14-3435-cv, 14-3474-cv
United States Fidelity and Guaranty Co. v Fendi Adele S.R.L. et al
14‐3435‐cv, 14‐3474‐cv
United States Fidelity and Guaranty Co. v. Fendi Adele S.R.L. et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term 2015
(Argued: September 17, 2015 Decided: May 17, 2016)
Docket Nos. 14‐3435‐cv, 14‐3474‐cv
UNITED STATES FIDELITY AND GUARANTY COMPANY,
Plaintiff‐Counter‐Defendant‐Appellee,
v.
FENDI ADELE S.R.L., FENDI S.R.L., FENDI NORTH AMERICA, INC.,
Defendants‐Counter‐Claimants‐
Appellants,
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION,
COHOES FASHIONS, INC.,
Intervenors‐Defendants‐Counter‐
Claimants‐Appellants,
ASHLEY REED TRADING, INC., SCOTT RESSLER, JAMES RESSLER,
Defendants‐Counter‐Claimants.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
Before: SACK, CHIN, and DRONEY, Circuit Judges.
Appeal from a judgment of the United States District Court for the
Southern District of New York (Berman, J.) in this insurance coverage case. A
seller of merchandise was insured under liability insurance policies for any
damages it was required to pay because of an ʺadvertising injury.ʺ During the
coverage period, it sold goods bearing counterfeit trademarks. In two
underlying lawsuits, it was found liable for, inter alia, trademark infringement.
The insurer brought this action below seeking a declaration that it owed no duty
to indemnify the insured under the policies. The district court held that the
policies did not cover the losses because they were not the result of an
ʺadvertising injury.ʺ
AFFIRMED.
ROBERT J. TRACY (Stefanie Robin Munsky, on the
brief), Clifton Budd & DeMaria LLP, New
York, New York, for Plaintiff‐Counter‐
Defendant‐Appellee United States Fidelity and
Guaranty Company.
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VICTOR GENECIN (Richard L. Mattiaccio and
Corrine A. Irish, on the brief), Squire Patton
Boggs, LLP, New York, New York, for
Defendants‐Counter‐Claimants‐Appellants
Fendi Adele S.R.L., Fendi S.R.L., and Fendi
North America, Inc.
GEORGE M. VINCI, JR. (David B. Picker, on the
brief), Spector Gadon & Rosen, P.C.,
Philadelphia, Pennsylvania, for Intervenor‐
Defendants‐Counter‐Claimants‐Appellants
Burlington Coat Factory Warehouse
Corporation and Cohoes Fashions, Inc.
CHIN, Circuit Judge:
In this case, a seller of merchandise was insured under two liability
insurance policies for any damages it was obligated to pay because of an
ʺadvertising injury.ʺ During the coverage period, it sold goods bearing
counterfeit trademarks. In two underlying lawsuits, it was found liable for, inter
alia, trademark infringement. The insurer brought this action below seeking a
declaration that it owed no duty to indemnify the insured under the policies.
The district court held that the policies did not cover the losses because they
were not the result of an ʺadvertising injury.ʺ We agree, and we therefore affirm.
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BACKGROUND
A. The Facts
Defendants‐Counter‐Claimants‐Appellants Fendi Adele S.R.L.,
Fendi S.R.L., and Fendi North America, Inc. (collectively, ʺFendiʺ) manufacture
luxury handbags, shoulder bags, purses, wallets, and other items, and own
associated federally‐registered trademarks. Ashley Reed Trading, Inc. (ʺAshley
Reedʺ) engages in the purchase and sale of off‐price branded handbags and other
luxury goods in New York and elsewhere, and Scott Ressler and James Ressler
are its principals. Intervenors‐Defendants‐Counter‐Claimants‐Appellants
Burlington Coat Factory Warehouse Corporation and its subsidiary Cohoes
Fashions, Inc. (together, ʺBurlingtonʺ) purchase clothing and other merchandise
at wholesale and resell to the public at discounted prices. Burlington regularly
purchased merchandise from Ashley Reed.
During the relevant time period, Ashley Reed sold counterfeit Fendi
goods ‐‐ fashion accessories that were not Fendi products, but that displayed one
or more Fendi trademarks and otherwise reproduced the appearance of genuine
Fendi products ‐‐ to Burlington and others.
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Plaintiff‐Counter‐Defendant‐Appellee United States Fidelity and
Guaranty Company (ʺUSF&Gʺ) is an insurance company that provides
commercial, property, and liability insurance. It issued three liability insurance
policies to Ashley Reed between 2003 and 2006. Two of the policies are at issue
in this case ‐‐ the 2003 Policy, effective February 8, 2003 through February 8,
2004, and the 2004 Policy, effective February 8, 2004 through February 8, 2006
(together, the ʺPoliciesʺ).
The Policies provide that USF&G will ʺpay those sums that the
insured becomes legally obligated to pay as damages because of . . . ʹadvertising
injuryʹ to which this insurance applies.ʺ App. at 383, 964. ʺAdvertisingʺ is
defined as ʺattracting the attention of others by any means for the purpose of
seeking customers or supporters or increasing sales or business.ʺ Id. at 400, 981.
ʺAdvertising injuryʺ includes injury resulting from four specified ʺoffenses,ʺ
including: ʺc. The use of anotherʹs advertising idea in your ʹadvertisingʹ; [and] d.
Infringement of anotherʹs copyright, trade dress or slogan in your ʹadvertising.ʹʹʹ
Id. at 400, 981.
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B. The Underlying Lawsuits
1. The First Action
In January 2006, Fendi sued Ashley Reed for trademark
counterfeiting, false designation of origin, and trademark dilution in violation of
the Lanham Act, 15 U.S.C. §§ 1114(1)(a), 1125(a), and 1125(c), and unfair
competition and trademark dilution under New York law (the ʺFirst Actionʺ).
Fendi sought treble damages pursuant to 15 U.S.C. § 1117(b), on the ground that
Ashley Reed intentionally used the Fendi trademarks with knowledge that they
were counterfeit. The district court entered a permanent injunction, and
awarded Fendi treble damages, prejudgment interest, fees, and costs.
On appeal, this Court affirmed, but vacated the district courtʹs
limitation of the damages award to counterfeits sold by Ashley Reed between
2005 and 2006 and remanded for a determination of whether damages should be
awarded for the entire 2001 to 2006 period that Ashley Reed had infringed. On
April 26, 2013, the district court entered on remand an award reflecting the
amount of Ashley Reedʹs sales of counterfeit goods from 2001 to 2006, trebled, as
well as attorneysʹ fees and costs, for a total monetary award of $34,650,885.91.
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USF&G initially denied coverage for the First Action, by letter dated
May 11, 2006. It later agreed, however, to pay for the defense of the action,
subject to a reservation of rights letter, but continuing to deny indemnification.
2. The Second Action
In January 2006, Fendi separately sued Burlington, alleging the sale
of counterfeit Fendi‐branded merchandise that Burlington had purchased from
Ashley Reed (the ʺSecond Actionʺ). Burlington asserted third‐party claims
against Ashley Reed. Fendi and Burlington settled as to Fendiʹs claims against
Burlington, and on April 5, 2012, Burlington obtained a judgment requiring
Ashley Reed to pay it damages, attorneysʹ fees, costs, and interest totaling
$248,257.14. This amount reflected Burlingtonʹs profits from the sale of
counterfeit goods it had purchased from Ashley Reed, as well as attorneysʹ fees,
costs, and interest. See Fendi Adele S.R.L. v. Burlington Coat Factory Warehouse
Corp., 867 F. Supp. 2d 427, 434, 438 (S.D.N.Y. 2012). Unlike in the First Action,
the damages here were not trebled. Id. at 433‐34.
C. The Instant Action
On July 12, 2011, USF&G commenced this action below against
Fendi and the Ashley Reed defendants, seeking a declaration that it owed no
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duty under the Policies to indemnify Ashley Reed with respect to the First
Action. Fendi asserted a counterclaim seeking indemnification for the judgment
entered against Ashley Reed in the First Action. Burlington was given
permission to intervene to seek indemnification under the Policies for the
judgment entered against Ashley Reed in the Second Action. Cross‐motions for
summary judgment followed.
On August 20, 2014, the district court granted summary judgment in
favor of USF&G. The district court held that the basis of Ashley Reedʹs liability
ʺwas the sale ‐‐ not the advertising ‐‐ of counterfeit Fendi products,ʺ and
therefore that there was no basis for indemnification under the Policies. U.S. Fid.
& Guar. Co. v. Ashley Reed Trading, Inc., 43 F. Supp. 3d 271, 278 (S.D.N.Y. 2014).
Judgment was entered accordingly and this appeal followed.
DISCUSSION
I. Applicable Law
We review de novo a district courtʹs grant of summary judgment,
ʺconstruing the evidence in the light most favorable to the non‐moving party and
drawing all reasonable inferences in its favor.ʺ SCR Joint Venture L.P. v.
Warshawsky, 559 F.3d 133, 137 (2d Cir. 2009) (internal quotation marks omitted).
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ʺBecause interpretation of an insurance agreement is a question of law, we
review the district courtʹs construction of the [Policies] de novo.ʺ VAM Check
Cashing Corp. v. Fed. Ins. Co., 699 F.3d 727, 729 (2d Cir. 2012).
The parties agree that New York law governs the interpretation of
the Policies. In deciding whether an insurance policy requires an insurer to
indemnify an insuredʹs loss, we must first examine whether there is a ʺreasonable
basis for a difference of opinion as to the meaning of the policy.ʺ Fed. Ins. Co. v.
Intʹl Bus. Machs. Corp., 18 N.Y.3d 642, 646 (2012) (internal quotation marks
omitted). If there is, ʺthe language at issue would be deemed to be ambiguous
and thus interpreted in favor of the insured.ʺ Id. This is because ʺNew York
follows the maxim of contra proferentem in insurance cases: where the plain
language of a policy permits more than one reasonable reading, a court must
adopt the reading upholding coverage.ʺ VAM Check Cashing, 699 F.3d at 732.
Under New York insurance law, the plain language of an insurance
policy is construed ʺin light of ʹcommon speechʹ and the reasonable expectations
of a businessperson.ʺ Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 383
(2003) (quoting Ace Wire & Cable Co. v Aetna Cas. & Sur. Co., 60 N.Y.2d 390, 398
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(1983)); see also Fieldston Prop. Owners Assʹn v. Hermitage Ins. Co., 16 N.Y.3d 257,
264 (2011). In construing a policy,
[a] reviewing court must decide whether, affording a
fair meaning to all of the language employed by the
parties in the contract and leaving no provision without
force and effect, there is a reasonable basis for a
difference of opinion as to the meaning of the policy. If
this is the case, the language at issue would be deemed
to be ambiguous and thus interpreted in favor of the
insured.
Intʹl Bus. Machs. Corp., 18 N.Y.3d at 646 (internal citations, alterations, and
quotation marks omitted).
ʺThe duty to indemnify is determined by the actual basis for the
insuredʹs liability to a third person, and does not turn on the pleadings, but
rather on whether the loss, as established by the facts, is covered by the policy.ʺ
Atl. Mut. Ins. Co. v. Terk Techs. Corp., 309 A.D.2d 22, 28 (1st Depʹt 2003) (internal
citations and quotation marks omitted); see also Robbins v. Mich. Millers Mut. Ins.
Co., 236 A.D.2d 769, 770 (3d Depʹt 1997) (ʺWhile the duty to defend is generally
measured against the allegations of the pleadings in the underlying action, the
duty to indemnify is distinctly different, for it is determined by the actual basis of
the insuredʹs liability to [a] plaintiff.ʺ).
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Several cases have construed advertising injury provisions under
New York law. The New York Court of Appeals has held that for a claimed
advertising injury to be covered, it ʺmust both arise out of an offense occurring in
the course of the insuredʹs ʹadvertising activitiesʹ and constitute one of the
enumerated offenses.ʺ A. Meyers & Sons Corp. v. Zurich Am. Ins. Grp., 74 N.Y.2d
298, 303 (1989). There, the court held that an insurer had no duty to defend
under a policy that covered the ʺnamed insuredʹs advertising activities,ʺ where
the insured had been accused of manufacturing, importing, and selling plastic
fasteners that infringed on another companyʹs patents. Id. at 301‐03. The insured
argued that its ʺinjuryʺ was covered because the complaint against it alleged
unfair competition, but the court held that because the alleged unfair competition
involved the importation and sale of infringing products, this was ʺnot injury
arising out of Meyersʹ ʹadvertising activities.ʹʺ Id. at 303.
In a similar case, the Second Department held that the insurer had
no duty to indemnify under an ʺadvertising injuryʺ clause where the insured had
been sued for trademark infringement. Am. Mfrs. Mut. Ins. Co. v. Quality King
Distribs., Inc., 16 A.D.3d 607, 607‐08 (2d Depʹt 2005). In the underlying action, the
insured had been found liable for selling counterfeit shampoo bottles bearing an
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unauthorized trademark. Procter & Gamble Co. v. Quality King Distribs. Inc., 123 F.
Supp. 2d 108, 118 (E.D.N.Y. 2000). The Second Department held that the injury
was not an ʺadvertising injuryʺ and that therefore the insurer had no duty to
indemnify. 16 A.D.3d at 608.
The sale of counterfeit goods bearing an unauthorized trademark
was also at issue in Century 21, Inc. v. Diamond State Insurance Co., 442 F.3d 79 (2d
Cir. 2006). There, we held that because of the ʺʹexceedingly broadʹ contours of an
insurerʹs duty to defend,ʺ the insurer was obliged to defend the action where the
policy contained an ʺadvertising injuryʺ clause and the complaint in the
underlying action alleged that the insured ʺmarketed, distributed and soldʺ the
infringing goods. Id. at 81‐83. We held that:
a term as broad and multi‐faceted as ʺmarketingʺ may
be construed to include activities apart from selling and
distribution that are ʺwithin the embraceʺ of
ʺadvertisingʺ as that term is used in the policy . . . .
Id. at 83. We did not reach the issue of the insurerʹs duty to indemnify, and we
specifically noted the possibility that a point might be reached in the underlying
proceedings when it became clear that the duty to defend ended because the
alleged marketing injury was not covered under the policy. Id. at 83‐84; see also
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Bridge Metal Indus., L.L.C. v. Travelers Indem. Co., 812 F. Supp. 2d 527, 542
(S.D.N.Y. 2011), affʹd, 559 F. Appʹx 15 (2d Cir. 2014) (in advertising injury
coverage case, recognizing distinction between broad duty to defend and
narrower duty to indemnify).
II. Application
The Policies define ʺadvertisingʺ as ʺattracting the attention of others
by any means for the purpose of seeking customers or supporters or increasing
sales or business.ʺ App. at 400, 981. The Policies define ʺadvertising injuryʺ as
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 personʹs or organizationʹs goods, products or services;
b. Oral or written publication of material that
violates a personʹs right of privacy;
c. The use of anotherʹs advertising idea in your
ʺadvertisingʺ;
d. Infringement of anotherʹs copyright, trade dress
or slogan in your ʺadvertising.ʺ
App. at 400, 981. Fendi and Burlington do not argue that Ashley Reedʹs ʺinjuryʺ
arises out of the offenses enumerated in subsections (a) or (b), but they both
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contend that subsection (c) applies, and Burlington also argues that subsection
(d) applies.
We conclude that the district court correctly held that the Policies
did not cover the injuries here, for subsections (c) and (d) require the use of
anotherʹs ʺadvertising ideaʺ or ʺcopyright, trade dress or sloganʺ in ʺyour
advertising,ʺ id. at 400, 981 (emphasis added), and there was no advertising by
Ashley Reed here. Ashley Reed did not engage in any advertising of the
counterfeit goods, and in its complaints in the underlying actions, Fendi did not
allege that it suffered injury because of any advertising activities on the part of
Ashley Reed. Rather, Fendi complained that it suffered injury because
defendants sold counterfeit goods, and damages were awarded in both of the
underlying actions based not on Ashley Reedʹs advertising activities but on its
sales of counterfeit products. Accord Meyers, 74 N.Y.2d at 303 (holding that
insuredʹs liability for importing and selling infringing products was not
advertising injury); Am. Mfrs. Mut. Ins. Co., 16 A.D.3d at 608 (holding that
insuredʹs liability for selling counterfeit shampoo bottles bearing unauthorized
trademark was not advertising injury).
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Fendi and Burlington argue that Ashley Reedʹs use of the Fendi
mark constituted advertising within the Policiesʹ broad definition of
ʺadvertisingʺ ‐‐ ʺattracting the attention of others by any means for the purpose
of seeking customers or supporters or increasing sales or business.ʺ App. at 400,
981. We reject the argument, in light of the well‐settled proposition that
insurance policies are to be construed ʺin light of ʹcommon speechʹ and the
reasonable expectations of a businessperson.ʺ Belt Painting Corp., 100 N.Y.2d at
383 (quoting Ace Wire & Cable Co., 60 N.Y.2d at 398). The parties could not have
reasonably expected that the advertising injury coverage of the Policies would
extend to the insuredʹs sale of infringing goods (where the insured engaged in no
advertising of the counterfeit goods) or that ʺadvertisingʺ would include the sale
(without more) of counterfeit products. As a matter of common sense, there is a
difference between the placement of a counterfeit brand label on a handbag and
the act of soliciting customers through printed advertisements or other media.
Here, the Fendi brand and logo were used as product identification (or, to be
more precise, misidentification) rather than as advertisement. Clearly, Ashley
Reed could not have reasonably expected that it would be indemnified for
disgorgement damages based on the profits it improperly made from selling
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goods that it knew bore a false designation of origin. See XL Specialty Ins. Co. v.
Loral Space & Commcʹns, Inc., 82 A.D.3d 108, 115 (1st Depʹt 2011) (It is ʺwell‐
established . . . that there is no insurance where an insured is forced to disgorge
funds that it acquired wrongfullyʺ); see also Vigilant Ins. Co. v. Credit Suisse First
Boston Corp., 10 A.D.3d 528, 528 (1st Depʹt 2004) (ʺThe risk of being directed to
return improperly acquired funds is not insurable. Restitution of ill‐gotten gains
does not constitute ʹdamagesʹ or a ʹlossʹ as those terms are used in insurance
policies.ʺ); J.P. Morgan Sec. Inc., 21 N.Y.3d at 334‐35.
In short, we conclude that Ashley Reedʹs injuries arose not from its
advertising activities, but from its sales of counterfeit products.
The Policies also contain a falsity exclusion, which provides an
additional basis for denying coverage. The Policies exclude coverage for an
advertising injury ʺ[a]rising out of oral or written publication of material, if done
by or at the direction of the insured with knowledge of its falsity.ʺ App. at 389,
1000. To the extent Ashley Reedʹs use of the Fendi logo on its handbags arguably
constitutes advertising ‐‐ and, again, we conclude that it does not ‐‐ the falsity
exclusion would be triggered, for the record is clear that Ashley Reed
intentionally published the material (that is, placed the Fendi logo on its bags)
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with knowledge that it would be selling goods bearing a false designation of
origin. See, e.g., Terk Techs. Corp., 309 A.D.2d at 31‐32 (holding that insurer had
no duty to defend or indemnify where insured intentionally sold counterfeit
goods, as insuredʹs conduct fell within ʺknown falsityʺ exclusion); A.J. Sheepskin
& Leather Co. v. Colonia Ins. Co., 273 A.D.2d 107, 107 (1st Depʹt 2000) (holding that
insurer had no duty to defend or indemnify where insured intentionally sold
infringing goods, as insuredʹs conduct fell within ʺknown falsityʺ exclusion).
We conclude that the district court did not err in denying coverage.
CONCLUSION
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
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