AMCO Insurance Company v. Inspired Technologies, Inc.

Filing

OPINION FILED - THE COURT: LAVENSKI R. SMITH, MORRIS S. ARNOLD and BOBBY E. SHEPHERD. Lavenski R. Smith, Authoring Judge (PUBLISHED) [3816656] [10-2321]

United States Court of Appeals
FOR THE EIGHTH CIRCUIT

___________
No. 10-2321
___________
AMCO Insurance Company,
Appellee,
v.
Inspired Technologies, Inc.,
Appellant.

*
*
*
* Appeal from the United States
* District Court for the
* District of Minnesota.
*
*
*
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Submitted: March 16, 2011
Filed: August 10, 2011
___________

Before SMITH, ARNOLD, and SHEPHERD, Circuit Judges.
___________
SMITH, Circuit Judge.
3M Company ("3M") sued Inspired Technologies, Inc. (ITI) for allegedly unfair
and false advertising, in violation of the Lanham Act, 15 U.S.C. §§ 1051, et seq., and
the Minnesota Uniform Deceptive Trade Practices Act (MDTPA), Minnesota Statutes
§§ 325D.43-325D.48. ITI tendered defense of the lawsuit to its liability-insurance
carrier, AMCO Insurance Company ("AMCO"), and the lawsuit ultimately settled.
Following the settlement between 3M and ITI, AMCO filed the instant declaratoryjudgment action against ITI, seeking a declaration that it did not owe ITI any duty to
defend or indemnify because the insurance policy's knowledge-of-falsity exclusion
excluded the 3M suit from coverage. The district court agreed with AMCO and
granted the insurer affirmative summary judgment, concluding that the exclusion

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barred coverage. ITI presently appeals, and, for the reasons that follow, we reverse
and remand.
I. Background
ITI is a small start-up company based out of Le Sueur, Minnesota. Before this
lawsuit, ITI purchased from AMCO a "Premier Business Owner's" insurance policy
and a "Commercial Umbrella Liability" insurance policy. At issue in this case is the
Premier Business Owner's policy ("the Policy"), which amounts to a standard
commercial general-liability policy or "CGL." The Policy covered, among other
things, "Advertising and Personal Injury Liability" but contained an accompanying
"knowledge-of-falsity" exclusion that provided as follows:
2.

EXCLUSIONS
This insurance, including any duty we have to defend "suits", does
not apply to:
a.
"Personal and advertising injury":
1)
Caused by or at the direction of the insured with the
knowledge that the act would violate the rights of
another and would inflict "personal and advertising
injury";
2)
Arising out of oral or written publication of material,
if done by or at the direction of the insured with
knowledge of its falsity

ITI and AMCO dispute whether this knowledge-of-falsity exclusion relieves AMCO
of its duty to defend ITT.
In November 2007, ITI began marketing a new product that it called "Frog
Tape," a painter's masking tape designed to compete with that of other manufacturers,
including 3M. Shortly after ITI commenced its marketing campaign, 3M mailed ITI
"cease and desist" letters, complaining that ITI's Frog Tape advertisements were false
and misleading. In December 2007, ITI retained the law firm of Winthrop &
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Weinstine ("Winthrop") to advise ITI on its developing dispute with 3M, and ITI
asserts that, as early as January 9, 2008, it notified AMCO of a potential 3M lawsuit.
On April 16, 2008, 3M sued ITI in federal district court, alleging in its twocount complaint that ITI violated the federal Lanham Act prohibiting unfair
competition (Count One) and MDTPA prohibiting the same. 3M alleged that "ITI has
engaged in an advertising campaign for its Frog Tape product including advertising
purporting to depict 3M Tape and claiming that certain tests and product
demonstrations prove that 3M Tape performs poorly in specific respects, including
bleeding of paint onto surfaces masked by 3M Tape." Notably, 3M alleged in
paragraph 12 of its complaint that
ITI's advertising purporting to depict results from use of 3M Tape is
false, misleading, and deceptive in at least the following specific
respects:
(a)

(b)

(c)

(d)

ITI's marketing brochures are false, misleading, and
deceptive because, among other reasons, the purported
"Actual Photo" of 3M Tape does not in fact depict an actual
photo but instead has been manipulated in a false and
deceptive manner in order to depict 3M Tape in an
unfavorable way.
ITI's product packaging is false, misleading, and deceptive
because the purported "Actual Photo" of 3M Tape is
misrepresented in order to depict 3M Tape in a manner that
is contrary to its typical use and effectiveness.
ITI's purported depictions of 3M Tape in print and video
advertising do not accurately depict the performance of 3M
Tape under conditions similar to typical usage in the
marketplace or under any test protocol sufficiently reliable
or scientific to support ITI's claims.
ITI has displayed videos at the 2007 Hardware Show and
thereafter on its website, generally purporting to
demonstrate poor performance by 3M Tape by, for
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(e)

example, depicting three strips of painter's tape placed sideby-side with the representations that the same pressure is
applied to Frog Tape and 3M Tape. The statement is false
and misleading because in fact the same pressure is not
applied to all depicted tapes.
ITI's product packaging and comparative advertising
campaign are false and misleading because they claim that
poor performance of 3M Tape is proved through
purportedly valid testing, when in fact the ITI test
conditions are not sufficiently reliable or comparable to
conditions of typical use to allow one to conclude with
reasonable scientific certainty that they establish the results
depicted. Among the varied respects in which ITI's testing
deviates from conditions representative of typical
applications include its use of application techniques
different than those used in typical applications, its use of
uncommon or limited purpose paints such as very lowviscosity paints, and its depictions of paint line results from
application of tape to atypical surfaces.

Additionally, 3M alleged in its complaint that "[ITI]'s actions have also caused
compensable harm to 3M that is recoverable pursuant to 15 U.S.C. § 1117(a)," which
awards enhanced damages to a Lanham Act plaintiff who proves that the defendant's
unfair competition was "willful." Subsequently, in its responses to one of ITI's ensuing
interrogatories, 3M responded as follows:
INTERROGATORY NO. 14: Describe all facts supporting your
allegation in paragraph 13 of your Complaint that: "ITI's product
packaging and comparative advertising campaign are false and
misleading in other respects as well, in that ITI has made other claims
about companies' tapes that are incorrect and unsubstantiated."
ANSWER: . . . At least some of ITI's "Actual Photos" cannot be actual
photos, but rather are manipulated images. In particular, the picture used

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in advertisements marked as Exhibits 12, 13, and 14 during ITI's Rule
30(b)(6) deposition have plainly been manipulated.
***
INTERROGATORY NO. 19: Describe in all possible detail the basis for
your claim that ITI's advertisements or demonstrations resulted in
consumer confusion or were intended to deceive.
ANSWER: It is apparent that, rather than use an "actual photo" of 3M
tape, ITI manipulated a tape image by, among other things, replicating
a photo to create a repeating pattern. Such replication could only occur
through intent to deceive. Any claim that ITI has not intended its
depictions of the alleged performance of 3M tape to harm the brand
image of 3M tapes is not plausible, and 3M does not expect ITI to
maintain so implausible a position. By presenting manipulated images
of 3M tape, ITI intended to deceive and confuse, and did deceive and
confuse, potential customers for 3M tapes.
(Emphases added.)
On May 9, 2008, ITI president and owner David Wagner notified AMCO in
writing of 3M's lawsuit and, pursuant to the Policy, ITI tendered to AMCO the
defense and indemnity of 3M's claims. In that same tender letter, Wagner requested
that AMCO consent to Winthrop continuing as ITI's counsel. According to AMCO,
it sent a letter to ITI on May 27, 2008, acknowledging receipt of the 3M complaint
and stating that AMCO had retained a different attorney, Robert Kuderer of Johnson
& Condon, to represent ITI in its defense of the 3M complaint. ITI disputes that it
received any immediate agreement by AMCO to defend the lawsuit, but instead that,
only on July 17, 2008, two months after initially notifying AMCO of the suit, it did
receive AMCO's letter. In any event, this factual dispute is immaterial to the court's
resolution of this appeal. Notably, in its letter agreeing to defend ITI per the Policy,
AMCO did not reserve its rights to later contest coverage.

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On August 8, 2008, after a couple of months of bickering among ITI, AMCO,
Winthrop, and Kuderer as to who would represent ITI in the 3M litigation, ITI,
Winthrop, and AMCO representatives convened to reach a consensus regarding ITI's
defense. At that meeting, AMCO offered to reimburse ITI—at Kuderer's billable
rate—for the attorney's fees ITI had paid Winthrop to date. On August 18, 2008, ITI
received a letter in which AMCO iterated the terms of this offer. Again, this letter did
not include a reservation of rights by AMCO. On August 18, 2008, 3M offered to
settle the lawsuit with ITI for a sum of $500,000. On October 1, 2008, during this
settlement offer's pendency and in anticipation of a settlement conference scheduled
for October 7, 2008, AMCO informed ITI that "there may be applicable exclusions
contained in [the Policy] that may apply to exclude coverage for the allegations and
claims for relief leveled by 3M against ITI." After reciting in the letter the potentially
applicable exclusions, AMCO stated that "[t]his letter is written to notify you that
AMCO Insurance Company is reserving all rights and defenses under the terms and
provisions of the policy involved herein including, but not limited to, those outlined
in this letter."
Eventually, ITI settled with 3M and AMCO consented to paying the agreed
settlement. On October 16, 2008, AMCO filed the instant declaratory-judgment action
seeking a declaration that it owed no duty to defend or indemnify ITI because the
Policy's exclusionary provisions excluded the 3M suit from coverage.
AMCO moved for summary judgment in this declaratory action, and, on
February 19, 2010, the district court granted AMCO's motion. Most pertinent for our
purposes, the district court concluded that AMCO owed no duty to defend ITI against
3M's lawsuit because the Policy's "knowledge-of-falsity" exclusion excluded coverage
for 3M's Lanham Act claims. Specifically, the district court, relying on 3M's
statements in its interrogatory answer that "such replication could only occur through
intent to deceive," concluded that "[i]t would defy logic to interpret the complaint's
language as alleging anything other than that ITI acted falsely and with knowledge of
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that falsity." Presently, ITI appeals and, for the reasons that follow, we reverse and
remand.
II. Discussion
On appeal, ITI urges that the district court erred in concluding that the Policy's
"knowledge-of-falsity" exclusion relieved AMCO of any duty to defend against 3M's
Lanham Act claims. Most relevantly, ITI argues that the district court erred because
(1) it failed to recognize that, under Minnesota law, a duty to defend all claims exists
when any one claim arguably is covered by the policy's language; and (2) it accorded
too much weight to 3M's interrogatory answers and, in so doing, disregarded the
complaint's averments. In response, AMCO counters that the district court properly
concluded that the knowledge-of-falsity exclusion obviated its duty to defend because
3M's interrogatory answers demonstrate that 3M actually sued ITI for intentional
conduct. ITI is correct in its first argument, and we reverse the district court's
summary judgment and remand accordingly.
Because this case is before the court on diversity jurisdiction, "[t]his [c]ourt will
apply the substantive law of the forum state, Minnesota." Callas Enters., Inc. v.
Travelers Indem. Co. of Am., 193 F.3d 952, 955 (8th Cir. 1999) (citing Erie R.R. Co.
v. Tompkins, 304 U.S. 64, 78 (1938)). "We review de novo the district court's
application of state law, and, if the state law is ambiguous, this [c]ourt predicts how
the highest court of that state would resolve the issue." Id. The Minnesota Supreme
Court has consistently stated that, "[b]ecause most insurance policies are preprinted
forms drafted solely by insurance companies—basically contracts of adhesion—policy
words of inclusion will be broadly construed, and words of exclusion are narrowly
considered." Gen. Cas. Co. of Wisc. v. Wozniak Travel, Inc., 762 N.W.2d 572, 575
(Minn. 2009).
Critically, under Minnesota law, "[a]n insured's [sic] 'duty to defend extends to
every claim that 'arguably' falls within the scope of coverage[, and] the duty to defend
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one claim creates a duty to defend all claims." Id. at 576 (quoting Woodale Builders,
Inc. v. Md. Cas. Co., 722 N.W.2d 283, 302 (Minn. 2006)). We conclude that the
district court erred in concluding that the knowledge-of-falsity exclusion negated
AMCO's entire duty to defend because where multiple claims are present the district
court failed to ensure that no single claim by 3M arguably fell within the scope of
coverage. See id.
As an initial matter, contrary to ITI's contention, the district court's reliance on
3M's interrogatory answers to deny coverage was not error. Admittedly, the general
rule in Minnesota is that "[t]he obligation to defend is contractual in nature and is
generally determined by the allegations of the complaint against the insured and the
indemnity coverage afforded by the policy." Farmers & Merchs. State Bank of Pierz
v. St. Paul Fire & Marine Ins. Co., 242 N.W.2d 840, 842 (Minn. 1976); see also
Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 418 n.19 (Minn. 1997)
("[T]his court typically will determine a duty to defend by comparing only those
allegations in the complaint with the appropriate language in the policy."). "However,
the complaint is not controlling when actual facts clearly establish the existence or
nonexistence of an obligation to defend." Farmers & Merchs. State Bank, 242 N.W.2d
at 842 (quotation and citation omitted). But "[o]nly when actual facts within the
insurer's knowledge clearly establish the existence or nonexistence of an obligation
to defend, will [the Minnesota Supreme Court] hold that the complaint is not
controlling." Meadowbrook, Inc., 559 N.W.2d at 418 n.19 (emphases added).
Here, AMCO and the district court relied on 3M's sworn interrogatory answers
as "actual facts." While no Minnesota cases have authorized using interrogatory
answers as "actual facts" for coverage determinations, interrogatory answers are sworn
statements and "may be used to the extent allowed by the Federal Rules of Evidence."
Fed. R. Civ. P. 33(c). Accordingly, AMCO's reliance on interrogatory answers to deny
coverage is analogous to the scenario in Haarstad v. Graff, 517 N.W.2d 582 (Minn.
1994). In that case, the insurer determined that its policy's intentional-act exclusion
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negated its duty to defend and based this determination on its interview of the insured.
Id. at 584. On appeal, the Minnesota Supreme Court approved the insurer's reliance
on this interview as "actual facts" outside the complaint upon which the insurer could
rely to deny duty-to-defend coverage. Id. at 584–85. The Minnesota Supreme Court's
rationale in Haarstad applies here with equal vigor. Indeed, in the instant case,
AMCO relied on the sworn interrogatory answers as actual facts, whereas, in
Haarstad, the insurer relied not on sworn interrogatories or deposition testimony
elicited by an adverse party, but on an unsworn interview that it conducted as part of
its own investigation. Id. at 584. The only aspect of 3M's interrogatory answers that
militate against their constituting "actual facts" is 3M's disclaimer in one of its
answers that "[a]ll these interrogatories are contention interrogatories, and discovery
is just beginning." Still, this disclaimer alone would not affect the answers' future
admissibility. Accordingly, the district court did not err in approving AMCO's
reliance—and in relying itself—on 3M's interrogatories as a source of actual facts
outside the complaint to make coverage determinations.
Nevertheless, AMCO and the district court did err in concluding that 3M's
interrogatory answers had the effect of triggering the Policy's knowledge-of-falsity
exclusion such that AMCO owed no duty to defend ITI against 3M's suit. Again, in
Minnesota,
it is apparent that an insurer seeking to avoid having to defend an insured
carries the burden of demonstrating that all parts of the cause of action
against the insured fall clearly outside the scope of coverage. If any part
is arguably within the scope of coverage, the insurer should defend,
reserving its right to contest coverage based on facts developed at trial
on the merits.
Farmers & Merchs. State Bank, 242 N.W.2d at 843 (emphases added)
(quotation and citation omitted).

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The district court's analysis fails to account for this feature of Minnesota law
which requires that AMCO clearly demonstrate that it owes no duty to defend "all
parts" of the 3M suit. Id. If any one claim of the 3M suit is arguably covered, AMCO
must defend the whole suit. Specifically, the two interrogatory answers upon which
the district court relied do not reflect that 3M alleged ITI's knowledge of falsity as to
all the purportedly unfair advertising. Interrogatory Number 14 asked 3M only to
"describe all facts supporting your allegation in paragraph 13 of your Complaint that:
'ITI's product packaging and comparative advertising campaign are false and
misleading in other respects as well, in that ITI has made other claims about
companies' tapes that are incorrect and unsubstantiated.'" (Emphasis added.) To this,
3M responded that certain photos plainly had been manipulated. Similarly, in its
answer to Interrogatory Number 19, 3M responded that "[i]t is apparent that, rather
than use an 'actual photo' of 3M tape, ITI manipulated a tape image by, among other
things, replicating a photo to create a repeating pattern. Such replication could only
occur through intent to deceive." (Emphasis added.)
In sum, both of these interrogatory answers concern 3M's allegations—mostly
in Paragraph 13 of its complaint— that the purported "actual photos" of 3M products
that ITI used in its packaging and comparative advertisements were inaccurate.
However, as stated earlier, these allegations are not the only ITI conduct that 3M
alleges violated the Lanham Act. Notably, in paragraph 12(c) of its complaint, 3M
alleged that what renders ITI's advertising unfair and false is that "ITI's purported
depictions of 3M Tape in print and video advertising do not accurately depict the
performance of 3M Tape under conditions similar to typical usage in the marketplace
or under any test protocol sufficiently reliable or scientific to support ITI's claims."
Similarly, in subsection (e) of the same paragraph, 3M alleged that,
[a]mong the varied respects in which ITI's testing deviates from
conditions representative of typical applications include its use of
application techniques different than those used in typical applications,
its use of uncommon or limited purpose paints such as very low-10-

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viscosity paints, and its depictions of paint line results from application
of tape to atypical surfaces.
In short, 3M's complaint alleged that ITI committed unfair advertising under the
Lanham Act in two separate regards: (1) by doctoring purported "actual photos" of 3M
Tape—conduct which most naturally implies intent, and (2) by failing to ensure the
accuracy of its market data by following the scientific method and other best practices
when conducting comparative tests and experiments on 3M Tape—conduct which
may be intentional or merely negligent. The distinction is meaningful. Indeed, as the
Minnesota Supreme Court has stated, "the [lower court] mistakenly focused on some
of the conduct being asserted to prove the claim." Meadowbrook, Inc., 559 N.W.2d
at 420.
To prevail on an unfair-competition claim under the Lanham Act, a plaintiff
need not prove that a defendant knew that its advertisements were false. The district
court thus focused on some of the conduct alleged to prove the claim rather than the
global claim itself. Count One of 3M's lawsuit alleged that ITI's conduct "constitute[d]
false advertising, in violation of Lanham Act § 43(a), 15 U.S.C. § 1125(a)." As several
of our sister circuits have recognized, "[i]t is well-settled that no proof of intent or
willfulness is required to establish a violation of Lanham Act § 43(a) for false
advertising." Vector Prods., Inc. v. Hartford Fire Ins. Co., 397 F.3d 1316, 1319 (11th
Cir. 2005) (citing, inter alia, Johnson & Johnson v. Carter-Wallace, Inc., 631 F.2d
186 (2nd Cir. 1980); Parkway Baking Co. v. Freihofer Baking Co., 255 F.2d 641 (3rd
Cir. 1958)). Indeed, 3M likely alleged that ITI willfully used false advertising only to
support its request in paragraph 17 of its complaint for enhanced damages under 15
U.S.C. § 1117(a), which entitles a plaintiff who proves certain willful violations of the
Lanham Act to "(1) [the] defendant's profits, (2) any damages sustained by the
plaintiff, and (3) the costs of the action." Accordingly, because AMCO failed to
satisfy its burden of demonstrating as a matter of law that all of 3M's claims against

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ITI clearly fell outside of the Policy's coverage, the district court's summary judgment
concluding that AMCO owed ITI no duty to defend was improper.
Finally, the district court and AMCO's reliance on this court's opinion in Callas
Enterprises, Inc. v. Traveler's Indemnity Co. of America, 193 F.3d 952 (8th Cir. 1999),
is misplaced. In Callas Enterprises, this court, applying Minnesota insurance law,
construed an identically worded knowledge-of-falsity exclusion. See id. at 955
(reciting the knowledge-of-falsity exclusion's language). Specifically, this court
opined—as an alternative to other dispositive holdings—that the policy's knowledgeof-falsity exclusion relieved the insurer of its duty to defend a defamation claim,
explaining its reasoning in a concluding footnote:
The underlying complaint filed by Sbemco against Callas . . . does
not specifically allege that Callas knowingly made false oral or written
publication of material. However, each of the nine claims for release
begins with a sentence which realleges, inter alia, paragraph 1 of the
complaint, also referred to as the "preliminary statement." In that
statement, the following allegation is made:
Moreover, Defendant engaged in deceptive trade practices
using "bait and switch tactics" in breaching its agreement
with Sbemco—Defendant solicited Sbemco customers
showing the customers samples of Sbemco custom safety
floor matting and obtaining orders from these customers of
Sbemco custom safety floor matting but actually selling the
customers either non-Sbemco floor matting or a different
type of Sbemco floor matting than that shown to the
customer.
It would defy logic to interpret this language as alleging anything other
than that Callas acted falsely and with knowledge of that falsity.
Id. at 957 n.5 (emphasis added).

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We do not consider Callas Enterprises dispositive of the instant appeal. Callas
Enterprises is factually distinguishable as well. The blatant "bait and switch" scheme
at play in Callas Enterprises is not present here; rather, as already explained, the false
advertising that ITI allegedly perpetrated could have been willful or simply negligent,
in which case the Policy's knowledge-of-falsity exclusion does not operate to bar
coverage.
In sum, AMCO failed to satisfy its burden of demonstrating, as a matter of law,
that every claim in 3M's complaint fell clearly outside the Policy's coverage. Farmers
& Merchs. State Bank, 242 N.W.2d at 843. Accordingly, because 3M alleged at least
one arguably coverable claim, AMCO owed ITI a duty under Minnesota law to defend
the entire suit. Id.
III. Conclusion
Based on the foregoing, we reverse the district court's grant of summary
judgment and remand for further proceedings consistent with this opinion.
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