Fifth Circuit Holds Solicitation of Customers Utilizing Pilfered Trade Secrets Is NOT An "Advertising Injury" Under Insurance Policy

Texas Lawyer has a piece that describes an appeal that went to the Fifth Circuit asking a question about a business provider's liability insurance policy: "If you directly solicit competitors' customers, is that advertising?" The term "advertising" was apparently not defined in the insurance policy and that led to confusion over whether defense fees and a jury verdict of over $13 million should have actually been covered by the insurance policy.

The Fifth Circuit said no.

In the underlying case, Rudamac Inc., a California family-owned printing company, sued its former employee, Daniel Chambers, along with Consolidated Graphics and a subsidiary, Thousand Oaks Printing & Specialties Inc., for Chambers' scheme to steal Rudamac's trade secrets. Chambers was the nephew of Rudamac's owner and president, Helen Mars. According to court papers, Mars "refused to give [Chambers] an ownership interest in the company."
Rudamac brought the case in California state court, alleging that Chambers misappropriated private information from Rudamac about product prices, profit margins and promotions for three of the company's customers when he became a Consolidated Graphics employee.

The jury ruled that Consolidated Graphics committed three torts: misappropriation of trade secrets, intentional interference with at-will employment relations and breach of fiduciary duty. It awarded Rudamac $5,698,000 in compensatory damages plus punitive damages, including $1,500,000 against Thousand Oaks and $6,647,000 against Consolidated Graphics. It did not award damages against Chambers. The judgment was affirmed on appeal.

During the insurance issue litigation, Consolidated Graphics' insurers sought a declaratory judgment in the Southern District of Texas that they had no duty to defend or indemnify the Consolidated Graphics defendants because the trade secrets theft did not constitute an "advertising injury" under the policies. Continental, an excess insurer, filed the declaratory judgment case in July 2008, and Sentry Insurance, the primary insurer, intervened that October.

The Fifth Circuit, affirming summary judgment in favor of the insurance companies, reasoned: "Texas law and our precedent make clear that in the Rudamac litigation against the Consolidated Graphics defendants, it was never alleged that the defendants caused an injury 'in the course of advertising your goods, products or services' within the meaning of Sentry's policy," Owen wrote. "The contacts Chambers had with the three customers were not through public dissemination of any kind. They were direct dealings. The district court did not err in holding that Sentry had no duty to defend the Consolidated Graphics defendants."