Autodistributors, Inc. v. Nationwide E&S Specialty

Background

This insurance-coverage dispute concerned whether Scottsdale Insurance Company had a duty to defend Autodistributors, Inc. and Steven M. Schneider in an underlying federal lawsuit in Florida. Autodistributors had entered into a franchise agreement with Sixt Franchise USA, LLC that allowed it to use Sixt’s trademarks and service marks for a car-rental business. After the relationship deteriorated, Sixt sued Autodistributors and Schneider, alleging trademark infringement and breach of the franchise agreement based on their use of Sixt’s marks in connection with a used-car business.

Scottsdale issued Autodistributors a commercial general liability policy covering July 1, 2018, through July 1, 2019. The policy covered certain “personal and advertising injury,” including use of another’s advertising idea in an advertisement and infringement of another’s copyright, trade dress, or slogan in an advertisement. But the policy excluded personal and advertising injury arising from a breach of contract, with an exception for an implied contract to use another’s advertising idea in an advertisement. It also contained an intellectual-property exclusion with an exception for certain advertising-related infringement.

Autodistributors tendered the defense of the Florida lawsuit to Scottsdale, which denied coverage. After the underlying lawsuit was settled, Autodistributors and Schneider sued Scottsdale, National Casualty Company, Nationwide E&S Specialty, and Scottsdale Indemnity Company, alleging that the defendants failed to defend and indemnify them. The parties filed cross-motions concerning the duty to defend.

Court’s analysis

The court considered defendants’ motion under Federal Rule of Civil Procedure 12(c), which permits judgment on the pleadings when, accepting the pleaded facts as true, the moving party is entitled to judgment as a matter of law. Under California law, an insurer generally must defend when the underlying complaint alleges liability potentially covered by the policy or could be amended to allege covered liability. The insured must first show that the claim falls within the policy’s coverage; the insurer then must prove that an exclusion applies.

The court held that the breach-of-contract exclusion applied. The underlying dispute concerned the franchise agreement’s terms and the parties’ alleged performance and breach. That agreement controlled Autodistributors’ right to use Sixt’s marks, slogans, advertising materials, color scheme, and other intellectual property. The court concluded that potential liability for slogan infringement, trade-dress infringement, and use of another’s advertising idea in an advertisement necessarily arose from the alleged breach of the franchise agreement.

The court rejected the plaintiffs’ argument that the exclusion applied only if the underlying breach-of-contract claim was ultimately meritorious. It also rejected their argument that an implied agreement concerning the use of Sixt’s advertising ideas placed the claims outside the exclusion. The court found that the underlying complaint alleged use of Sixt’s marks outside the scope of the express franchise agreement and did not suggest potential liability based on an implied agreement to use Sixt’s advertising ideas.

Because the court found the breach-of-contract exclusion dispositive, it did not decide the parties’ arguments concerning the policy’s intellectual-property exclusion, whether the underlying complaint otherwise created potential covered liability, or whether the plaintiffs adequately pleaded agency and joint-liability theories. The court also declined to convert defendants’ motion into a motion for partial summary judgment because it found the plaintiffs’ outside evidence irrelevant to the breach-of-contract exclusion.

Disposition

The court granted defendants’ motion for judgment on the pleadings on the basis that Scottsdale did not owe the plaintiffs a duty to defend in the Florida lawsuit. The court terminated as moot plaintiffs’ motion for partial summary judgment, directed the clerk to enter judgment for defendants, and closed the case.