Native American Arts, Inc. v. Hartford Casualty Insurance

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

Nos. 04-3861 & 04-3862
NATIVE AMERICAN ARTS, INC., as assignee of
Stravina Operating Company, LLC,
Plaintiff-Appellant,
v.

HARTFORD CASUALTY INSURANCE COMPANY &
HARTFORD INSURANCE COMPANY OF THE MIDWEST,

Defendants-Appellees.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 03 C 7233 & 03 C 7234—Charles P. Kocoras, Chief Judge.
____________
ARGUED MAY 4, 2005—DECIDED JANUARY 25, 2006
____________

Before RIPPLE, ROVNER, and WOOD, Circuit Judges.
WOOD, Circuit Judge. This case dates back to 2001, when
Native American Arts, Inc. (NAA), sued two divisions of
Stravina Operating Company, LLC. Stravina asked its
insurers to defend it against NAA’s complaints, but they
refused. Eventually, NAA and Stravina settled, and as part
of that settlement, Stravina assigned its rights under its
old insurance policies to NAA. Relying on those assign-
ments, NAA initiated the present litigation against
Stravina’s primary insurers, Hartford Casualty Insur-
2 Nos. 04-3861 & 04-3862

ance Company and Hartford Insurance Company of the
Midwest (collectively referred to as Hartford), and
Stravina’s excess insurer, Great American Insurance
Company, claiming that they had breached a duty to defend
Stravina from NAA’s original lawsuits. After reviewing the
applicable policies, the district court found that the insur-
ers had no such duty to defend Stravina. NAA appealed,
and we affirm.

I
In the summer of 2001, NAA filed separate complaints
against Bloom Brothers and Artistic Impressions, two
divisions of Stravina. The complaints alleged that from
at least the late 1990s, Stravina manufactured and sold
inauthentic Native American crafts and jewelry. NAA
charged that Stravina was deceiving the public and harm-
ing manufacturers of authentic Native American goods by
suggesting that its products too were authentic. If this
proved to be true, the complaints asserted, the defendants’
actions would violate the Indian Arts and Crafts Act, 25
U.S.C. § 305, et seq., which forbids selling merchandise “in
a manner that falsely suggests it is . . . an Indian product.”
§ 305e(a). As we noted recently in another case brought by
NAA, Native American Arts, Inc. v. The Waldron Corp.,
although the Indian Arts and Crafts Act dates back to 1935,
until 1990 the Act’s only sanction was criminal. 399 F.3d
871, 873 (7th Cir. 2005). And that remedy has been purely
theoretical: in its seventy years of existence, no charges
have ever been filed under the criminal provision of the Act.
Id. In 1990, Congress added teeth to the legislation,
creating a private cause of action that enabled injured
plaintiffs—sellers of authentic Indian arts and crafts—to
recover substantial damage awards from violators of the
Act. Id.; see 25 U.S.C. § 305e(a)(2), (b), (c).
Nos. 04-3861 & 04-3862 3

Upon receiving NAA’s first complaint in April 2001,
Stravina asked Hartford to defend it. After reviewing the
complaint, however, Hartford denied coverage, informing
Stravina that the policy did not obligate it to defend claims
based on the Indian Arts and Crafts Act. Stravina alerted
Hartford to the second NAA complaint two years later, and
once again, Hartford informed Stravina that it had con-
cluded that Stravina’s insurance coverage did not extend to
this type of allegation.
In August 2003, with Stravina’s insurers on the sidelines,
NAA and Stravina settled both lawsuits. Stravina paid
NAA $150,000 and agreed on a “settlement value” for NAA
of $3 million, which NAA could seek through an assignment
of Stravina’s rights under its old insurance policies. (In
each settlement agreement, the parties allocated $1 million
to each of the three policy years covered by Hartford and
Great American; because the insurance companies had
declined to participate in the process, they had no say over
this agreed amount.) Soon thereafter, NAA filed two
complaints in the Northern District of Illinois against the
defendants, alleging that Stravina’s insurance coverage
included a duty to defend against NAA’s original lawsuits,
and at this point also a duty to indemnify. After the
complaints were consolidated, the district court granted the
defendants’ motion for summary judgment. The court
agreed with Hartford’s original assessment, finding that
the policies did not include a duty to defend complaints
alleging violations of the Indian Arts and Crafts Act. The
district court’s decision included Stravina’s excess insurer,
Great American Insurance Company, but Great American
was dismissed from this appeal after it reached a settle-
ment with NAA.
4 Nos. 04-3861 & 04-3862

II
Because this case is based on diversity jurisdiction, we
look to state law to determine the scope of Stravina’s
insurance coverage. See Allen v. Transamerica Ins. Co., 128
F.3d 462, 466 (7th Cir. 1997). While NAA and the defen-
dants disagree about which state’s law applies— NAA says
Illinois, the defendants, California—we need not engage
this debate. Although California and Illinois law differ on
the consequences of an insurer’s breach of its duty to
defend (in particular, the consequences for the duty to
indemnify after a duty to defend has been established),
both states take essentially the same approach to determin-
ing whether an insurer has a duty to defend in the first
place. Compare Crum & Forster Managers Corp. v. Resolu-
tion Trust Corp., 620 N.E.2d 1073, 1079 (Ill. 1993) with
Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153,
1160 (Cal. 1993). At this stage of the litigation, therefore,
Illinois would apply its own law, and the federal court must
follow suit. See, e.g., Dearborn Ins. Co. v. Int’l Surplus
Lines Ins. Co., 719 N.E.2d 1092, 1096 (Ill. App. Ct. 1999);
see also Jean v. Dugan, 20 F.3d 255, 260 (7th Cir. 1994)
(“Where there is no disagreement among the contact states,
the law of the forum state applies.”).
In Illinois, to determine whether an insurer has a duty to
defend its insured, “the court must look to the allegations
in the underlying complaint and compare these allegations
to the relevant coverage provisions of the insurance policy.”
Crum & Forster, 620 N.E.2d at 1079. If the facts alleged in
the underlying complaint fall within, or even potentially
within, the coverage provisions of the policy, the insurer
must defend the insured. Id. In assessing whether the duty
exists, a court must construe the allegations in the underly-
ing complaint liberally and any doubt in coverage must be
resolved in favor of the insured. See Ill. State Med. Ins.
Servs., Inc. v. Cichon, 629 N.E.2d 822, 826 (Ill. App. Ct.
1994). Nonetheless, deference only goes so far; if the policy
Nos. 04-3861 & 04-3862 5

terms are unambiguous, the court must apply their plain
and ordinary meaning. Crum & Forster, 620 N.E.2d at
1078.
NAA argues that Hartford’s duty to defend arose because
the complaints alleged an “advertising injury.” Stravina’s
policy read: “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.” Save for a few
irrelevant changes, Stravina’s policy during the period of
coverage at issue here defined “advertising injury” as:
a. Oral or written publication of material in your
“advertisement” that slanders or libels a person or
disparages a person’s or organization’s goods,
products or services;
b. Oral or written publication of material in your
“advertisement” that violates a person’s right of
privacy;
c. Copying, in your “advertisement,” a person’s or
organization’s “advertising idea” or style of “adver-
tisement”; or
d. Infringement of copyright, slogan, or title of any
literary or artistic work, in your “advertisement.”
The policy defined “advertisement” as “a dissemination of
information or images that has the purpose of inducing the
sale of goods, products or services through: (1) Radio; (2)
Television; (3) Billboard; (4) Magazine; (5) Newspaper; or
[(6)] Any other publication that is given widespread public
distribution.” While this definition is broad, the policy
contained an exception: an advertisement “does not include
the design, printed material, information or images con-
tained in, on or upon the packaging or labeling of any goods
or products.”
6 Nos. 04-3861 & 04-3862

Hartford argues that this exception to the definition
applies here. In its view, Stravina’s products were mere-
ly labeled misleadingly and since, under the policy, labels
do not constitute advertisements, there can be no ad-
vertising injuries. If NAA’s original complaints were
this narrow, Hartford’s argument might be persuasive.
NAA’s complaints, however, alleged not only that Stravina
mislabeled its products, but also that Stravina violated
the Indian Arts and Crafts Act by suggesting its products
were authentic “in advertising activity[,] including the
distribution of catalogues and brochures as well as other
advertising and marketing methods.” Given the breadth
of NAA’s complaints, we find that at least some of
NAA’s allegations concerned advertisements.
We find as well that the complaints adequately alleged
that Stravina’s advertisements were injurious. Stravina’s
policies included as part of the definition of such an in-
jury the copying of another “organization’s ‘advertising
idea’,” which the policy defined circularly as “any idea for
an advertisement,” or the copying of another’s “style
of advertisement.” NAA’s complaints mirrored this lan-
guage, alleging that Stravina effectuated many of its
violations of the Indian Arts and Crafts Act by
“misappropriat[ing . . . NAA’s] advertising ideas and style
of doing business.” NAA’s advertisements stressed the
authenticity of its goods; by falsely doing the same,
Stravina’s advertisements traded upon a reputation,
history, and sales advantage that it did not deserve.
Allegedly, by appropriating NAA’s advertising strategy,
Stravina took sales away from those whose heritage
gives them the right to capitalize on the market value
and goodwill associated with authentic, Native American-
made products. While the Indian Arts and Crafts Act
does not require that misrepresentation occur through
the use of advertisements, the fact that NAA’s com-
plaints alleged that Stravina took advantage of NAA’s
Nos. 04-3861 & 04-3862 7

“advertising style” to effectuate its alleged violation of the
Act should have put Hartford on notice that at least some of
Stravina’s actions may have caused an “advertising injury.”
Cf. American Simmental Ass’n. v. Coregis Ins. Co., 282 F.3d
582 (8th Cir. 2002) (finding that the use of the term
“fullblood” to misrepresent the quality of cattle constituted
an “advertising injury”). Moreover, an insurer’s duty to
defend arises so long as the complaint potentially falls
within the policy’s coverage, even if coverage is debatable.
See Crum & Forster, 620 N.E.2d at 1079.
But our inquiry cannot end there. From 1999 to 2001,
Stravina’s policy excluded coverage for an “ ‘advertising
injury’ arising out of [the] infringement of [a] trademark,
trade name, service mark or other designation of origin
or authenticity.” Similarly, from 2001 to 2003, the policy
excluded any advertising injuries “[a]rising out of any
violation of any intellectual property rights, such as patent,
trade secret, trademark, trade name, service mark or other
designation of origin or authenticity.” This language is
unambiguous, and it is enough to remove NAA’s complaints
from the purview of Hartford’s duty to defend. The purpose
of the Indian Arts and Crafts Act is to protect consumers
and the makers of authentic Native American goods from
false representations of a product’s “origin or authenticity.”
See 68 Fed. Reg. 35164 (describing the Indian Arts and
Crafts Act as “essentially a truth-in-marketing law de-
signed to prevent, through both civil and criminal sanc-
tions, marketing of products in a manner that falsely
suggests such products are produced by Indians when the
products are not, in fact, made by an Indian as defined by
the 1990 Act.”).
NAA argues against this result by asserting that the
advertising injury exclusion in the policies was meant
only to apply to advertising injuries caused by trade-
mark violations. Taking that thought one step further, NAA
argues that so long as it did not file suit under the Lanham
8 Nos. 04-3861 & 04-3862

Act, 15 U.S.C. § 1051 et seq., the complaints cannot fall
under the “origin or authenticity” exclusion. We find this
reading untenable. While it is true that the exclusion
includes trademark violations, it would do serious violence
to the language to say that it is limited to trademark, or
Lanham Act, violations. Instead, after specifically mention-
ing trademarks, the exclusion goes on to state broadly that
Hartford’s duty to defend will not extend to any dispute
concerning the “designation of origin or authenticity” of one
of Stravina’s products. This is exactly what NAA alleged in
the 2001 complaints.
Even if we thought that the exclusion were tied more
closely to traditional forms of intellectual property, such as
trademarks, NAA cannot prevail. In Waldron, we wrote
that as a functional matter, the Indian Arts and Crafts
Act and its implementing regulation, see 25 C.F.R.
§ 309.24(a)(2), “makes ‘Indian’ the trademark denoting
products made by Indians, just as ‘Roquefort’ denotes a
cheese manufactured from sheep’s milk cured in limestone
caves in the Roquefort region of France.” 399 F.3d at 873-
74. Thus, even if the policies’ exclusions applied only to
trademark-like violations, they would apply here, because
a violation of the Indian Arts and Crafts Act is just
such a violation. Indeed, in Waldron, we looked to Lanham
Act cases to guide our analysis. See 399 F.3d at 875-76.
NAA’s final argument is that even if the “origin or authen-
ticity” exclusion applies, there is an exception to that
exclusion in Stravina’s 2001-2002 policy for any infringe-
ment of a “title of any . . . artistic work.” Although NAA’s
original amended complaints alleged an “advertising injury
arising out of Defendants’ infringement of title,” the
complaints contained no information that would have
alerted the insurers to a possible independent infringement
of title theory. An insurer has no duty to defend where it is
“clear from the face of the underlying complaints that the
allegations fail to state facts which bring the case within,
Nos. 04-3861 & 04-3862 9

or potentially within, the policy’s coverage.” U.S. Fidelity &
Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930 (Ill.
1991).
Even taking into account the fact that in federal court the
pleading standard is adequate notice, rather than the
adequacy of facts alleged, see FED. R. CIV. P. 8(a), the best
NAA can offer is that Stravina “passed off their goods
under the designation or descriptive heading of Indian-
made.” Such false descriptions do not constitute “infringe-
ments of title,” and thus this allegation fails the notice test.
In Curtis-Universal, Inc. v. Sheboygan Emergency Medical
Services, Inc., 43 F.3d 1119, 1124 (7th Cir. 1994), we
suggested that the infringement of titles “presumably”
involves titles “of books, songs, products, services, and so
forth.” See also Mez Indus., Inc. v. Pacific Nat’l. Ins. Co.,
90 Cal. Rptr. 2d 721, 734 (Cal. Ct. App. 1999) (term “title”
“apparently refers to a name, such as a name of a literary
or artistic work, rather than to ownership of an invention
or other thing,” citing Owens-Brockway Glass v. Interna-
tional Ins. Co., 884 F. Supp. 363, 368 (E.D. Cal. 1995));
First State Ins. Co. v. Alpha Delta Phi Fraternity, 1995
WL 901452 (Ill. App. Ct. Nov. 3, 1995) (unpublished)
(defining term “title” as “the name by which anything is
known,” following Black’s Law Dictionary 1485 (6th ed.
1990)). In other words, falsely describing how something is
made or who made it is quite different than appropriating
or misusing the “title” of another’s artistic work. It is one
thing to claim that your sparkling wine was created using
the méthode champenoise; it is quite another to claim that
your sparkling wine is Veuve Clicquot Ponsardin™. NAA’s
original complaints alleged that Stravina deceived custom-
ers through mislabeling and the like, but it provided
nothing to indicate that it was trying to assert a claim of
title infringement.
10 Nos. 04-3861 & 04-3862

III
While NAA’s complaints adequately alleged that
Stravina’s advertisements were harmful, that harm
allegedly occurred as a result of Stravina’s false repre-
sentations about the authenticity of its products. Since
Stravina’s insurance coverage did not extend to this type of
claim, the district court was correct to grant Hartford’s
motion for summary judgment. We therefore AFFIRM the
judgment of the district court.

A true Copy:
Teste:

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

USCA-02-C-0072—1-25-06