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National Trust Insurance Co. v. Heaven Hill Distilleries, Inc.

United States District Court, W.D. Kentucky, Louisville Division

March 29, 2018

NATIONAL TRUST INSURANCE COMPANY, Plaintiff,
v.
HEAVEN HILL DISTILLERIES, INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          David J. Hale, Judge

         Plaintiff National Trust Insurance Company filed this action seeking a declaratory judgment that it has no duty to defend or indemnify Defendant Heaven Hill Distilleries pursuant to six insurance policies National Trust sold to Heaven Hill between 2011 and 2014. The dispute arises from a lawsuit filed in Canadian Federal Court in which Diageo Canada, Inc. alleged that Heaven Hill infringed its registered trademarks. In an opinion issued on June 12, 2017, the Canadian court held that Heaven Hill infringed Diageo's trademarks. The court found, however, that Heaven Hill did not knowingly do so.

         Before the Court are three motions: National Trust's motion for clarification of this Court's April 28, 2015 Order (Docket No. 41), Heaven Hill's motion for partial summary judgment (D.N. 44), and Starr Indemnity & Liability Company's motion to intervene as a plaintiff in this action (D.N. 61). National Trust's and Heaven Hill's motions raise two issues: (i) whether the Canadian court's determination that Heaven Hill did not knowingly infringe Diageo's trademarks binds National Trust and (ii) whether National Trust may seek reimbursement of the costs it incurred defending Heaven Hill in the Canadian litigation. For the reasons set forth below, the Court will grant in part and deny in part National Trust's motion, grant in part and deny in part Heaven Hill's motion, and grant Starr's motion.

         I. Background

         Between 2011 and 2014, National Trust issued six insurance policies to Heaven Hill, each containing commercial liability insurance provisions. (D.N. 1, PageID # 3) The six policies consist of four identical general-liability policies and two identical umbrella-coverage policies. (Id.) Under the terms of the policies, National Trust agreed to pay sums that Heaven Hill becomes legally obligated to pay because of “personal and advertising injury, ” which the policies define to include liability stemming from trade-dress infringement. (D.N. 1-2, PageID # 109, 117) National Trust also assumed the duty to defend Heaven Hill in any suit in which it was alleged that Heaven Hill was liable for damages caused by a “personal or advertising injury.” (Id., PageID # 109)

         Starr issued excess insurance policies to Heaven Hill in 2013 and 2014. (D.N. 61, PageID # 853) The terms of Starr's excess policies follow the “terms, definitions, conditions, and exclusions” of the National Trust general-liability policies and apply only when Heaven Hill's underlying insurance with National Trust has been exhausted. (Id., PageID # 853-54)

         On March 26, 2014, Diageo filed suit against Heaven Hill in Canadian Federal Court, asserting that Heaven Hill had infringed its Canadian trademark registrations based on alleged similarities in the bottling and labeling of Heaven Hill's “Admiral Nelson's” rum and Diageo's “Captain Morgan” line of spirits. (D.N. 1, PageID # 3) Among other allegations, Diageo accused Heaven Hill of willfully and knowingly infringing its trademarks. (D.N. 44-1, PageID # 664)

         Heaven Hill promptly notified National Trust of the Canadian litigation and requested that it defend and indemnify Heaven Hill in accordance with the insurance policies. (Id.) On April 3, 2014, National Trust conditionally acknowledged and responded to its duty to provide Heaven Hill with a defense, subject to a reservation of rights. (See D.N. 44-2) Thereafter, National Trust took control of Heaven Hill's defense and imposed its choice of defense counsel in the Canadian litigation. (D.N. 44-1, PageID # 664-65)

         National Trust filed this action on May 29, 2014, seeking a declaration from this Court that it has no duty under the terms of the insurance policies to defend or indemnify Heaven Hill in the Canadian litigation. (D.N. 1, Page ID # 3, 17) National Trust alleges that coverage for the Canadian litigation is barred by a number of different provisions of the insurance policies. One of those provisions is an exclusion that bars coverage for any conduct that constitutes a knowing violation of the rights of another. (See D.N. 1-2, PageID # 109) National Trust seeks to litigate whether this “knowledge exclusion” applies, thereby relieving National Trust of its duty to indemnify or defend Heaven Hill. (D.N. 1, PageID # 5) Heaven Hill responded to this accusation with a counterclaim seeking a declaratory judgment that National Trust is contractually obligated to defend Heaven Hill in the Canadian litigation and pay any damages for which Heaven Hill may be found liable. (D.N. 9)

         In October 2014, Heaven Hill moved to stay discovery as to whether it knowingly infringed Diageo's trademarks, arguing that a continuation of discovery would present an irreconcilable conflict of interest. (D.N. 16, PageID # 279) In a Memorandum Opinion and Order entered April 28, 2015, the Court agreed, reasoning that “[a]llowing National Trust to attempt to discover and show in this case that Heaven Hill knowingly or intentionally violated Diageo's legal rights while maintaining an obligation to defend Heaven Hill in the Canadian Litigation is problematic and presents a potential conflict of interest.” (D.N. 29, PageID # 434) Thereafter, National Trust requested reconsideration of the partial stay. (D.N. 32) The Court denied the motion in an order entered January 11, 2016. (D.N. 37)

         National Trust now moves for clarification of the Court's April 28, 2015 Order. (D.N. 41) Specifically, National Trust seeks clarification that (i) any determination in the Canadian litigation regarding Heaven Hill's knowledge or intent will not bar National Trust from seeking an independent determination of the issue in this action and (ii) National Trust will be allowed to seek reimbursement of attorney fees and costs in the event that this Court determines that Heaven Hill was not entitled to a defense in the Canadian litigation under the terms of the policies. (Id.) Heaven Hill moves for partial summary judgment as to each issue raised in National Trust's motion. (D.N. 44) Specifically, Heaven Hill argues that if the Canadian court finds that it did not knowingly infringe Diageo's trademarks, National Trust is barred from litigating the knowledge issue. (D.N. 44-1, PageID # 668) Heaven Hill also argues that National Trust is not entitled to recoup costs incurred defending Heaven Hill in the Canadian litigation, even if this Court determines that National Trust had no duty to defend. (Id., PageID # 685) As of the filing of Heaven Hill's motion for partial summary judgment, no discovery had been taken by either party. (See id., PageID # 657)

         On June 12, 2017, while these motions were pending, the Canadian Federal Court issued its decision in the underlying lawsuit, concluding that Heaven Hill had infringed Diageo's trademarks. See Diageo Canada Inc. v. Heaven Hill Distilleries, Inc., 2017 F.C. 571 (Can. Ont.). The Canadian court also found that there was insufficient evidence to conclude that Heaven Hill acted knowingly in so infringing. Id. at ¶ 84.

         Meanwhile, Starr Indemnity filed a motion to intervene in the present lawsuit. (D.N. 61) Starr argues that it has a substantial legal interest in this action, as it shares in common most of the coverage defenses raised by National Trust. Accordingly, Starr seeks to intervene pursuant to Federal Rule of Civil Procedure 24(a) and 24(b). (See id.)

         II. Standard

         Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “In deciding a motion for summary judgment, the court must view the factual evidence and draw all reasonable inferences in favor of the nonmoving party.” Banks v. Wolfe Cty. Bd. of Educ., 330 F.3d 888, 892 (6th Cir. 2003) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). “While all inferences are drawn in favor of the non-moving party, that party still must present some affirmative evidence supporting its position to defeat an otherwise appropriate motion for summary judgment.” Tucker v. Tennessee, 539 F.3d 526, 531 (6th Cir. 2008).

         III. Whether National Trust May Litigate the Knowledge Issue

         In its motion for clarification, National Trust argues that the Canadian court's determination regarding Heaven Hill's knowledge should not bar it from litigating that issue in the present action. (D.N. 41) Heaven Hill seeks summary judgment on the same question, arguing that National Trust is so barred. (D.N. 44) The initial difficulty in resolving this dispute results from the parties' reliance on two distinct areas of law in support of their positions. National Trust supports its argument by citing an exception to the doctrine of collateral estoppel. (D.N. 41-1, PageID # 629-43) Relying on contract principles, Heaven Hill argues that regardless of any preclusive effect, National Trust is barred from litigating the knowledge issue under the express terms of the policies. (D.N. 44-1, PageID # 668-85) The Court concludes that National Trust's position is correct and that National Trust is therefore not barred from litigating the knowledge issue.

         a. The Express Terms of the Policies

         Heaven Hill argues that “[u]nder the express terms of the Policies, National Trust's duty to indemnify Heaven Hill is determined solely by the nature of the underlying judgment.” (D.N. 44-1, PageID # 659) Because this is a diversity action, Kentucky law governs issues of contract interpretation. Erie v. Tompkins, 304 U.S. 64 (1938); see also Associated Indus. of Ky., Inc. v. U.S. Liab. Ins. Grp., 531 F.3d 462, 465 (6th Cir. 2008) (applying Kentucky law in a diversity action concerning the interpretation of an insurance contract).

         In relevant part, the policies state that National Trust “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury' to which this insurance applies.” (D.N. 1-2, PageID # 109 (emphasis added))[1] The policies further provide that “‘[p]ersonal and advertising injury' means injury . . . arising out of . . . [i]nfringing upon another's copyright, trade dress or slogan in [Heaven Hill's] advertisement.” (Id., PageID # 117) The policies also state that “[the] insurance does not apply to . . . ‘[p]ersonal and 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 and advertising injury.'” (Id., PageID # 109)

         Heaven Hill argues that based on the provisions cited above, “National Trust's duty to indemnify Heaven Hill is triggered and becomes fixed when Heaven Hill becomes ‘legally obligated to pay damages' on account of conduct that constitutes a ‘personal and advertising injury' that is covered by the Policies.” (D.N. 44-1, PageID # 659) In other words, Heaven Hill claims that upon a determination by the Canadian court that Heaven Hill did not act knowingly, Heaven Hill became liable for a “personal and advertising injury” (i.e., a judgment against Heaven Hill for negligent infringement of trade dress) that falls within the policies' coverage.

         This is a strained reading of the policies' terms, however. Under Heaven Hill's reading, the exclusionary phrase “to which this insurance applies” is linked to any underlying judgment against Heaven Hill. But “a limiting clause or phrase . . . should ordinarily be read as modifying only the noun or phrase that it immediately follows.” See Lockhart v. United States, 136 S.Ct. 958, 963 (2016) (citing Barnhart v. Thomas, 540 U.S. 20, 26 (2003)). Thus, the exclusionary phrase “to which this insurance applies” modifies the phrase “personal and advertising injury, ” which exclusively refers to Heaven Hill's conduct (i.e., type of damage) rather than any underlying judgment. Indeed, the policies define “personal and advertising injury” to include “injury . . . arising out of . . . infringing upon another's . . . trade dress.” (D.N. 1-2, PageID # 117 (emphasis added)) The exclusionary phrase is therefore linked to the underlying conduct or type of damage giving rise to the judgment, rather than the judgment itself.

         This interpretation is in line with how courts have interpreted similar exclusionary phrases. The Kentucky Supreme Court has noted that “[t]he qualifying phrase, ‘to which this insurance applies' underscores the basic notion that the premium paid by the insured does not buy coverage for all property damage but only for that type of damage provided for in the policy.” Kemper Nat'l Ins. Cos. v. Heaven Hill Distilleries, Inc., 82 S.W.3d 869, 876 (Ky. 2002) (emphasis added)); see also City of Sandusky, Ohio v. Coregis Ins. Co., 192 F. App'x 355, 360 (6th Cir. 2006) (finding that under principles of Ohio contract interpretation, the phrase “to which this insurance applies” “does not include sums payable only because of the success of claims that were plainly not otherwise covered by the insurance policy”); Mid-Continent Cas. Co. v. Petroleum Sols., Inc., No. CV 4:09-0422, 2016 WL 5539895, at *23 (S.D. Tex. Sept. 29, 2016) (finding that the phrase “property damage to which this insurance applies” referred not to whether liability was found in the underlying judgment but whether the damage was caused by an occurrence in the coverage territory).

         Accordingly, there must be a determination of whether Heaven Hill's conduct falls within the policies' coverage. The question here is whether a finding in underlying litigation that bears on this determination binds the insurer in subsequent proceedings. When presented with policy language similar to the language at issue here, courts have consistently determined the preclusive effect of findings made in underlying litigation using principles of collateral estoppel rather than contract interpretation. See, e.g., Allstate Ins. Co. v. Blount, 491 F.3d 903, 910 (8th Cir. 2007) (analyzing the preclusive effects of an underlying criminal action in determining whether the “criminal act exclusion” of an insurance policy was triggered); Berry Plastics Corp. v. Ill. Nat'l Ins. Co., 244 F.Supp.3d 839 (S.D. Ind. 2017) (analyzing the preclusive effect of a jury finding regarding damages in an underlying action to determine whether the insurer could challenge whether the damages were covered “property damages”); Eckstein v. Cincinnati Ins. Co., 469 F.Supp.2d 444 (W.D. Ky. 2007) (addressing whether collateral estoppel barred an insurer from litigating certain issues in light of findings made in an underlying action); Nationwide Mut. Fire. Ins. Co. v. Stanley, 403 F.Supp.2d 638, 644 (E.D. Tenn. 2005) (analyzing the preclusive effects on an underlying criminal action in determining whether the “intent exclusion” of an insurance policy was triggered).

         Arguing against this line of cases, Heaven Hill devotes significant attention to the Oregon Supreme Court's recent opinion in FountainCourt Homeowners' Ass'n v. FountainCourt Development, LLC, 380 P.3d 916 (Or. 2016). At issue in FountainCourt was an insurance provision stating that “[the insurer] will pay those sums that the insured becomes legally obligated to pay as damages because of . . . ‘property damage' to which this insurance applies.” Id. at 925 (emphasis added). The court held that the insurer was not “entitled to second-guess or retry the nature of [the insured's] liability” (i.e., a previous court's determination that property damage had occurred). Id. This holding was not based on collateral estoppel, but rather on the court's concern that such second-guessing would require “the court to evaluate-as a matter of contract law-what, precisely, the insured has become legally obligated to pay as damages in the prior ...


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