promotes this
(slight) interest in seclusion, as it also keeps telephone lines
from being tied up and avoids consumption of the recipients’
ink and paper. (It is these latter economic interests that
furnish the basis of judicial decisions rejecting constitu-
6 No. 04-1659

tional challenges to restrictions on uninvited faxes. See
Destination Ventures, Ltd. v. FCC, 46 F.3d 54 (9th Cir.
1995); Missouri ex rel. Nixon v. American Blast Fax, Inc.,
323 F.3d 649 (8th Cir. 2003).) But the question is not how
the word “privacy” was used in the debates that led to
§227(b)(1)(C), or in its implementing regulations, but what
the word means in this insurance policy. To say, as the
district court did, that §227(b)(1)(C) protects privacy, and
then stop the analysis, is to avoid the central question in
the case: whether the policy covers the sort of seclusion
interest affected by faxed ads.
One reason to doubt that the policy covers the claim is the
identity of the plaintiff. JC Hauling is a corporation, and
businesses lack interests in seclusion. It is not just that
they are “open for business” and thus welcome phone calls
and other means to alert them to profitable opportunities.
It is that corporations are not alive. Where does a corpora-
tion go when it just wants to be left alone? Most states hold
that business entities lack privacy interests. See Restate-
ment (Second) of Torts §652I Comment c. Cf. United States
v. Morton Salt Co., 338 U.S. 632, 652 (1950). (Our point is
not that business entities lack interests protected by
§227(b)(1)(C), but that it does not help to call them “privacy”
interests.) Corporate managers have interests in seclusion,
but the state suit was filed by the corporation rather than
by any natural person. A fax is less disturbing than a phone
call, and a business-related call at work does not invade the
managers’ interest in seclusion.
The class of junk-fax recipients may include real rather
than artificial people, however, so we cannot stop yet. The
structure of the policy strongly implies that coverage is
limited to secrecy interests. It covers a “publication” that
violates a right of privacy. In a secrecy situation, publica-
tion matters; otherwise secrecy is maintained. In a seclu-
sion situation, publication is irrelevant. A late-night knock
on the door or other interruption can impinge on seclusion
No. 04-1659 7

without any need for publication. Contacting one customer
at a time may not be “publication” at all for purposes of
advertising-injury coverage. See Western States Insurance
Co. v. Wisconsin Wholesale Tire, Inc., 184 F.3d 699 (7th Cir.
1999) (Illinois and Wisconsin law). Perhaps automated
faxes to hundreds of recipients could be deemed a form of
publication, but this would be irrelevant to the seclusion
interest. To put this differently, §227(b)(1)(C) condemns a
particular means of communicating an advertisement, rather
than the contents of that advertisement—while an advertis-
ing-injury coverage deals with informational content.
Readers doubtless will note that, although Illinois law
supplies the rule of decision, we have not cited any Illinois
case interpreting the scope of “privacy” coverage under an
advertising-injury clause. That is because Illinois has not
issued any pertinent decision at any level (trial or appel-
late). The closest is Melvin v. Burling, 141 Ill. App. 3d 786,
789, 490 N.E. 2d 1011 (3d Dist. 1986), which holds that an
interest in seclusion is “privacy” only if the subject of the
intrusion is itself private. This does not resolve our contro-
versy (though it does offer a little support for American
States). Nor, for that matter, has the highest court of any
state grappled with the subject. Almost all litigation of this
kind has proceeded in federal district court. Most of these
decisions have come out the same way as our district judge,
and for the same reason—and thus have failed to distinguish
secrecy from seclusion, or to appreciate that the statute’s
drafters and the insurance may use the word “privacy” in
different ways. See, e.g., Park University Enterprises, Inc.
v. American Casualty Co., 314 F. Supp. 2d 1094, 1102-11 (D.
Kan. 2004); Universal Underwriters Insurance Co. v. Lou
Fusz Automobile Network, Inc., 300 F. Supp. 2d 888, 894-96
(E.D. Mo. 2004); Prime TV, LLC v. Travelers Insurance Co.,
223 F. Supp. 2d 744, 752-53 (M.D. N.C. 2002). We disapprove
these and similar decisions. Ours is the first federal
appellate decision on the subject, and for reasons already
8 No. 04-1659

given we hold that an advertising-injury clause of the kind
in American States’ policy does not cover the normal
consequences of junk advertising faxes.
For completeness we add that the property-damage clause
in the policy is no more useful to Capital Associates; junk
faxes use up the recipients’ ink and paper, but senders
anticipate that consequence. Senders may be uncertain
whether particular faxes violate §227(b)(1)(C) but all senders
know exactly how faxes deplete recipients’ consumables.
That activates the policy’s intentional-tort exception (which
applies to the property-damage coverage though not the
advertising-injury coverage): it forecloses coverage when the
recipient’s loss is “expected or intended from the standpoint
of the insured.” Because every junk fax invades the recipi-
ent’s property interest in consumables, this normal outcome
is not covered.
So clear is this that American States need not provide a
defense to the suit, even though Illinois (whose law applies)
requires insurers to defend when coverage is a close issue,
whether or not the policy would provide indemnity. See,
e.g., Aetna Casualty & Surety Co. v. Prestige Casualty Co.,
195 Ill. App. 3d 660, 553 N.E. 2d 39 (1st Dist. 1990). This
issue is not close.
REVERSED
No. 04-1659 9

A true Copy:
Teste:

________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—12-23-04