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February 2022: Pennsylvania - Commercial General Liability Coverage - Advertising Injury Claim

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The Third Circuit in Vitamin Energy, LLC v. Evanston Ins. Co. (3d Cir. Jan. 5, 2022) found a commercial general liability insurer owed its insured, Vitamin Energy, LLC, a defense on the grounds that an underlying complaint filed by 5-hour Energy against Vitamin Energy stated “Advertising Injury” that was not otherwise excluded from coverage.

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Vitamin Energy allegedly ran an advertisement campaign in which it favorably compared its products to competing products like “5-hour Energy liquid energy shots.” Vitamin Energy’s advertisements also allegedly promised “steroid-like performance without the accompanying risks.” The company that owns the 5-hour Energy brand then sued Vitamin Energy for “false and misleading comparative advertising,” as well as trademark infringement, false designation of origin, and trademark dilution.

Vitamin Energy sought commercial general liability coverage from its insurer, Evanston Insurance Company, in relation to 5-hour Energy’s suit. Evanston disclaimed, contending that the underlying suit did not involve “Advertising Injury” under the relevant policy. Vitamin energy then sued Evanston in the Pennsylvania Court of Common Pleas in a complaint that included counts for declaratory judgment, breach of contract, and bad faith denial of coverage. Evanston removed the matter to District Court for the Eastern District of Pennsylvania, which decided in favor of the insurer.

The Parties’ Arguments

Vitamin Energy appealed the District Court’s decision. It argued before the Third Circuit that the allegations of the 5-hour Energy suit amounted to “Advertising Injury” because they disparaged 5-hour Energy’s products. In particular, Vitamin Energy focused on statements from the underlying complaint that claimed Vitamin Energy’s advertisements left the “false and/or misleading impression” that Vitamin Energy’s products were superior to 5-hour Energy’s.

Evanston responded that the underlying complaint referred only to Vitamin Energy’s allegedly false and misleading advertisements regarding its own products. Evanston contended that such allegations do not equate to “Advertising Injury” under the policy. The insurer also argued that coverage is obviated by operation of its policy’s intellectual property exclusion, incorrect description exclusion, failure to conform exclusion, and two knowing injury exclusions.  

The Third Circuit’s Decision

The Third Circuit first examined the meaning of “Advertising Injury” under the Evanston coverage. It set forth that the policy defined that term to mean injury:

arising out of oral or written publication of material that libels or slanders … a person’s or organization’s products, goods or operations or other defamatory or disparaging material, occurring in the course of the Named Insured’s Advertisement.

The parties agreed that the term “disparaging material” referred, at a minimum, to “an injurious false statement about another’s goods.”

The opinion then found that the underlying complaint’s allegations “are best read as saying not only that Vitamin Energy’s own products contain 100% of the daily recommended value of vitamin B, but also that 5-hour Energy’s products do not.” It reasoned that these advertising statements made allegedly false claims about 5-hour Energy’s products, not just about Vitamin Energy’s, and so qualified as “disparaging material” capable of triggering the Evanston policy’s duty to defend.

The opinion then turned to Evanston’s arguments based on policy exclusions. The Third Circuit rejected the intellectual property exclusion first. It reasoned that although that provision potentially applied to the underlying trademark infringement cause of action, 5-hour Energy’s complaint contained other allegations that were not affected by the intellectual property exclusion. The opinion used similar reasoning in rejecting the application of the incorrect description and failure to conform exclusions, since these exclusions held potential applicability to Vitamin Energy’s allegedly false statements about its own products but not to statements about third party products like 5-hour Energy drinks.

Finally, the Third Circuit found that two knowing injury exclusions to the Evanston policy did not apply. These exclusions barred coverage for:

[A]ny Claim based upon or arising out of Personal Injury or Advertising Injury caused by or at the direction of the Insured with the knowledge that the act would violate the rights of another and would inflict Personal Injury or Advertising Injury; [or]

[A]ny Claim based upon or arising out of Personal Injury or Advertising Injury arising out of the oral or written publication of material, if done by or at the direction of the Insured with the knowledge of its falsity[.]

Evanston, in arguing that these exclusions defeated its defense obligation, focused on underlying allegations that Vitamin Energy “infringed on 5-hour Energy’s trademarks with actual knowledge that it was doing so.” But the opinion concluded that these exclusions did not remove coverage for certain other underlying accusations, including Vitamin Energy’s allegedly false and misleading characterization of 5-hour Energy products’ vitamin contents.

Conclusion

The Third Circuit’s opinion made clear that its conclusions do not “signal how the coverage dispute here should ultimately be decided.” It further noted that its decision was limited to a finding that Evanston owed Vitamin Energy a duty to defend in relation to 5-hour Energy’s suit. In essence, then, the Vitamin Energy opinion provides a case study in how courts may apply Pennsylvania law regarding the duty to defend.

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