Pennsylvania National Mutual Casualty Insurance Company v. Beach Mart, Inc. et al

Filing 57

ORDER denying as moot 42 Motion for Clarification filed by Pennsylvania National Mutual Casualty Insurance Company and granting in part and denying in part 46 Motion for Judgment on the Pleadings. Signed by US District Judge Terrence W. Boyle on 3/5/2018. (Stouch, L.)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
NORTHERN DIVISION
No. 2:14-CV-8-BO

PENNSYLVANIA NATIONAL MUTUAL)
CAUSALTY INSURANCE COMPANY, )
)

Plaintiff,

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v.

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BEACH MART, INC.,
Defendant.

ORDER

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This cause comes before the Court on plaintiffs motion for judgment on the pleadings
pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. Defendant has responded, plaintiff
has replied, and the matter is ripe for ruling .. Also before the court is the parties' joint motion for
clarification of the scheduling order. For the reasons that follow, plaintiffs motion for judgment
on the pleadings -is granted in part and the motion for clarification is denied as moot.
BACKGROUND
Plaintiff, Pennsylvania National Mutual Casualty Insurance Company (Penn National)
filed this declaratory judgment action under 28 U.S.C. § 2201, on February 4, 2014, seeking a
declaration of non-coverage relative to four businessowners liability policies and four commercial
umbrella policies issued to Beach Mart. Penn National's complaint stems from a matter currently
pending before this Court, styled as Beach Mart, Inc. v. L&L Wings, Inc., No. 2:11-CV-44-BO
(E.D.N.C.) ("underlying action"). The underlying action was brought by Beach Mart against L&L

Wings on September 9, 2011, for breach of contract and a declaratory judgment that Beach Mart
had fully complied with a 2005 Agreement with L&L Wings to use the name SUPER WINGS in
retail stores and that L&L Wings had no lawful grounds to terminate the 2005 Agreement. Id at
[DE 1]. Beach Mart has since filed an amended complaint, alleging claims against L&L Wings
for fraudulent inducement to contract, negligent misrepresentation, cancellation of trademark
registrations, false or fraudulent trademark registration, unfair and deceptive trade practices, and
declaratory judgment. Id. at [DE 184]. L&L Wings has asserted counterclaims against Beach
Mart in the underlying action. The counterclaims currently pending against Beach Mart in the
underlying action are for breach of contract, specifically breach of the 2005 Agreement entered
into between L&L Wings and Beach Mart with an effective date of August 29, 2005; breach of the
implied· covenant of good faith and fair dealing; a declaration that Beach Mart acquired no rights
to the WINGS trademark or otherwise as a result of an assignment agreement; and a declaration
that L&L Wings is the owner of the WINGS name in connection with retail stores, beachwear, and
beach-related products. Id. at [DE 304]. Penn National has been providing a defense to Beach
Mart on the counterclaims, subject to a complete reservation of rights.
This declaratory action was stayed on May 5, 2014, on the parties' consent motion and the
stay was lifted on September 25, 2017. Penn National thereafter filed an amended complaint, to
which Beach Mart filed an answer and counterclaims and defendant L&L Wings filed an answer.
Beach Mart's counterclaims against Penn National were filed on October 2, 2017, and allege that
Penn National breached its insurance contract, acted in bad faith, and engaged in unfair and
deceptive trade practices in violation of N.C. Gen. Sta. § 75-1.1. [DE 41]. Beach Mart further
seeks a declaratory judgment that Penn National is.required to defend and indemnify Beach Mart
against L&L Wings' counterclaims in the underlying action. Penn National filed its motion for

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judgment on the pleadings on December 13, 2017, and on January 4, 2018, stipulated to the
dismissal of defendant L&L Wings.
DISCUSSION
A motion for judgment on the pleadings under Fed. R. Civ. P. 12(c) allows for a party to
move for entry of judgment after the close of the pleadings stage, but early enough so as not to
delay trial. Fed. R. Civ. P. 12(c). Courts apply the Rule 12(b)(6) standard when reviewing a
motion under Rule 12(c). Mayfield v. Nat'! Ass 'nfor Stock Car Auto Racing, Inc., 674 F.3d 369,
375 (4th Cir. 2012). "Judgment on the pleadings is not properly granted unless the moving party
has clearly established that no material issue of fact remains to be resolved and the party is entitled
to judgment as a matter of law." United States v. Any & all Radio Station 'Jjansmission Equip.,
207 F.3d 458, 462 (8th Cir. 2000). It is within a court's discretion whether to consider matters
outside the pleadings if presented, and thereby convert the motion for judgment on the pleadings
to one for summary judgment under Rule Fed. R. Civ. P. 56. A. S. Abell Co. v. Baltimore

Typographical Union No. 12, 338 F.2d 190, 193 (4th Cir. 1964).
A brief summary of the factual background of the underlying action is necessary to resolve
the instant motion. Beach Mart and L&L Wings both operate retail stores at beach locations which
sell beachwear, sunglasses, souvenirs, and similar items; Beach Mart operates stores only in North
Carolina while L&L Wings operates stores in North Carolina and other states, including Florida
and South Carolina. L&L Wings alleges that it ~as operated its stores under the WINGS trademark
since 1978. Prior to 1995, Beach Mart's principal, who had formerly been employed by or
otherwise in business with L&L Wings, began doing business as Beach Mart. Beach Mart and
L&L Wings entered into an agreement in 1995 which described the terms under which Beach Mart
was permitted to use the WINGS name for its stores.

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The 1995 Agreement expired on

January 1, 1996, after which time Beach Mart continued to use the WINGS trademark in its
operation of business, including by using it in store signage, merchandise tags, and advertising. In
2005, Beach Mart and L&L Wings entered into a second agreement to resolve their disputes
regarding Beach Mart's ongoing use of the WINGS trademark after the expiration of the 1995
Agreement. The 2005 Agreement prohibited Beach Mart from using the WINGS trademark on a
standalone basis after December 31, 2005, but permitted it to use WINGS modified by "super" or
"big" in eight North Carolina counties. L&L Wings contends that Beach Mart continued to use
the WINGS trademark standing alone, including on merchandise tags, receipts, advertising, and
store signage, after December 31, 2005. L&L Wings further alleges that where Beach Mart did
use the modifier "super" or "big" it did so in such a way as to render the modifier undetectable.
L&L Wings further alleges that Beach Mart employees answered the telephone by identifying the
store as "Wings," that Beach Mart constructed and continues to operate stores whose fa9ade is
identical to that of L&L Wings', and that Beach Mart adopted the advertising slogan "All you need
for the beach," which is nearly identical to L&L Wings' slogan "All you need to reach the beach."
See No. 2:11-CV-44-BO (E.D.N.C.) ([DE 1; 18; 21; 184; 304].
Penn National issued Businessowners Liability policies to Beach Mart, with coverage
beginning January 1, 2008, and coverage renewed to cover the periods of 2009, 2010, and 2011.
Penn National also issued Commercial Umbrella Liability policies to Beach Mart with coverage
beginning January 1, 2008, and coverage renewed to cover 2009, 2010, and 2011. The relevant
policy provisions in the Businessowners Liability (BL) policies provide coverage for advertising
injury caused by an offense committed in the course of advertising the policy-holder's goods,
products, or services, but only if the offense was committed in the coverage territory during the
policy period. [DE 1-3 at 51of105] Businessowners' Liability Coverage Form§ A(l)(b)(2)(b).

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The policy defines an advertising injury to include an injury arising out of one or more offenses,
including misappropriation of advertising ideas or style of doing business and infringement of
copyright, title, or slogan. Id. at [61 of 105] § F(l). The Commercial Umbrella Liability (UL)
policies provide coverage for advertising injury when the underlying insurance either does not
provide coverage or has been exhausted but only ifthe offense was committed within the coverage
territory during the policy period. [DE 1-8 at 24 of 45] Commercial Umbrella Liability Coverage
Form at§ B(l)(a)-(b). The applicable policy exclusion provisions raised by Penn National state
that the BL policies do not apply to personal or advertising injuries arising out of oral or written
publication of material whose first publication took place prior to the beginning of the policy
period, and further defines an advertising injury to not include breach of contract, other than
misappropriation of advertising ideas under an implied contract, or injuries arising out of the
infringement of copyright, patent, trademark, trade secret or other intellectual property rights. [DE
1-3 at 56-57of105] §§ B(l)(p); (q). The UL policy exclusions exclude coverage for personal or
advertising injury arising out of material published prior to the policy period or arising out of
breach of contract, except an implied contract to use another's advertising idea in your
advertisement. [DE 1-8 at 24 of 45] §§ 2(A)(3); (6).
Generally speaking, the insurer's duty to defend the insured is broader than its
obligation to pay damages incurred by events covered by a particular policy. An
insurer's duty to defend is ordinarily measured by the facts as alleged in the
pleadings; its duty to pay is measured by the facts ultimately determined at trial.
When the pleadings state facts demonstrating that the alleged injury is covered by
the policy, then the insurer has a duty to defend, whether or not the insured is
ultimately liable.
·

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Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691 (1986). 1 In order to
determine whether the insurer has a duty to defend, a court considers the language of the policy,
including its exclusions, and determines whether the events as alleged in the underlying pleadings
are covered by the policy terms. Id In North Carolina, insurance policy provisions that extend
coverage are construed liberally, while policy provisions that exclude coverage are strictly
construed. Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C., 364 N.C. 1, 9-10 (2010).
Additionally, even if some of the allegations do not fall within the policy's coverage, so long as
some allegations are covered by the policy there is a duty to defend. Pennsylvania Nat. Mut. Cas.
Ins. Co. v. Sharpe Images, Inc., 3:11-CV-150, 2012 WL 3962747 (W.D.N.C. Sept. 11, 2012).
Having compared the counterclaims alleged by L&L Wings to the applicable· policy
provisions, the Court holds there is no duty to defend. L&L Wings has alleged that Beach Mart
used WINGS on a stand-alone basis continually from January 1, 1995, and SUPER WINGS
continually from January 1, 2006. The BL and UL policies at issue did not become effective until
January 1, 2008, and both policies expressly apply only to actions or offensive conduct committed
during the policy period, and further exclude from coverage injuries arising from actions which
first occurred prior to the policy period. L&L Wings has alleged that Beach Mart's offensive use
of WINGS and SUPER WINGS has been continuous and ongoing since at least 2006, and thus
Beach Mart's offensive conduct began outside the coverage period and is not covered. The Court
must also determine, however, whether any of the specific offensive conduct complained of by
L&L constitutes a covered event, as Penn National would have a duty to defend even where there

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The parties do not dispute that North Carolina law governs the interpretation of the policies at
issue. See, e.g., Westfield Ins. Co. v. Nautilus Ins. Co., 154 F. Supp. 3d 259, 264 (M.D.N.C.
2016).
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is a mere possibility that the potential liability is covered. See Waste Mgmt., 315 N.C. at 691 n.2.
(allegations that describe hybrid of covered and excluded events trigger duty to defend).
There are currently two substantive counterclaims alleged against Beach Mart - one for
breach of contract and one for breach of an implied duty of good faith and fair dealing. Also
pending against Beach Mart are two declaratory judgment claims seeking declarations that L&L
Wings owns the WINGS trademark in relation to retail stores, beachwear, and beach-related
products and that Beach Mart has no rights in the WINGS mark. L&L Wings' prior counterclaims
which were dismissed by the Court on October 3, 2014, concerned trademark infringement and
unfair competition claims against Beach Mart for its use of the WINGS and SUPER WINGS
trademarks. Beach Mart, No. 2:11-CV-44-BO [DE 18]; [DE 233]. As noted above, these claims
all plainly arise out of the same continued use of the WINGS mark about which L&L Wings has
complained since sometime prior to the 2005 Agreement.
Beach Mart argues that, although some offending conduct took place prior to the policy
period, the fact that some conduct took place after the policy period is sufficient to bring its claim
within the terms of .the policy. Indeed, the North Carolina Court of Appeals has held that an
exclusion for written or oral material first published prior to policy coverage period does not
excuse an insurer's duty to defend simply because some offending statements were made or
materials published both before and during the policy period. Kubit v. MAG Mut. Ins. Co., 210
N.C. App. 273, 289 (2011). However, theKubitcourtwent on to note that so long as the statements
or materials published are substantially the same as the offending material published prior to the
policy period, the exclusion applies and there is no )duty to defend. Id. at 290.
Here, there is no doubt that the offending material which was published prior to the
coverage period is the same or substantially similar to what was published during the coverage

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period. L&L Wings alleges that, "[s]ubsequent to December 31, 2005, Beach Mart has used, and
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continues to use, the WINGS trademark," and it seeks damages on account of "Beach Mart's
continual violation of the 2005 Agreement and unauthorized use of the WINGS trademark". Beach
Mart, No. 2:11-CV-44-BO [DE 304] at 14;17. The allegedly offending material at issue, whether

it is present in building facades, advertising slogans, merchandise tagging, or otherwise, has been
substantially the same since in first occurred. Although L&L Wings contends that the language in
its counterclaims which references Beach Mart's actions "subsequent to December 31, 2005" is
not specific enough to determine at this stage whether the offending material was published prior
to the policy period, a fair reading of the allegations contained in the counterclaims reveals
otherwise. Specifically, L&L Wings expressly complains about Beach Mart's continued use of
the WINGS trademark beginning at a minimum when Beach Mart ceased paying fees to L&L
Wings for use of the mark as provided by the 1995 Agreement and prior to the parties' agreeing
to terms of use of the WINGS trademark in the 2005 Agreement on August 29, 2005.

Beach

Mart, No. 2:11-CV-44-BO [DE 304] at 13. The variation of Beach Mart's use of the trademark,

whether on merchandise tags or in a telephone greeting, "occur[s] within a common, clearly
identifiable advertising objective, do[es] not give rise to 'fresh wrongs'" which would trigger
coverage. Hanover Ins. Co. v. Urban Outfitters, Inc., 806 F.3d 761, 768 (3d Cir. 2015). Rather,
· where, as here, an insured has engaged in "similar liability-triggering behavior both before and
during [the] coverage period," a prior publication exclusion is properly applied. Id. at 770.
Accordingly, because the advertising injury alleged by L&L Wings regarding Beach
Mart's use of the WINGS trademark is substantially the same over time without any meaningful
interruption, it is thus not covered under either the BL or UL policies. The Court therefore holds
that Penn National has no duty to defend Beach Mart as to the counterclaims brought by L&L

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Wings in the underlying action. Because the question of whether the duty to indemnify is generally
not ripe until after facts in the underlying case have been found, the Court will dismiss that claim
without prejudice subject to Penn National's re-filing at the appropriate time. See Ellett Bros. v.
US. Fid & Guar. Co., 275 F.3d 384, 388 (4th Cir. 2001); see also Travelers Indem. Co. v. Miller
Bldg. Corp., 221 F. App'x 265, 267 (4th Cir. 2007) ("As a general practice, courts wait to decide

coverage until litigation or agreement has determined the particular damage for which an insured
will be responsible.").
The Court further holds that Beach Mart has failed to state a claim for which relief can be
granted on its counterclaims against Penn National for breach of contract, bad faith, unfair and
deceptive trade practices, and for declaratory judgment that Penn National has a duty to indemnify
and defend. As Penn National has no duty to defend, there has been no breach of contract, bad
faith, or unfair and deceptive trade practice by Penn National to date. Beach Mart has provided
no authority which would suggest that, where there is no duty to defend, there can be bad faith in
the handling of an insured's claim. See, e.g., Old Republic Ins. Co. v. Horn, No. 1:08CV402, 2010
WL 3608323, at *5 n.4 (M.D.N.C. Sept. 8, 2010) ("since there is no coverage, there can be no bad
faith in the claims handling."). As the determination of Penn National's duty to indemnify is not
ripe, nor are any counterclaims arising out of any actions related to Penn National's
indemnification.
CONCLUSION
For the foregoing reasons, Penn National's motion for judgment on the pleadings on its
claims as well as Beach Mart's counterclaims [DE 46] is GRANTED IN PART and DENIED IN
PART. Penn National is entitled to judgment in its favor on its duty to defend and on Beach Mart's
counterclaims arising out of a duty to defend. Penn National's claim for declaratory judgment as

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to its duty to indemnify and Beach Mart's counterclaims arising out of Penn National's duty to
indemnify are not ripe and are DISMISSED WITHOUT PREJUDICE. The joint motion for
clarification [DE 42] is DENIED AS MOOT.
The clerk is DIRECTED to enter judgment accordingly and close the file.

SO ORDERED, this~ day of March, 2018.

~Ewt1¥
UNITED STATES DISTRICT JUDGE

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