St. Paul Fire and Marine Insurance Company v. Giganews, Inc. et al
Filing
45
ORDER GRANTING 28 Motion for Summary Judgment; DENYING 37 Cross-Motion for Summary Judgment and Response. Signed by Judge Sam Sparks. (ml)
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IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
ST. PAUL FIRE AND MARINE INSURANCE
COMPANY,
Plaintiff,
Case No. A-15-CA-89-SS
-vs-
GIGANEWS, INC. and LI VE WIRE SERVICES,
INC.,
Defendants.
ORDER
BE IT REMEMBERED on this day the Court reviewed the file in the above-styled cause, and
specifically Plaintiff St. Paul Fire and Marine Insurance Company's Motion for Summary Judgment
[#28]; Defendants Giganews, Inc. and Livewire Services, Inc.'s Cross-Motion for Summary
Judgment and Response [#3 7] thereto; Plaintiffs Reply in Support of its Motion for Summary
Judgment and Response [#43] thereto; and Defendants' Reply in Support of their Cross-Motion for
Summary Judgment [#44]. Having reviewed the documents, the governing law, and the file as a
whole, the Court now enters the following opinion and orders.
Background
This is an insurance coverage dispute between Plaintiff St. Paul Fire and Marine Insurance
Company and its insureds, Defendants Giganews, Inc. and Livewire Services, Inc. The dispute arises
out of copyright claims asserted by Perfect 10, Inc., an adult entertainment company, in an
underlying lawsuit filed in California federal court (the Underlying Suit). St. Paul seeks a judicial
declaration it had no contractual duty to defend Defendants in the Underlying Suit pursuant to a
/
commercial general liability policy issued by St. Paul (the Policy). Defendants believe they were
entitled to a defense, and have filed a counterclaim for breach of contract, violations of the Texas
Insurance Code, and breach of the duty of good faith and fair dealing, and seeking reasonable
attorney's fees. The case is now before the Court on cross-motions for summary judgment. For the
following reasons, the Court finds summary judgment is due to be granted in favor of St. Paul as to
all claims.
Background
I.
The Underlying Lawsuit
On March 28, 2011, Perfect 10 filed the Underlying Suit, styled Perfect 10 Inc.
Inc., Livewire Services, Inc.
and Does
1
v.
Giganews,
through 100, in the United States District Court for the
Southern District of California. The case was subsequently transferred to the United States District
Court for the Central District of California. The original complaint asserted claims for copyright
infringement, trademark infringement, trademark dilution, unfair competition, and violations of
rights of publicity. See Compl. [#1] (Underlying Compi.), Perfect 10 Inc.
v.
Giganews, Inc. et al.,
2:1 1-cv-07098-AB-JPR (C.D. Cal. filed Mar. 28, 2011) (Underlying Suit). On March 26, 2013,
Perfect 10 filed an amended complaint, which asserted only claims for copyright infringement. First
Am. Compl. [#10 1] (Am. Underlying Compi.), Underlying Suit. The Underlying Complaint and
Amended Underlying Complaint are based on the same facts and can be summarized as follows.'
While the factual allegations in each complaint are similar, under Texas law, the insurer's duty to defend is
determined "by examining the latest, and only the latest, amended pleadings." Rhodes v. Chicago. Ins. Co., 719 F.2d
116, 119 (5th Cir. 1983) (interpreting Texas law); see also John Deere Ins. Co v. Truckin' USA., 122 F.3d 270, 273
n. 1 (5th Cir. 1997). Consequently, the Court will recite the relevant facts based on allegations contained in the
Underlying Amended Complaint.
1
-2-
Giganews is a USENET service provider that owns and operates the websites giganews.com
and supernews.com.2 Giganews sells internet users monthly subscription access to electronic media
stored on USENET servers. Id. ¶J 5,23-32. Giganews owns and operates various USENET servers,
which store electronic content uploaded by USENET users. Id. ¶ 26. Livewire is also a USENET
service provider, but does not own any of its own USENET servers. Instead, Livewire contracts with
Giganews for USENET content, which it then sells to its customers for a monthly fee. Id.
¶IJ
6, 59.
According to their Digital Millennium Copyright Act (DMCA) filings, Defendants' operations are
located in Austin, Texas. Id. ¶ 7. Giganews' USENET servers are also located in Austin. Id. ¶ 8.
Perfect 10 Inc. is an adult entertainment company. Id. ¶ 4, 13-17. Perfect 10 produces,
markets, and sells adult entertainment products, including photographs, magazines, videos, and other
merchandise, and owns thousands of copyrighted photographs, videos, and other materials. Id.
¶J
4, 13, 18. Perfect 10 also owns and operates the website perfectlO.com. Id. ¶ 16. Perfect 10 sells
access to copyrighted content on this website for a membership fee of $25.50 per month and Perfect
10's revenues are predominantly derived from this source. Id.
¶J
16-17. Perfect 10 invests
substantial sums of money, time, effort, and talent to produce its copyrighted adult entertainment
products, and the success of Perfect 10's business is almost entirely dependent on its intellectual
property rights. Id.
¶J 18,
22.
2
USENET is a worldwide system of online discussion boards known as "newsgroups." Each newsgroup
provides an online platform for people with similar interests to communicate. Users can also post electronic files
containing electronic media directly to a "newsgroup." These files, known as "articles," can then be downloaded and
viewed using special browsing software. See, e.g. Seflon v. Jew, 201 F. Supp. 2d 730, 737 n.3 (W.D. Tex. 2001);
Playboy Enters., inc. v. Webbworld, Inc., 991 F. Supp. 543, 549 (N.D. Tex. 1997).
Perfect 10 also alleges it is the "owner of the valuable and well-known Perfect 10 family of trademarks,
including but not limited to PERFECT 10, PERFECT1O.COM, and PlO," which "are used in commerce by Perfect 10
on and in connection with the sale of its products and services, including PERFECT 10 magazine and perfect 1 0.com."
Id. ¶ 19. Perfect 10 claims it "has spent millions of dollars advertising and promoting the Perfect 10 Marks and the
Perfect 10 products and services bearing these marks" and "has built and owns the valuable goodwill symbolized by the
-3-
Perfect 10 alleges "Giganews has at least 10,000,000 customers" to whom it "sells access to
at least 9,000,000,000,000,000 bytes (9,000 trillion bytes) of stolen movies, songs, computer
software, images, and other material..
., [including] virtually every major popular movie, popular
song, popular software program, and image ever created, for anywhere from $4.99 per month up to
$34.99 a month, depending on the amount of material desired by the user and the speed of delivery."
Id.
¶IJ
5, 24. Livewire' s service apparently operates in a substantially similar way, selling the
material it receives from Giganews to subscribers at different prices, depending upon usage. Id. ¶ 59.
In exchange for this payment, Giganews provides its customers with a username and password,
which can be used to log in to the USENET via a newsreader/browser program such as Giganews's
proprietary "Mimo" browser. Id. ¶ 27. Once logged in, customers can use the newsreader's search
functions to locate and view specific media on the USENET servers. Id.
¶J
24, 29-32. Using these
search functions, Giganews and Livewire customers can download and view a massive amount of
Perfect 10 copyrighted materials, including but not limited to all of the material Perfect 10 publishes
on its website in a given year or complete versions of Perfect 10 magazines. Id. ¶J 30, 31.
In this way, Perfect 10 alleges Defendants knowingly reproduce and publicly display
thousands of Perfect 10 copyrighted images, which Giganews stores on its servers and offers to its
customers. Id. ¶ 33. Perfect 10 claims Defendants have caused and induced the unauthorized
copying, reproduction, public display, distribution, and sale of more than 267,000 Perfect 10
copyrighted materials without its consent. Id. ¶J 65, 72. According to Perfect 10, while the
USENET may once have contained a significant amount of legal materials, "Defendants' ability to
Perfect 10 Marks." Id.
-4-
generate monthly subscriptions and revenues is based almost exclusively on the demand for pirated
copyrighted works." Id. ¶ 55.
On November 14,2014, summaryjudgment was entered in favor of Giganews and Livewire
on Perfect 10's copyright claims. See Nov. 14, 2014 Order [#619], Underlying Suit; Nov. 14, 2014
Order [#620], Underlying Suit. These decisions are currently on appeal to the Ninth Circuit.
II.
The Policy
Defendants are both named insureds under the Policy, which was issued by St. Paul and
covered the one-year term from March 15, 2009, to March 15, 2010.
The Policy provides
commercial general liability coverage with $2 million in aggregate policy limits and umbrella excess
commercial general liability coverage with $5 million in limits. P1.'s Mot. Summ. J. [#28-4] Ex. A-i
(the Policy) at 100, 215. Pursuant to the Policy terms, St. Paul has a duty to defend against a claim
or suit for covered injury or damage. See id. at 105. The Policy provisions relevant to coverage are
as follows:
What This Agreement Covers
Advertising injury liability. We'll pay amounts any protected person is legally
required to pay as damages for covered advertising injury that:
results from the advertising of your products, your work, or your completed
work; and
is caused by an advertising injury offense committed while this agreement is
in effect.
Advertising injury means injury, other than bodily injury or personal injury, that's
caused by an advertising injury offense.
Advertising injury offense means any of the following offenses:...
Unauthorized use of any advertising material, or any slogan or title, of others
in your advertising.
Advertising means attracting the attention of others by any means for the purpose of:
seeking customers or supporters; or
-5-
increasing sales or business.
Advertising material means any covered material that:
is subject to copyright law; and
others use and intend to attract attention in their advertising.
Slogan means a phrase that others use and intend to attract attention to their
advertising.
But we won't consider slogan to include a phrase used as, or in, the name of:
any person or organization, other than you;
any business, or any of the premises, products, services, work, or completed work,
of any person or organization other than you.
Title means a name of a literary or artistic work.
Id at 104-05. The Policy also contains the following exclusion:
Intellectual property. We won't cover injury or damage or medical expenses that
result from any actual or alleged infringement or violation of any of the following
rights or laws:
Copyright.
Patent.
Trade dress.
Trade name.
Trade secret.
Trademark.
Other intellectual property rights or laws.
Nor will we cover any other personal injury or advertising injury that's alleged in any
claim or suit which also alleges any such infringement or violation.
But we won't apply this exclusion to bodily injury or property damage that results
from your products or your completed work.
Nor will we apply this exclusion to advertising injury that results from the
unauthorized use of any:
copyrighted advertising material;
trademarked slogan; or
trademarked title;
of others in your advertising.
Id. at 43, 119.
III.
Procedural History
Defendants timely provided notice of the Underlying Suit to St.
Paul.4
In a reservation of
rights letter dated June 16, 2011, St. Paul denied any duty to defend Defendants under the Policy.
Defs.' Cross-Mot. Summ. J. [#37] Ex. 1-6 at 583. Id. On October 4, 2011, Defendants responded
to St. Paul, asserting that the Underlying Lawsuit was covered by the Policy and demanding benefits.
Id. Ex. 1-H at
594-603. According to Defendants, St. Paul did not respond to this letter until
January 14, 2014, when it again sent a letter denying coverage under the Policy. Id. Ex. 1-I at
604-19. St. Paul's basis for denying coverage under the Policy was the same in both denial letters:
there is no coverage under the "advertising injury liability" provision because Perfect 10 did not
allege Defendants used any of Perfect 10's copyrighted advertising materials in Defendants'
advertisingand therefore did not allege a covered "advertising injury," as defined in the policy.
Id. at 616.
On February 2, 2015, St. Paul filed the instant action seeking a declaration it had no duty to
defend Defendants in the Underlying Suit.
See Compl.
[#1]. On July 21,2015, Defendants filed an
answer alleging St. Paul wrongfully denied their claim for coverage and asserting counterclaims
against St. Paul for breach of contract, breach of the duties of good faith and fair dealing, violations
'
Defendants also tendered the Underlying Suit to Travelers Lloyds Insurance Company and AIG. Travelers
Lloyds and St. Paul are wholly owned subsidiaries of The Travelers Companies. Based on allegations in the Underlying
Lawsuit, Travelers Lloyds agreed to defend Defendants pursuant to a Cyber First Communications and Media Liability
Form policy, which had a $50,000 deductible and $1,000,000 limit. See Pl.'s Mot. Sunim. J. [#28-13] Ex. 0 at 520.
Similarly, AIG agreed to defend Defendants pursuant to an Internet Media Liability Insurance Module, which also had
a $1,000,000 deductible. Id. [#28-1] Ex. A at 3. The parties represent Defendants have spent approximately $8,000,000
litigating the Underlying Suit and have exhausted the policy limits under both the Travelers Lloyds and AIG policies.
See Defs.' Cross-Mot. Sunim. J. [#37] at 10.
St. Paul also denied coverage under the Policy's "bodily injury," "property damage," and "personal injury"
coverage agreements. See Defs.' Cross-Mot. Summ. J. [#37] Ex. 1-I at 616. These coverage provisions are not at issue
in this suit.
-7-
of Chapters 541 and 542 of the Texas Insurance Code, and attorney's fees. See Answer [#6]. On
March 13, 2016, St. Paul filed its motion for summary judgment as to all claims. See P1.'s Mot.
Summ. J. [#28]. On March 11, 2016, Defendants filed a response to St. Paul's motion and also
moved for summary judgment as to all claims. See Defs.' Cross-Mot. Summ. J. [#37]. The cross-
motions are fully briefed and ripe for consideration.
Analysis
I.
Summary JudgmentLegal Standard
Summary judgment shall be rendered when the pleadings, the discovery and disclosure
materials on file, and any affidavits show that there is no genuine dispute as to any material fact and
that the moving party is entitled to judgment as a matter of law.
v.
FED. R. Civ. P.
56(a); Celotex Corp.
Catrett, 477 U.S. 317, 323-25 (1986); Washburn v. Harvey, 504 F.3d 505, 508 (5th Cir. 2007).
A dispute regarding a material fact is "genuine" if the evidence is such that a reasonable jury could
return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,248
(1986). When ruling on a motion for summary judgment, the court is required to view all inferences
drawn from the factual record in the light most favorable to the nonmoving party. Matsushita Elec,
Indus. Co.
v.
Zenith Radio, 475 U.S. 574, 587 (1986); Washburn, 504 F.3d at 508. Further, a court
"may not make credibility determinations or weigh the evidence" in ruling on a motion for summary
judgment. Reeves
v.
Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000); Anderson, 477
U.S. at 254-55.
Once the moving party has made an initial showing that there is no evidence to support the
nonmoving party's case, the party opposing the motion must come forward with competent summary
judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586. Mere
-8-
conclusory allegations are not competent summary judgment evidence, and thus are insufficient to
defeat a motion for summary judgment Turner
v.
Baylor Richardson Med. Ctr., 476 F.3d 337, 343
(5th Cir. 2007). Unsubstantiated assertions, improbable inferences, and unsupported speculation are
not competent summary judgment evidence. Id. The party opposing summary judgment is required
to identify specific evidence in the record and to articulate the precise manner in which that evidence
supports his claim. Adams
v.
Travelers Indem. Co. of Conn., 465 F.3d 156, 164 (5th Cir. 2006).
Rule 56 does not impose a duty on the court to "sift through the record in search of evidence" to
support the nonmovant's opposition to the motion for summary judgment. Id. "Only disputes over
facts that might affect the outcome of the suit under the governing laws will properly preclude the
entry of summary judgment." Anderson, 477 U.S. at 248. Disputed fact issues that are "irrelevant
and unnecessary" will not be considered by a court in ruling on a summary judgment motion. Id.
If the nonmoving party fails to make a showing sufficient to establish the existence of an element
essential to its case and on which it will bear the burden of proof at trial, summary judgment must
be granted. Celotex, 477 U.S. at 322-23.
II.
Insurance Policy Interpretation and the Eight-Corners Rule
"Under Texas law, insurance policies are construed as are contracts generally, and must be
interpreted to effectuate the intent of the parties at the time the contracts were formed." Gulf Chem.
& Metallurgical Corp. v. Associated Metals & Minerals Corp.,
1
F.3d 365,369(5th Cir. 1993). "To
determine an insurer's duty to defend, Texas courts follow the 'eight corners' rule." CU Lloyd's of
Tex. v.
Main Street Homes, Inc., 79 S.W.3d 687,692 (Tex.
Union Fire Ins. Co.
v.
App.Austin 2002, no pet.) (citing Nat '1
Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997)). Applying
the eight-corners rule, a court must "consider only the allegations in the underlying complaint and
the terms ofthe insurance policy to determine whether a duty to defend exists, giving the allegations
in the petition a liberal interpretation and resolving any doubt in favor of the insured." Id. If the
underlying petition does not allege facts that are potentially within the policy's coverage, then the
insurer has no duty to defend. GuideOne Elite Ins. Co.
305, 310 (Tex.
v.
Fielder Rd. Baptist Church, 197 S.W.3d
2006).6
III.
Application
A.
Did the Amended Underlying Complaint Allege Defendants Used Perfect 10's
Advertising Material in its "Advertising"?
Applying the eight-corners rule, the Court must compare the Amended Underlying Complaint
to the Policy and determine whether Perfect 10 alleged facts that are potentially within the Policy's
coverage. It is undisputed the "intellectual property" exclusion bars coverage for damages arising
from Perfect 10's copyright infringement claims unless such claims fall within the exception for
61n an extended footnote, Defendants ask the Court to look outside the eight corners of the underlying pleadings
and the policy by considering subsequent motions, court orders, and other documents filed in the Underlying Suit, which
they argue "further reinforce and confirm" St. Paul's duty to defend. See Defs.' Mot. Summ. J. [#37] at 12 n.5. First,
Defendants argue the eight-corners standard is governed by California law, which requires the Court to consider extrinsic
evidence if such evidence shows a potential for coverage. The court disagrees; Texas law applies to this dispute.
Although the Underlying Suit was filed in California, the Policywhich consists of Texas formswas issued through
a Texas agent to Texas insureds, and insures risks nationwide. Applying Texas's choice-of-law rules, which compare
the relationships between the instant dispute and each state, it is readily apparent this dispute is more closely related to
Texas than to California. See Reddy Ice Corp. v. Travelers Lloyds Ins. Co., 145 S.W.3d 337, 344 (Tex. App.Houston
[14th Dist.] 2004, pet. denied) (where policies "provide nationwide coverage, the place of contracting, the place of
negotiation, the domicile, residence, nationality, place of incorporation, and place of business of the parties become the
primary factors to determine which law applies"). The Court refuses to consider extrinsic evidence on the basis of
California law. Second, applying Texas law, Defendants point to a "very narrow exception, permitting the use of
extrinsic evidence" when, among other things, "it is initially impossible to discern whether coverage is potentially
implicated." See, e.g., GuideOne Mut. Ins. Co. v. Grace Christian Ctr. of Killeen, Texas, Inc.,
2015 WL
9839704, at *3 (W.D. Tex. 2015). However, Defendants admit the pleadings "already make clear" whether coverage
is implicated and instead seek the consideration of extrinsic evidence for the purpose of "reinforcing" or "confirming"
what can already be discerned from the pleadings. See Defs.' Mot. Summ. J. [#37] at 12 n.5; id. ("[T}he allegations in
the pleadings, by themselves, bring the [Underlying Lawsuit] within the ambit of coverage" (emphasis added)). This is
not an appropriate application ofthe exception. Finally, even the Court were to consider the extrinsic evidence put forth
by Defendants, it would not alter the outcome of this coverage suit as the materials do not contain material information
not already alleged in the underlying pleadings. Consequently, the Court refuses to stray from the eight corners of the
underlying pleadings and the Policy to reach its decision.
F.3d,
!DI
"advertising injury that results from the unauthorized use of any: copyrighted advertising material;
trademarked slogan; or trademarked title; of [Perfect 10's] in [Defendants'] advertising."
See Policy
at 43, 119. The sole issue is whether the Amended Underlying Complaint alleged Defendants used
any of Perfect 10's copyrighted materials in Defendants' "advertising."
Construing the allegations in the Amended Underlying Complaint liberally and in favor of
coverage, as the Court is obligated to do, the Court finds no allegations Defendants used any of
Perfect 10's copyrighted advertising materials, slogan, or title in Defendants' own "advertising."
Indeed, the underlying pleadings contain no accusations relating to the content of Defendants'
advertising, let alone any allegations Defendants' advertisements contained materials that infringed
Perfect 10's copyrights.7 Additionally, there are no allegations Defendants publicized, marketed, or
promoted their businesses using any unauthorized reproductions of Perfect 10's copyrighted
materials or otherwise solicited business using Perfect 10's content. Rather, Perfect 10 alleges
Defendants reproduced and displayed Perfect 10's copyrighted images on its users' computer screens
after
its users had already purchased a subscription, downloaded a newsreader application, entered
a username and password, and performed a keyword search for Perfect 10 content. These factual
accusations do not state a claim for a covered advertising injury, as defined by the Policy.
Defendants acknowledge the underlying pleadings do not expressly accuse them of using
Perfect 10's copyrighted advertising materials in their advertising. However, Defendants claim St.
Paul skirted its contractual duty to defend because the underlying pleadings, construed liberally and
While the Underlying Complaint alleged Giganews "has various advertising operations," the Amended
Underlying Complaint omits this allegation and does not mention Defendants' "advertising operations" or otherwise
include the word "advertising" with reference to Defendants. Compare Underlying Compl. ¶ 5 with Am. Underlying
Compl. ¶ 5. Even if the amended underlying pleadings had retained the reference to Defendants' "advertising
operations," the Court still finds the allegations insufficient to state a covered "advertising injury."
-11-
in favor of coverage, at least potentially state a cause of action for a covered advertising injury. See,
e.g., St. Paul Fire & Marine Ins. Co.
v.
Green Tree Fin. Corp.Tex., 249 F.3d 389, 391-93 (5th Cir.
2001). Defendants base this argument on the broad Policy definition of the term "advertising,"
which means "attracting the attention of others by any means for the purpose of: seeking customers
or supporters; or increasing sales or business." Policy at 105. According to Defendants, the use of
Perfect 10's copyrighted content constituted "advertising" because the images were "publicly
displayed" or "offered" as a means of attracting (1) prospective customers to purchase new monthly
subscriptions, or (2) current customers to purchase more expensive subscriptions.
The Court is not persuaded. Defendants' argument rests on the faulty premise the word
"display" is synonymous with the word "attract." While "attract" is not defined in the Policy, the
Oxford English Dictionary defines the term to mean "{t]o cause to come to a place or join in a
venture by offering something of interest or
advantage."8
Reading the underlying pleadings as a
whole, Perfect 10 alleges Defendants "displayed" or "offered" the images to its customers after they
paid for a subscription and after the customers affirmatively chose to search for the offending
images. Thus, by the time the images were "displayed" or "offered," the users' attention had already
been attracted to Defendants' services. The alleged "public display" of Perfect 10 copyrighted
images was not used as a tool to induce prospective customers "to come to" or "join in" Defendants
businessthe images were merely the product or service the customer had already purchased.
Similar logic applies to Defendants' argument the use of Perfect 10's copyrighted content
constituted "advertising" because the images were "publicly displayed" or "offered" as a means of
8
Attract, v., OEDONLINE, June 2016, http://www.oed.com/view/Entry/1 2902?rskerXGruZZ&result=2&is
Advanced=false#eid.
-12-
attracting current customers to purchase more expensive subscriptions. Again, the alleged "display"
of Perfect 10's copyrighted images was the product or service a customer had contracted to receive
in return for a monthly subscription fee, and there are no allegations the images caused current
customers "to come to" or "join in" enhanced subscription services. Absent some allegation tying
the copyrighted images to a solicitation for current customers to purchase additional services, the
Court refuses to find the alleged "display" of Perfect 10's content took place in Defendants'
"advertising." To find otherwise would transform the goods and services a customer purchases into
"advertising" for future purchases, thereby converting an excluded claim for copyright infringement
into a covered "advertising injury."9 This was beyond the intent of the contracting parties.
Defendants also cite to Mid-Continent Cas. Co v. Kipp Flores Architects, LLC, 602 F. App'x
985, 992 (5th Cir. 2015), to support their position. In Kipp Flores, judgment was entered in favor
of an architectural firm after ajury found a homebuilder built several hundred homes using the firm's
copyrighted designs without permission. The Fifth Circuit concluded the homes qualified as
"advertisements" under the CGL policy, and thus the alleged infringement of the designs occurred
in Defendants' "advertising" for purposes of triggering "advertising injury" coverage. However,
unlike in this case, it was "undisputed that [the homebuilder's] primary means of marketing its
construction business was through the use of the homes themselves,.
. .
all of which were marketed
to the general public." Id. In contrast to the homes in Kipp Flores, there are no allegations
Tangentially, Defendants argue the infringement occurred in their advertising because Perfect 10 alleges
current and prospective subscribers are drawn to subscribe exclusively based on the availability of pirated copyrighted
works, including Perfect 10's advertising materials. See Am. Underlying Compl. ¶ 55 ("Defendants' ability to generate
monthly subscriptions and revenues is based almost exclusively on the demand for pirated copyrighted works."). This
argument fails for two reasons. First, allegations customers were drawn to subscribe to Giganews or Livewire are not
specific to Perfect 10 but rather to "pirated copyrighted works" generally. Second, there are no allegations of the source
of consumers' knowledge that Perfect 10 content can be accessed through Defendants' service. It is the source of
knowledge that could potentially qualify as "advertising" under the Policy definition of the term, not the availability of
the material itself.
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Defendants marketed their respective businesses to the general public, or to current customers,
through the unauthorized use of Perfect 10's copyrighted images.'° Rather, the images were
displayed after a user purchased a subscription and chose to conduct a search for Perfect 10 content.
Again, these allegations do not state a claim for a covered "advertising injury." Accord Gemmy
Indus. Corp v. Alliance Gen. Ins. Co., 190 F. Supp. 2d 915, 919 (N.D. Tex. 1998) (finding claims
for trade dress infringement related to the sale of knock-off novelty items covered "advertising
activity" because "it was clear that plaintiff was sued for using this trade dress to 'call public
attention' to its product"); Bay Elec. Supply, Inc.
v.
Travelers Lloyds Ins. Co., 61 F. Supp. 2d 611,
619 (S.D. Tex. 1999) (concluding claims for trade dress or trademark infringement constituted
"advertising activity" based on allegations of "importation, marketing and/or sale of circuit breakers
bearing the infringing reproduction{s]
.
.
.
and/or which bear or are packaged with infringing
reproductions").
Finally, in a last-ditch effort to recoup the cost of defending the Underlying Suit, Defendants
argue the Policy's definition of the term "advertising" is ambiguous and thus the Policy must be
construed in favor of coverage. The Court disagrees. A provision is only ambiguous where the
language is subject to more than one reasonable interpretation, not merely where, as here, the parties
advance conflicting policy interpretations. See, e.g, Kipp Flores, 602 F. App'x at 989. Defendants
do not offer any alternative constructions of the Policy term "advertising," and the Court finds their
10
Defendants also argue the phrase "public display" refers to the "dissemination of the images to the general
public," and not just to Defendants subscribers. Again, this argument ignores other allegations that the images were
displayed only after a user purchased Defendants' subscription services. See, e.g., Underlying Am. Compi. ¶ 23-32.
There are no allegations suggesting Perfect 10's images were "open to general observation, view, or knowledge." Public,
n., OEDONUNE, June2016, http://www.oed.comlview/Entiy/1 54052?rsker25TQHE&result=1&isAdvanced=false#eid.
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interpretation of what falls within the scope of the term is not reasonable. The Court refuses to find
St. Paul owed Defendants a duty to defend on this basis.
Even giving the Amended Underlying Complaint its most liberal interpretation, and defying
the limits of common sense, there are simply no references to Defendants' advertising activities, let
alone any allegation Defendants used Perfect 10's copyrighted advertising materials, title, or slogan
in Defendants' own advertising. There are no allegations Defendants publicized the availability of
Perfect 10 materials to attract or draw in prospective or current customers, provided samples of
Perfect 10 content in any business solicitations, displayed Perfect 10 images to the general public
on any of their webpages, or used Perfect 10's advertising material, title, or slogan in any of its
promotional or marking materials.
Consequently, because there are no allegations that can
reasonably be read to allege Defendants' use of Perfect 10's materials in its advertising, the Court
finds the Amended Underlying Complaint does not even potentially state a covered "advertising
injury" claim. Summary judgment is thus due to be granted in St. Paul's
B.
favor.'1
Defendants' Counterclaims
Under Texas law, "there can be no claim for bad faith when an insurer has promptly denied
a claim that is in fact not covered." Republic Ins. Co.
v.
Stoker, 903 S.W.2d 338, 341 (Tex. 1995).
The two exceptions to this rule are where an insurer "commit[s] some act, so extreme, that would
cause injury independent of the policy claim" or fails "to timely investigate its insured's claims."
Id.
'
Having found the Amended Underlying Complaint did not potentially state a claim for a covered "advertising
injury," the Court need not reach the issue of whether there is a causal connection between the injury and the "advertising
activity." See Kipp Flores, 602 F. App'x at 991 (noting the district court's test for determining whether a policy covers
"advertising injury" includes inquiry into the causal nexus between the alleged injury and alleged "advertising activity").
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St. Paul argues Defendants' extra-contractual counterclaims must be dismissed because it
Defendants' claim was not covered, and thus it owed Defendants no contractual duty to defend. In
response, Defendants argue St. Paul did not timely investigate their claims, and that such failure
constituted an act, so extreme, that caused injury independent of the policy claim because it led to
their inability to settle the Underlying Suit in 2014.
Viewed in the light most favorable to Defendants, Defendants have produced no evidence
of an extreme act that caused injury independent of the policy claim. In reaching this conclusion,
the Court notes the Fifth Circuit's recent observation that "[t]he Stoker language has frequently been
discussed, but in seventeen years since the decision appeared, no Texas court has yet held that
recovery is available for an insurer's extreme act, causing injury independent of the policy claim."
See Mid-Continent Cas. Co.
v.
Eland Energy, Inc., 709 F.3d 515, 521-22 (5th Cir. 2013). First,
Defendants provide no evidence or argument substantiating their claim St. Paul's investigation was
"untimely," and the summary judgment evidence before the Court suggests otherwise. Indeed,
Defendants tendered the Underlying Suit to St. Paul on May 13,2011, and received a response from
St. Paul outlining its coverage
positionwhich included an agreement to provide a defense under
a related policyon June 16,2011. Second, even assuming Defendants had presented evidence the
investigation was insufficient in some regard, they have presented no evidence of any injury
independent of the policy claim. Consequently, summary judgment is due to be granted in favor of
St. Paul with respect to Defendants' counterclaims.
Conclusion
The Court concludes the Amended Underlying Complaint does not allege any unauthorized
use of Perfect 10's copyrighted advertising materials, slogan, or title in Defendants' advertising.
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Because the underlying pleadings did not state factual allegations potentially falling within the scope
of a covered "advertising injury," St. Paul did not have a contractual duty to defend Defendants in
the Underlying Suit, and summary judgment is due to be granted in their favor as to each claim.
Accordingly,
IT IS ORDERED that Plaintiff St. Paul Fire and Marine Insurance Company's
Motion for Summary Judgment [#28] is GRANTED;
IT IS FURTHER ORDERED that Defendants Giganews, Inc. and Livewire Services,
Inc.'s Cross-Motion for Summary Judgment and Response [#37] is DENIED;
IT IS FINALLY ORDERED that St. Paul Fire and Marine Insurance Company was
not contractually obligated to defend Defendants Giganews, Inc. and Livewire Services, Inc.
in Perfect 10 Inc.
v.
Giganews,
Inc. et al.,
2:11 -cv-07098-AB-JPR (C.D. Cal. filed Mar. 28,
2011).
SIGNED this the
/7ay of June 2016.
(I
SAM SPARKS
UNITED STATES DISTRICT JUDGE
89 msj ord mns.wpd
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