PRODUCT SOURCE INTERNATIONAL, LLC v. FOREMOST SIGNATURE INSURANCE COMPANY et al

Filing 26

OPINION FILED. Signed by Chief Judge Jerome B. Simandle on 6/30/16. (js)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

PRODUCT SOURCE INTERNATIONAL,
LLC,
Plaintiff,

HONORABLE JEROME B. SIMANDLE

Civil Action
No. 15-8704 (JBS/JS)

v.
FOREMOST SIGNATURE INSURANCE
COMPANY, MARYLAND CASUALTY
COMPANY, and FARMER’S
INSURANCE COMPANY,
Defendants.

APPEARANCES:
Anthony J. DiMarino III, Esq.
Emmett Stephan Collazo, Esq.
A.J. DiMarino, P.C.
41 Grove Street
Haddonfield, NJ 08033
-andTodd Jason Leon, Esq.
Hill Wallack
202 Carnegie Center
CN 5226
Princeton, NJ 08543
Attorneys for Plaintiff
Claudia Daniela Codruz, Esq.
Traub Lieberman Straus & Shrewsberry LLP
322 Route 35 South
Red Bank, NJ 07701
Attorney for Defendants

SIMANDLE, Chief Judge:

OPINION

INTRODUCTION
In this case, Plaintiff Product Source International, LLC
seeks a declaratory judgment that Defendants Foremost Signature
Insurance Company, Maryland Casualty Company, and Farmer’s
Insurance Company, with whom Plaintiff holds commercial general
liability insurance policies, collectively owe a duty to defend
and indemnify Plaintiff in a trademark infringement suit in the
United States District Court for the Eastern District of
Virginia. Defendants seek to dismiss Plaintiff’s claims,
asserting that its requests for declaratory judgment are moot
and that it has failed to state a claim for relief for insurers’
bad faith. For the following reasons, the Court will grant in
part and deny in part Defendants’ motion to dismiss.
BACKGROUND
The Court accepts as true for the purposes of the instant
motions the following facts as alleged in the Complaint. [Docket
Item 1.]
Plaintiff Product Source International, LLC (“PSI”) is a
limited liability corporation with its headquarters in New
Jersey. (Compl. ¶ 6.) Plaintiff purchased an insurance policy
with Maryland Casualty Company in 2007 and renewed that policy
yearly. (Id. ¶ 14.) Foremost Signature Insurance Company
underwrote the renewal term of that insurance policy effective
from February 16, 2014 through February 16, 2015. (Id. ¶ 15.)
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The Foremost Commercial General Liability policy includes a
$2,000,000 “per occurrence limit of liability” and a $4,000,000
general aggregate limit. (Id.) Farmers Insurance Exchange
manages all claims for Maryland Casualty Company and Foremost
Signature Insurance Company (collectively, the “Insurers”). (Id.
¶ 16.)
Plaintiff’s insurance policies provide “general commercial
liability . . . subject to certain conditions and exclusions.”
(Id. ¶ 24.) Those exclusions do not apply to “claims sounding in
infringement of trade dress or slogan.” (Id. ¶ 43.) Plaintiff
alleges that its insurance policies cover “personal and
advertising injuries” (id. ¶ 41), including “injury arising out
of the use of another’s advertising idea in an advertisement, or
infringing upon another’s trade dress or slogan in an
advertisement.” (Id. ¶ 42.)
Plaintiff sells, among other things, cigarette filter
products. (Id. ¶ 10.) Those filters are sold in a white box with
a blue background printed with the phrases “NIC OUT” and “LESS
TAR – MORE TASTE.” (Id. ¶ 11.) Plaintiff has been selling
products with the “NIC OUT” phrase since at least March 2003.
(Id. ¶ 12.) Plaintiff applied for a federal registration for the
phrase NIC OUT in March 2006, which was granted on December 4,
2007 under U.S. Registration No. 3,350,041. (Id. ¶ 17.)

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On June 23, 2009, Leonid Nahshin filed a Petition for
Cancellation of Plaintiff’s NIC OUT mark with the United States
Patent and Trademark Office’s Trademark Trial Appeal Board,
asserting that he owned the mark. (Id. ¶ 18.) On June 21, 2013,
the Trademark Trial Appeal Board granted Nahshin’s petition to
cancel Plaintiff’s registration. (Id. ¶ 20.) Plaintiff appealed
the Trademark Trial Appeal Board’s ruling to the United States
District Court, where the appeal was heard before the United
States District Court for the Eastern District of Virginia (the
“Nahshin Action”). (Id. ¶ 21.) Nahshin brought counterclaims
against Plaintiff in that case, including a “false designation
of origin” claim under the Lanham Act. (Id. ¶¶ 22, 45.)
Shortly thereafter, Plaintiff tendered a demand for defense
to the counterclaims to the Insurers. (Id. ¶ 23.) The Insurers
indicated that they were investigating the claims against
Plaintiff, but on October 14, 2014, they sent a letter
disclaiming coverage based on the claims for damages brought by
Nahshin because Plaintiff had submitted no documentation that
those claims were covered under its Commercial General Liability
insurance policy. (Id. ¶¶ 25-27.) Plaintiff demanded that the
Insurers withdraw their disclaimer of coverage for the Nahshin
Action, explaining Nahshin’s counterclaims further and asserting
that the claims were covered under the insurance policies
because the Insurers had no colorable basis for disputing that
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use of the phrase NIC OUT “constituted the use of an advertising
slogan” and because Nahshin’s claims for damages were based on
allegations of trade dress infringement. (Id. ¶¶ 28-29.) The
Insurers then agreed on January 15, 2015 to provide a defense to
Plaintiff in the Nahshin Action. (Id. ¶ 30.) Nonetheless,
Plaintiff asserts that the Insurers have rejected any agreements
as to compensation for legal costs. (Id. ¶ 32.)
On June 24, 2015, the United States District Court for the
Eastern District of Virginia granted Nahshin summary judgment on
his counterclaims concerning common law ownership of the phrase
NIC OUT but did not grant Nahshin money damages. (Id. ¶ 34.)
Plaintiff timely appealed the ruling to the Court of Appeals,
and Nahshin filed a cross-appeal of the denial of damages. (Id.
¶¶ 37, 39.)1
On July 22, 2015, the Insurers informed Plaintiff that any
duty to defend owed by the Insurers in the Nahshin Action
“expired” when the District Court granted Nahshin’s motion for
summary judgment. (Id. ¶ 34.) The Insurers stated that “only a
fraction” of the legal defense costs, “if any at all” were
“potentially” covered by the policies. (Id. ¶ 35.) The Insurers
then informed Plaintiff “that they believe that they have no

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Plaintiff represents that the Nahshin Action terminated on
December 22, 2015, after the filing of this action; Plaintiff
and Nahshin withdrew their cross-appeals after settling their
dispute for an unidentified amount of money. (Pl. Opp. at 4.)
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obligation to defend or indemnify their insured PSI under any
policy.” (Id. ¶ 36.)
Plaintiff filed this action in the Superior Court of New
Jersey, Camden County, on October 27, 2015, bringing claims
against the Insurers for declaratory judgments as to the
Insurers’ duty to defend and indemnify Plaintiff in the Nahshin
Action, and for insurance bad faith in denial of coverage for
the Nahshin Action. [Docket Item 1.] Defendants timely removed
this case to the United States District Court and filed the
instant motion to dismiss [Docket Item 8] which Plaintiff
opposes. [Docket Item 16.] The Court will decide this motion
without holding oral argument pursuant to Fed. R. Civ. P. 78.
STANDARD OF REVIEW
1. Rule 12(b)(1)
Because federal courts are courts of limited jurisdiction,
the party seeking to invoke the court’s jurisdiction bears the
burden of proving the existence of subject matter jurisdiction.
See Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377
(1994).

Federal Rule of Civil Procedure 12(b)(1) therefore

enables a party, as here, to move to dismiss a complaint for
lack of subject matter jurisdiction.
Article III of the United States Constitution requires that
“an actual controversy must be extant at all stages of [the
Court's] review, not merely at the time the complaint is filed.”
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Camesi v. Univ. of Pittsburgh Med. Ctr., 729 F.3d 239, 247 (3d
Cir. 2013) (quoting Genesis Healthcare Corp. v. Symczyk, ___
U.S. ____, 133 S.Ct. 1523, 1528 (2013)). With respect to actions
for declaratory judgment, litigants present a justiciable
controversy only where “the facts alleged, under all the
circumstances, show that there is a substantial controversy,
between parties having adverse legal interests, of sufficient
immediacy and reality to warrant the issuance of a declaratory
judgment.” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127
(2007) (citing Maryland Casualty Co. v. Pacific Coal & Oil Co.,
312 U.S. 270, 273 (1941).
Two corollaries to the requirement for a live controversy
are the doctrines of mootness and ripeness. "An action is
rendered moot when an intervening circumstance deprives the
plaintiff of a personal stake in the outcome of the lawsuit at
any point during the litigation.” Id. A case becomes
constitutionally moot “only when it is impossible for a court to
grant any effectual relief whatever to the prevailing party.” In
re ICL Holding Co., Inc., 802 F.3d 547, 553 (3d Cir. 2015)
(citing Chafin v. Chafin, ___ U.S. ___, 133 S.Ct. 1017, 1023
(2013)). “As long as the parties have a concrete interest,
however small, in the outcome of the litigation, the case is not
moot.” Campbell-Ewald Co. v. Gomez, ___ U.S. ___, 136 S.Ct. 663,
669 (2016). At the same time, the parties must present an actual
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controversy that is ripe for review, or an issue that is fit for
judicial resolution. Pic-a-State Pa., Inc. v. Reno, 76 F.3d
1294, 1298 (3d Cir. 1996) (discussing Abbott Lab. V. Gardner,
387 U.S. 136, 149 (1967), overruled on other grounds). “The
judicial power does not extend to hypothetical disputes, and
federal courts may not give opinions advising what the law would
be upon a hypothetical state of facts.” Williams v. BASF
Catalysts LLC, 765 F.3d 306, 327 (3d Cir. 2014) (citing Chafin,
133 S.Ct. at 1023). In other words, a case is moot where there
is no conflict between the parties for the court to adjudicate;
a case is unripe when that conflict does not yet exist. In
either case, “the case or disputed claim presents no article III
case or controversy, and a federal court lacks jurisdiction to
hear it.” Krys v. Aaron, 106 F. Supp. 3d 492, 500 (D.N.J. 2015)
(citing Mollett v. Leicth, 511 Fed. Appx. 172, 173 (3d Cir.
203)).
2. Rule 12(b)(6)
Pursuant to Rule 8(a)(2), Fed. R. Civ. P., a complaint need
only contain “a short and plain statement of the claim showing
that the pleader is entitled to relief.” Specific facts are not
required, and “the statement need only ‘give the defendant fair
notice of what the . . . claim is and the grounds upon which it
rests.’” Erickson v. Pardus, 551 U.S. 89, 93 (2007) (citations
omitted). While a complaint is not required to contain detailed
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factual allegations, the plaintiff must provide the “grounds” of
his “entitle[ment] to relief”, which requires more than mere
labels and conclusions. Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 555 (2007).
A motion to dismiss under Rule 12(b)(6), Fed. R. Civ. P.,
may be granted only if, accepting all well-pleaded allegations
in the complaint as true and viewing them in the light most
favorable to the plaintiff, a court concludes that the plaintiff
failed to set forth fair notice of what the claim is and the
grounds upon which it rests. Id. A complaint will survive a
motion to dismiss if it contains sufficient factual matter to
“state a claim to relief that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). Although a court
must accept as true all factual allegations in a complaint, that
tenet is “inapplicable to legal conclusions,” and “[a] pleading
that offers labels and conclusions or a formulaic recitation of
the elements of a cause of action will not do.” Id. at 678.
DISCUSSION
1. Count I
First, Defendants seek to dismiss Plaintiff’s Count I for a
declaratory judgment that the Insurers owe a duty to defend
Plaintiff in the Nahshin Action on the grounds that this claim
is moot, and thus the Court lacks subject matter jurisdiction
over this claim for relief. In Count I, Plaintiff seeks “a
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judgment from this Court declaring that the Insurers have a duty
to defend PSI in the Nahshin Action.” (Compl. ¶ 54.)
The gravamen of Plaintiff’s Complaint is that Defendants
have made inconsistent representations to Plaintiff about their
willingness and obligation to defend Plaintiff in the Nahshin
Action; Plaintiff alleges that the Insurers have both
acknowledged this duty (id. at ¶¶ 30, 53) and disclaimed it (id.
¶¶ 34-36) and that no payments have been forthcoming since
January 15, 2015. (Id. ¶ 30.) Defendants claim that because they
agreed in writing to “provide a defense to PSI” in the Nahshin
Action, Plaintiff is seeking a declaration on a moot conflict
and thus the Court lacks jurisdiction over this request (Def.
Br. at 5); Plaintiff argues that it has stated a justiciable
claim because its Insurers have effectively denied its claim for
lack of coverage. (Pl. Opp. at 10-13.)
The Court disagrees with Defendants’ position that this
dispute is moot. Despite an earlier acknowledgement of the
Insurers’ duty to defend Plaintiff in the Nahshin Action,
Defendants’ inconsistent conduct leaves Plaintiff with a
remaining personal stake in the answer to this question. If the
Insurers must defend Plaintiff in the Nahshin Action, money will
be forthcoming to defray the costs of litigation; if the
Insurers have no such duty, as their conduct suggests they
believe, then Plaintiff will have to shoulder that burden alone.
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As alleged in the Complaint, this dispute meets the Supreme
Court’s description of a justiciable claim for declaratory
judgment: here, “there is a substantial controversy, between
parties having adverse legal interests, of sufficient immediacy
and reality to warrant the issuance of” a declaration of the
parties’ relative rights. MedImmune, 549 U.S. at 127.
Accordingly, the Court will deny Defendants’ motion to dismiss
Count I.
2. Count II
Second, Defendants seek to dismiss Plaintiff’s Count II for
a declaratory judgment that the Insurers owe a duty to indemnify
Plaintiff in the Nahshin Action on the grounds that this claim
is both moot and unripe, and thus the Court lacks subject matter
jurisdiction over this claim for relief. In Count II, Plaintiff
seeks “a judgment from this Court declaring that the Insurers
have a duty to defend PSI for any judgment entered or settlement
reached in the Nahshin Action.” (Compl. ¶ 57.) The crux of
Defendant’s motion to dismiss as to Count II is whether the
Complaint alleges that this duty to indemnify Plaintiff is
ongoing –- in other words, whether Plaintiff seeks to enforce a
duty that is neither extinguished nor premature.
Plaintiff alleges that it “has been informed by Nahshin
that Nahshin would continue to seek damages compensation from
PSI,” and that both Plaintiff and Nahshin have already filed
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cross-appeals of the Eastern District of Virginia’s rulings as
of the filing of this action on October 27, 2015. (Compl. ¶¶ 3739.) Plaintiff alleges that “the policies obligate the Insurers
to defend PSI in the ongoing action with Nahshin and pay any
judgment or settlement that may result.” (Id. ¶ 49 (emphasis
added).) Assuming the truth of both of these statements, the
Nahshin Action is still ongoing and not “resolved” as Defendants
claim. (See Def. Br. at 7.) Nor is an appeal in that case so
remote or contingent as to render any continuing duty to
indemnify Plaintiff for a judgment or settlement unripe for
adjudication. (See id. at 8.)2 Accordingly, Plaintiff has set
forth a justiciable controversy over Defendants’ duty to
indemnify Plaintiff in the Nahshin action and the Court will
deny Defendants’ motion to dismiss Count II.
3. Count III
Finally, Defendants argue that Plaintiff’s Count III for
insurers’ bad faith must be dismissed as the Complaint fails to
state a claim for relief. Insurance companies owe a duty of good

2

Defendants’ contention that “there are no allegations” in the
Complaint that Nahshin has appealed the denial of damages
misrepresents Plaintiff’s Complaint. The Complaint plainly
alleges that both Nahshin and Plaintiff have cross-appealed the
District Court’s rulings to the United States Court of Appeals
for the Fourth Circuit. (Compl. ¶¶ 37, 39). Defendants’ entire
argument as to Count II is remarkable in its ungrounded
assertion that the Nahshin Action, though the subject of a
pending appeal, is somehow “resolved.” Not surprisingly,
Defendants cite no support for this proposition.
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faith to their insured in processing first-party claims, or
claims brought by the insured against their insurance company to
pay claims covered by their policy. Pickett v. Lloyd’s, 621 A.2d
445, 450 (N.J. 1993); see also N.J.S.A. 17B:33-8. In Count III,
Plaintiff asserts that Defendant breached this duty of good
faith by delaying its investigation into and denying insurance
coverage for the claims Plaintiff defended against in the
Nahshin Action.
Under New Jersey law, “To show a claim for bad faith, a
plaintiff must show the absence of a reasonable basis for
denying benefits of the policy and the defendant’s knowledge or
reckless disregard of the lack of a reasonable basis in denying
the claim.” Pickett, 621 A.2d at 453 (citing Bibeault v. Hanover
Ins. Co., 417 A.2d 313, 319 (R.I. 1980)). In other words, an
insurance company cannot be liable for bad faith where there is
a “reasonable basis for denying benefits,” or where eligibility
for coverage under the insurance policy is “fairly debatable.”
Id. Under this “fairly debatable” standard, a plaintiff can only
succeed on a bad faith claim against his insurer if he can
establish that he would be entitled to summary judgment on the
underlying claim –- that there are no factual issues over
whether the plaintiff is entitled to insurance coverage under
his policy. Id.; see also Tarsio v. Provident Ins. Co., 108 F.
Supp. 2d 397, 401 (D.N.J. 2000) (“If factual issues exist as to
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the underlying claim (i.e., questions of fact as to whether
plaintiff is entitled to insurance benefits – plaintiff’s first
cause of action), the Court must dismiss plaintiff’s second
cause of action – the ‘bad faith’ claim.”).
Plaintiff alleges in the Complaint that its insurance
policies “provide commercial general liability . . . subject to
certain conditions and exclusions” and that the counter-claims
brought by Nahshin against Plaintiff in the Nahshin Action fall
within that coverage. (Id. ¶ 24, 40.) Specifically, Plaintiff
alleges that “[t]he Nahshin allegations fall within one or more
of the offenses under the definition of ‘personal and
advertising injury’ under the policies issued by the Insurers to
PSI.” (Id. ¶¶ 41, 44.) In particular, Plaintiff points to
“Coverage B at paragraph 14” and “Endorsement 9S 2102 Ed. 6-01,
entitled Electronic Data Liability Amendment Endorsement” as
provisions of their insurance policies which cover the trademark
infringement claims in the Nahshin Action. (Id. ¶¶ 42-43.)3
Plaintiff further alleges that Defendants, after agreeing in
January 2015 to provide a defense in the Nahshin Action, “state

3

As with Count II, Defendants blatantly mischaracterize
Plaintiff’s allegations. Defendants take the position that the
Complaint “is silent as to whether trademark infringement is
eligible for coverage under the policy” (Def. Br. at 11), but
Plaintiff has clearly alleged that Nahshin’s allegations against
Plaintiff fall within the definition of covered legal claims
under its policies. (Compl. ¶¶ 41, 44.)
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that only ‘a fraction’ of PSI’s legal defense costs . . . ‘if
any at all,’ were ‘potentially’ covered by Insurers” and now
assert “that they believe that they have no obligation to defend
or indemnify their insured PSI under any policy.” (Id. ¶¶ 30,
35, 36.)
Plaintiff has plainly alleged that Defendants lacked a
reasonable basis for denying to defend and indemnify Plaintiff:
the Complaint states that the insurance policies in question had
specific provisions which covered the trademark infringement
claims in the Nahshin Action.4 But Plaintiff has not adequately
set forth the second element required under Plunkett,
Defendants’ knowledge or reckless disregard for the fact that
they had no reasonable basis for their denial of insurance
benefits. While Plaintiff alleges in the Complaint that
Defendants have “delayed the processing of the claim knowingly
or in reckless disregard of the fact that they had no valid
reason for doing so,” (id. ¶¶ 62-63), this amounts to no more
than a legal conclusion which this Court need not accept as
true. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Accordingly,
this Court will grant Defendants’ motion to dismiss as to Count

4

In finding that this element has been adequately pleaded in the
Complaint, the Court expresses no opinion on the merits of these
allegations, or whether Plaintiff could actually establish on
summary judgment that no factual issues exist as to its
entitlement to insurance benefits under these policies.
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III of the Complaint. This dismissal will operate without
prejudice to Plaintiff’s right to amend its pleadings to cure
this deficiency. While Defendants assert that any amendment
would be futile, the Court will not assume that Plaintiffs
cannot set forth more developed factual as to Count III, and the
Court grants Plaintiff a period of 21 days to file an Amended
Complaint curing the deficiency, if Plaintiff is able to do so
consistent with counsel’s obligations under Rule 11, Fed. R.
Civ. P.
CONCLUSION
An accompanying Order will be entered.

June 30, 2016
Date

s/ Jerome B. Simandle
JEROME B. SIMANDLE
Chief U.S. District Judge

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