Unfair Competition Exclusion From Insurance Coverage Too Broadly Applied
Ever since my late client Dean Lesher insisted that we tender the defense of a straightforward antitrust case to his CGL insurance carrier — a decision which ultimately won him a decisive jury verdict in Travelers Ins. Co. v. Lesher (1986) 187 Cal. App. 3d 169 — I have always reviewed insurance policies for my antitrust clients in the hope of finding coverage language which might allow the tender of such formidable litigation to the insurers, but never found much to lend me hope. I was thus very interested in a recent case where coverage was sought, but denied, in a false advertising case because of an “antitrust exclusion.” The case was decided by the First Circuit under Massachusetts law; but it is a rare bird and deserves this comment.
The case is Welch Foods, Inc. v. National Union Fire Ins. Co. (2011) 659 F. 3d 191; but the short per curiam opinion relies almost wholly on the District Court’s decision granting the insurer’s motion for summary judgment, which is not much deeper in its analysis. It can be found at 2010 WL 3928704. The complaint alleged that a competitor and a consumer class had accused Welch of engaging in “false and misleading advertising” and “false advertising and deceptive labeling” in advertising its pomegranate juice. Welch sought insurance coverage under the advertising coverage provisions of its insurance policy, on the ground that “Welch’s statements that its product contained ‘pomegranate juice’ (if in reality, the juice was primarily comprised of apple and white grape juice) could be deemed to be ‘misleading statement[s]’ and thus fall within the ambit of the policy.”
The opinions do not state the nature of the policy under which Welch sought coverage; but it was likely a D&O. The District Court denied coverage because of a policy provision that was captioned “Antitrust Exclusion,” which excluded coverage for claims “alleging, arising out of, based upon or attributable to, or in any way involving either directly or indirectly, antitrust violations, price fixing, price discriminations, unfair competition, deceptive trade practices and/or monopolies, including actions, proceedings, claims or investigations related thereto ….” I had not previously seen this exclusion.
The District Court denied coverage, reading the exclusion broadly: “[T]he plain language of the exclusion is broad enough to include a variety of anti-competitive behavior. Nothing in the text of the exclusion limits it solely to antitrust claims. ” I can’t quarrel with the court’s grammatical analysis: “deceptive trade practices,” taken literally, would be something that happened in business or commerce (“trade practices”) and that is deceptive, i.e., “apt or tending to deceive.” That would cover virtually all business torts, and make much of the “personal injury” coverage illusive, especially the advertising coverage.
But there is another approach to this issue: the rule of noscitur a sociis, or “a word is known by the company it keeps.” If so read, the exclusion for unfair trade practices would be considered in the well established context of that phrase in the antitrust world. Section 5 of the Federal Trade Commission Act, known widely as the “little Sherman Act,” is generally thought of as the fountainhead of “unfair business practices” in the antitrust context. It prohibits “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” It seems fair to say that a knowledgeable lawyer, reading the “antitrust exclusion” of this insurance policy, would think that it addresses “trade practices which conflict with the basic policies of the Sherman and Clayton Acts,” as the Supreme Court held in FTC v. Brown Shoe Co. (1966) 384 U.S. 316, and would think that the insurer must defend other commercial cases which assert improper advertising and the like.
Indeed, in California the courts have at times required that exclusionary clauses be read in their context, perhaps most prominently in MacKinnon v. Truck Ins. Exchange (2003) 31 Cal. 4th 635, where the court stated that “[a]lthough examination of various dictionary definitions of a word will no doubt be useful, such examination does not necessarily yield the ‘ordinary and popular’ sense of the word if it disregards the policy’s context. [Citation]. Rather, a court properly refusing to make “‘a fortress out of the dictionary,”” [citation] quoting Justice Learned Hand’s dictum in Cabell v. Markham (2d Cir.1945) 148 F.2d 737, 739) must attempt to put itself in the position of a layperson and understand how he or she might reasonably interpret the exclusionary language.” By that reasoning, the California Supreme Court read the absolute pollution exclusion, now virtually universal in liability insurance policies, to apply only to the conduct which led to this exclusion, i.e.,to conduct “commonly thought of as pollution, and not to a landlord’s negligent use of ordinary pesticides (p. 655).
I have mixed feelings about having an insurer defend an antitrust case for the insured. But the reasoning of the Welch case seems dangerous, and mistaken to boot. I would like to think that in California, the outcome would have been different.