Insured's Lawful Sales Of Genuine Product Prior To Insurance Period, Even If Counterfeit Product Later Sold Is Nearly Identical, Does Not Trigger Policy's "Prior Publication" Exclusion

Posted on June 24, 2009 by Michael Rigney

CAPITOL INDEMNITY CORP. v. ELSTON SELF SERVICE WHOLESALE GROCERS, INC. (March 12, 2009)

Elston Self-Service Wholesale Grocers, Inc. ("Elston") is a wholesale cigarette distributor. Lorillard Tobacco Co. ("Lorillard") filed a complaint against Elston, alleging that it sold counterfeit cigarettes bearing a Lorillard trademark. Elston was insured by Capitol Indemnity Corp. When Elston claimed coverage, Capitol Indemnity disclaimed any duty to indemnify or defend. Capitol Indemnity sought a declaratory judgment that it had no such duty. The district court ruled that Capitol Indemnity had an obligation to defend Elston in the Lorillard litigation. Capitol Indemnity appeals.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Manion affirmed. The Court addressed the policy provisions. At issue was an exclusion to the policy's coverage of "advertising injury." The policy excluded from coverage any injury arising out of the publication of “material” whose first publication took place before the policy period. Capitol Indemnity argued that Elston's years of lawful sales of Lorillard cigarettes before the beginning of the policy term constituted a prior publication. The counterfeit packaging was nearly identical to the Lorillard packaging. The Court rejected Capitol Indemnity’s position. It interpreted the term "material" in the policy exclusion to refer to the same wrongful material alleged in the complaint. Because there was no allegation of counterfeit sales prior to the policy term, there was no prior publication. Under Illinois law, Capitol Indemnity is required to defend Elston if the underlying complaint potentially falls within the scope of coverage. Having found that the prior publication exclusion does not apply, the Court affirmed the district court’s finding of a duty to defend.

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Named Plaintiff's "Idiosyncratic" Understanding of Advertising Does Not Support Class Action

Posted on November 10, 2008 by Michael Rigney

THOROGOOD V. SEARS, ROEBUCK & CO.  (October 28, 2008)

Steve Thorogood bought a dryer at Sears, Roebuck & Co. (“Sears”). Sears’ point-of-sale literature stated that the drum inside the dryer was made of stainless steel. In fact, part of Sears’ dryer drum was made of a coated, non-stainless steel. Thorogood filed a class action on behalf of himself and other purchasers of the dryer in 28 states and the District of Columbia. He alleged that he thought that the entire drum was made of stainless steel, that the non-stainless part rusted and stained his clothes, and that Sears’ advertising was deceptive. Thorogood based his claim on the Tennessee Consumer Protection Act. The district court certified the class. Sears appeals.

In their opinion, Judges Posner, Kanne, and Evans reversed and remanded for decertification. The panel started by observing some of the benefits of the class action procedure, as well as some of its downsides. One particular downside of some class actions, according to the Court, is the undermining of federalism. Thorogood’s case presented a good example. Thorogood was attempting to litigate 500,000 claims of residents of 29 jurisdictions in one federal court. These claims would be “wrested from the control” of those jurisdictions and their laws. The Court was troubled that certain procedural rules that govern the relief to which those 500,000 claimants would be entitled would be ignored. Specifically, for example, Tennessee’s consumer protection act does not allow a class action in state court. Although the Court recognized that the Tennessee rule did not prevent the class action from proceeding under federal law, the expansion of available relief did trouble the Court. The Court’s concerns led it to approach the class action aspect of the case with caution.

The Court found the case to be a particularly poor candidate for class action treatment. Not only did common issues of fact not predominate over individual issues of fact, the Court stated that there were no common issues of fact. Thorogood’s concerns about rust were “idiosyncratic.” The Court doubted that any of the other 500,000 claimants believed as he did. Each class member would have to individually establish, at a hearing, his or her: a) understanding of the meaning of the stainless steel advertising, b) reliance on the advertising’s meaning that the stainless steel drum would prevent rust stains, and c) damages. Since there was no common, single understanding of the advertising, the class should not have been certified. The Court did note a certain difficulty in determining individual relief as well. That difficulty could have been managed through an aggregate class relief approach, had the case been otherwise suitable for class treatment.  

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