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March 13, 2019 Articles

Rethinking Federal Appellate Court Legerdemain in Analyzing the Scope of “Potential Coverage”

A modest proposal for changes designed to encourage panels to not render decisions based on “fresh” cases without appropriate input from the parties

by David A. Gauntlett

“Legerdemain” is from the Middle French. It means a “sleight of hand.” In this article, it describes a judicial decision based principally on legal authority that neither the parties nor the court addressed, prior to the issuance of the court’s decision. Its use is surprisingly prevalent when courts address disputes under Coverage “B.” Indeed, coverage cases requiring appellate courts to address novel legal issues are especially prevalent in analysis of Coverage “B” offenses. See, Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 744, 746-47 (3d Cir. (Pa.) 1999) (“The definition of ‘advertising injury’ in standard business insurance policies has troubled and in some cases confounded courts for years.”).

The Problem

On occasion, appellate court panels issue opinions relying on cases neither cited nor addressed by the parties. These “fresh” cases may not fully address the propositions for which they are cited. Given the limited standard on review provided through a petition for rehearing, that remedy is often of little benefit to the parties in correcting errors arising from a panel’s reliance on a fresh case.

Two appellate decisions (one of which is published) relying on a “fresh” case neither briefed by the parties nor addressed in oral arguments are discussed below.

Interstate Bakeries Corp. v. OneBeacon Ins. Co.

The first case, Interstate Bakeries, 686 F.3d 539 (8th Cir. (Mo.) 2012), addressed whether the phrases “Nature’s Own” and “Nature’s Pride” were used by the claimant as a “slogan” or “title” so as to implicate “advertising injury” insurance coverage under those offenses where the phrases were used notably to promote bread products on packages, shelf tags, and coupons. The majority did not consider whether these promotional phrases could do “double duty” as both a trademark (product source identifier) and a “slogan” (“attention getting phrase”).

The majority misapprehended Missouri case law concerning inferences and assumptions to be drawn from the pleadings and extrinsic evidence raised that implicated potential insurance coverage. It is not true that Missouri courts are barred under all circumstances from considering reasonable, logical inferences from the facts pled to find potential insurance coverage thereby requiring the insurer to defend its insured. But no Missouri cases, including those cited by the majority, have ever so held.

The majority cited Penn-Star Ins. Co. v. Griffey, 306 S.W.3d 591, 599 (Mo. Ct. App. 2010), for the proposition that “a court is barred from ‘reading into [a complaint] any factual assumption’” when determining the duty to defend. The majority then refused to draw inferences from the underlying plaintiff’s (Flowers) pled facts about its use of “Nature’s Own” as a “slogan” or “title” that are unavoidable. But Penn-Star limits the quoted statement to cases where the complaint fails to allege sufficient facts from which an inference can reasonably be drawn. And Penn-Star applied the rule to avoid an exclusion, not to limit coverage.

In fact, it reversed judgment for the insurer, finding that the alleged facts did not trigger the exclusion. Missouri law compelled that result as it construes exclusions strongly in favor of coverage and against the insurer. Macheca Transport. Co. v. Philadelphia Indemn. Co., 463 F.3d 827, 832 (8th Cir. (Mo.) 2006) (insurance policy exclusions are construed “most strongly” against the insurer and in favor of coverage). Missouri law, as interpreted by this court, requires a defense where the underlying allegations “state a claim which is potentially or arguably within the policy’s coverage,” with “any uncertainty . . . decided in favor of the insured[.]” Missouri Terrazzo Co. v. Iowa Nat’l. Mut. Ins. Co., 740 F.2d 647, 652 (8th Cir. (Mo.) 1984). Any doubts (e.g., about facts’ sufficiency to support inferences) should be reasoned in favor of a defense. Liberty Mut. Ins. Co. v. FAG Bearings, 153 F.3d 919, 924 (8th Cir. (Mo.) 1998).

In Penn-Star, an injured bar patron sued for negligence. The bar’s insurance policy provided “bodily injury” coverage but excluded coverage for claims “expected or intended from the standpoint of the insured” or resulting from “assault and battery.” The Penn-Star court noted there were no allegations that any bar employee injured the plaintiff but only that some employee physically removed the claimant from the premises and “placed him on the sidewalk,” whereupon he fell and struck his head. Id. at 594. Because there were no allegations of an attack or assault or hostile motive, the policy’s exclusions were not triggered. The Penn-Star court simply declined to “read into” the complaint any “factual assumptions” that the bar’s employee engaged in violence or had a hostile motive required to trigger the exclusion at issue. Id. at 599.

Penn-Star does not support the majority’s refusal to consider the reasonable inferences (such as that Flowers applies “Nature’s Own” to packaged bread) based on Flowers’ detailed — if inartfully organized or labeled — allegations. Its allegations about the use and function of its “Nature’s Own” mark together with allegations of IBC’s use of the competing “Nature’s Pride” mark on its displayed, “marketed” and “promoted” bread packaging [SA 0040-0050] more than suffice to support the inferences that Flowers uses its “Nature’s Own” mark as a “slogan” or “title,” or both. So understood, Penn-Star did not support the majority’s narrow reading of the pleadings for the reasons adopted by the thoughtful analysis of the dissent.

In my view, the factual basis of Flowers' complaint implicates IBC's policy with OneBeacon—requiring a duty to defend. In my view, "the question is not whether [Flowers] stated a claim for relief sufficient to survive a motion to dismiss. Rather, the question is: Did the original and First Amended petitions state enough to potentially or possibly establish coverage under the policy, thereby triggering [OneBeacon's] duty to defend?" Trucks Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64, 83 (Mo. Ct. App. 2005). "Missouri law suggests that as long as the petition demonstrates the potential or possible statement of a claim within insurance coverage, even if inartfully drafted, it triggers the insurer's duty to defend." Id. (emphasis added).

Interstate Bakeries Corp. v. Onebeacon Ins. Co., 686 F.3d 539, 547 (8th Cir. 2012).

Subsequent decisions from the Eighth Circuit, applying Missouri law, have looked to what the salient facts imply as well as directly state in evaluating insurance coverage. Thus, in analyzing the structure of a policy of insurance, the panel observed that when construing “what ‘directors’ means, the fact that ‘directors’ appears in 1(d) implies that the term directors is used within the context of a corporation.” United Fire & Cas. Ins. Co. v. Thompson, 758 F.3d 959, 963 (8th Cir. (Mo.) 2014).

This decision is fully in accord with case authority (ignored by the Panel in Interstate Bakeries) expansively interpreting the facts which a court can rely on under Missouri law to find a defense implicated. As Essex Ins. Co. v. Harris, No. 4:09CV2071 TIA, 2011 U.S. Dist. LEXIS 113421, at *21-23 (E.D. Mo. Sep. 30, 2011) (citing Missouri appellate authority) stated:

In addition to the allegations in the complaint, the insurer must also consider other facts it knew or could reasonably have ascertained. Id. . . . If the allegations and ascertainable facts establish any potential and possible coverage then the insurer has a duty to defend. Truck Ins., 162 S.W.3d at 79. The duty to defend exists if the complaint contains other claims that would not be covered. Id.

Big 5 Sporting Goods Corp. v. Zurich Am. Ins. Co., 635 F. App'x 351 (9th Cir. (Ca.) 2015)

The second decision, Big 5, analyzed whether fact allegations that could support “personal injury” coverage was implicated for common law privacy invasion claims so as to fall outside of Zurich’s restricting statutory exclusions. But in so ruling, the panel necessarily addressed the merits of the factually asserted common law claims, improperly assessing whether they would suffice to create liability—an issue not properly considered in evaluating the duty to defend. Aurafin-Oroamerica, LLC v. Federal Ins. Co., 188 Fed. Appx. 565, 566 (9th Cir. (Cal.) 2006) (“The viability of the underlying claim against the insured does not affect an insurance company’s duty to defend.”).

The memorandum decision drew a distinction rarely addressed by coverage cases between “false, frivolous and groundless” claims that require a defense and those that offer no colorable basis that could possibly implicate coverage of any kind. The court in Big 5 relied on Venoco, Inc. v. Gulf Underwriters Ins. Co., 175 Cal. App. 4th 750, 765 (2009), for the proposition that “the duty to defend groundless actions applies only to claims covered by the policy.” Venoco deduced this requirement from a provision of the policy that limits its defense duty to claims “to which this insurance applies” based on the seminal coverage case of Gray v. Zurich Ins. Co., 65 Cal.2d 263 (1966).” Id.

Finding that phrase to be unambiguous, the court clarified, Id. at 765:

This qualified provision is not an agreement to defend all suits or to defend actions that fall outside the coverage provisions. (Jaffe v. Cranford Ins. Co. (1985) 168 Cal.App.3d 930, 936 [214 Cal. Rptr. 567].)

Venoco addressed a claim that could not create liability under settled coverage law principles unlike the case in Big 5. Relying on Venoco, the court concluded that the first amended complaints non-statutory claims for common law privacy invasion and California constitutional privacy invasion claims were of no moment to the coverage analysis since there could be no possible exposure based on existing case law for conduct alleged in the first amended complaint under those schemes. The court therefore determined that Big 5 was obligated at its own expense to eliminate these claims.

As the Venoco court explained at 175 Cal. App. 4th at 764:

Courts have held that these pollution exclusions also preclude coverage for claims involving the failure to disclose the existence of pollution, even in cases where the insureds were not polluters. . . . Here the liability for failure to warn is interwoven with, and directly connected to, the toxic exposure liability claim. Venoco is alleged to be responsible for the toxic pollution. Given the allegations in the plaintiffs' complaints, the policy excludes coverage for tort liability for Venoco's alleged failure to warn about its release of toxic chemicals.

The court emphasized this point by contending that “we have scoured the legal landscape searching for precedents supporting Big 5’s assertions, but we have come up empty.” Big 5 Sporting Goods, 635 F. App’x at 354. The court characterized Big 5’s claim as a garden variety zip code claim despite newly articulated allegations of the first amended complaint that the privacy rights asserted by Big 5 do not exist pursuant to Folgelstrom v. Lamps Plus, Inc., 195 Cal. App. 4th 986, 992 (2nd Dist. 2011), finding a “serious” invasion of privacy where zip codes were used to reverse engineer home addresses for marketing purposes. The few district court decisions following Big 5’s analysis neither cite its discussion of Venoco nor rely on the legal proposition Big 5 endorsed therein.

This resolution has not been followed by any subsequent Ninth Circuit cases. Notably, a closely related issue (not germane in Big 5 due to the inclusion of a TCPA exclusion in its policy, but indicative of the breadth of the common law privacy invasion claims, often nested within the TCPA litigation) was recently certified by the Ninth Circuit Court of Appeals for resolution to the California Supreme Court pursuant to Rule 8.548 of the California Rules of Court in Yahoo! Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., No. 17-16452, 2019 U.S. App. LEXIS 1409, at *4 (9th Cir. Jan. 16, 2019):

Does a commercial liability policy that covers “personal injury,” defined as “injury . . . arising out of . . . [o]ral or written publication . . . of material that violates a person's right of privacy,” trigger the insurer's duty to defend the insured against a claim that the insured violated the Telephone Consumer Protection Act by sending unsolicited text message advertisements that did not reveal any private information?

Key to the resolution of this issue is whether “‘publication of material that violates a person’s right of privacy’ applies to the right to secrecy, seclusion, or both.” Id. at *2. If it encompasses secrecy, claims for relief concurrently asserted with trade secret misappropriation (excluded by vigorous intellectual property exclusions) may implicate a defense. It also may well be a consideration in clarifying the import of inferences from the facts alleged that the court of appeals’ analysis in both Interstate Bakeries or Big 5 Sporting Goods did not embrace. See, Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 277, 287 (2014) (“[A defense arises] where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability.”) (internal quotes omitted).

A Proposed Solution

Three solutions come to mind to arm appellate courts with new tools.

First, a de novo petition for rehearing limited to five pages, addressing only the “fresh” case and its effect on the decision. The time for filing a petition for rehearing could be tolled or the “fresh” case issue could be integrated into a standard petition for rehearing but subject to de novo review. This direction could also come from the panel itself before issuing an opinion by offering a tentative order where it includes a fresh case. This approach is consistent with what federal courts presently authorize where a district court seeks to rely upon new authority not briefed by the parties. Reinhardt v. Colvin, 2015 U.S. Dist. LEXIS 50952, at *13 (W.D.N.C. Apr. 17, 2015) (“See Fussell v. AMCO Ins. Co., 2013 U.S. Dist. LEXIS 3596 (E.D.Cal. Jan. 9, 2013) (providing for tentative ruling and allowance of supplemental briefs where a court relies on un-argued authority.”).

Second, direct access to certification of the issue addressed to the State Supreme Court for review as occurred in Yahoo! which the Panel must grant unless it reissues its order without the “fresh” case or arguments which its inclusion advanced.

Third, where the “fresh” case requires reassessment of the factual basis for the federal court of appeal’s decision, remand to the district court to address such facts within a 90-day period and an expedited reconsideration of any district court order issued thereafter either to the same panel or a panel composed of as many members of the original panel as can be assembled.

Conclusion

These proposed changes will encourage panels to not render decisions based on “fresh” cases without appropriate input from the parties, and provide more staying power for the issues that it especially asserted in the issuance of published opinions.

Where the opinions are unpublished, they will encourage issuance of decisions that address the legal issues presented to the court in a manner that will wrestle with the thorny legal issues raised.

David A. Gauntlett is with Gauntlett & Associates.


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