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INSURANCE NOTES

Insurer Has No Duty To Defend Against Third Party Action Alleging Theft Of Trade Secrets (We Do Graphics v. Mercury Casualty Co.)

01.03.2005
Stratacom filed suit against We Do Graphics, Inc. ("WDG") and Jakovich, an employee of WDG and former employee of Stratacom, asserting numerous causes of action including misappropriation of trade secrets. Stratacom alleged that, after it received notice of Jakovich's resignation, it discovered customer files missing, and that Jakovich, who then became an employee of WDG, solicited business from Stratacom's customers for WDG's benefit.

WDG tendered the defense of Stratacom's actions to Mercury Casualty Company ("Mercury"), which had issued a business liability policy including coverage for advertising injury. According to the policy, the insurance applied to "'[a]dvertising injury' caused by an offense committed in the course of advertising your goods, products or services" and that "'[a]dvertising injury' means injury arising out of . . . (a) [o]ral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services; (b) [o]ral or written publication of material that violates a person's right of privacy; (c) [m]isappropriation of advertising idea or style of doing business; or (d) [i]nfringement of copyright, title or slogan."

Mercury denied coverage. After prevailing against Stratacom, WDG sued Mercury for breach of contact, bad faith, and fraud. The trial court sustained Mercury's demurrer to the fraud cause of action and granted summary judgment on the breach of contract and bad faith claims. WDG appealed the trial court's decision to grant summary judgment.

The Court of Appeal held that, where a third party action involves a defecting employee who allegedly stole trade secrets and attempted to solicit his or her former employer's customers, the advertising injury provision in business liability policy does not provide coverage.

The appellate court found that the trade secrets Jakovich allegedly took were customer information, not advertising ideas. The court also noted that, contrary to WDG's assertions in the bad faith action, there were no allegations in the underlying action of Jakovich having any input into WDG's marketing and advertising strategies. Thus, there was no basis for finding that Jakovich stole marketing techniques in advertising.

Similarly, the underlying complaint did not contain any allegations of libel, slander, or other false statements of fact in connection with Jakovich's customer solicitation. Consequently, the court concluded that the underlying complaint did not contain any facts relating to an advertising injury, and Mercury properly denied a defense and indemnity to WDG. This case is important because it provides a good example of common business disputes that fall outside the scope of coverage under the standard advertising injury liability clause.

 

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