District Court Finds Sale of Knock Off Fendi Products Does Not Constitute “Advertising Injury”

Posted by

The United States District Court for the Southern District of New York ruled that United States Fidelity & Guaranty Co. (USF&G) had no obligation to indemnify its insured, Ashley Reed, for a judgment of $30 million stemming from its sale and distribution of counterfeit Fendi products. United States Fid. & Guar. Co. v. Ashley Reed Trading, Inc., No. 11 Civ. 4782, 2014 U.S. Dist. LEXIS 116280 (S.D.N.Y. Aug. 20, 2014).

The coverage dispute arose out of the following circumstances. USF&G issued three CGL policies to Ashley Reed, effective from 2003-2006. Fendi sued Ashley Reed, and, separately, Burlington Coat Factory (BCF), resulting from Ashley Reed’s sale and distribution of fake Fendi products from 2001 through 2006. USF&G filed a declaratory judgment action, seeking a declaration that it had no duty to indemnify Ashley Reed for the underlying judgments because the awards were “based upon profits obtained from the sale of counterfeit goods – not from advertising activity.”

The defendants focused on the “advertising injury” definition of “[t]he use of another’s advertising idea in your ‘advertising.’” In particular, the defendants argued that the underlying lawsuits, which were premised on trademark infringement violations of the Lanham Act, “inherently and necessarily implicates advertising.” The district court unequivocally disagreed. The district court first explained that Ashley Reed’s liability was not based on any advertising of the counterfeit goods, but rather, was based solely on its sale and offering for sale of the counterfeit goods. The district court further highlighted the distinction between liability for sale of infringing goods and advertising of infringing goods, relying on the two alternative bases for infringement in the Lanham Act: one based on the sale, offering for sale, or distribution of goods and services, and another based on the advertising of any goods or services. The district court also reasoned that the defendants’ argument mooted the “in your ‘advertising’” requirement of the offense. Thus, the district court held that USF&G had no duty to indemnify Ashley Reed in connection with the underlying lawsuits because Ashley Reed’s liability was not based on any “advertising injury.”

Additionally, the district court analyzed the Prior Publication Exclusion. Because the counterfeit sales began before the USF&G policy first incepted, the district court held that the exclusion applied.  The district court also rejected the defendants’ argument about the Prior Publication Exclusion not applying to the Advertising Idea offense because it did not use the word “publication.”  The district court refused to so limit the Prior Publication Exclusion to only some of “advertising injury” offenses.

This ruling is a significant victory for insurers, as the district court recognized a limited scope of “advertising injury” coverage here. However, given the amount at stake, the ruling is one that will likely be appealed.