First Circuit Finds Coverage Where District Court Did Not

First Circuit Finds Coverage Where District Court Did Not

By David A. Gauntlett[*]

Introduction

The First Circuit’s recent Lionbridge[2] decision followed the recent trend of federal appellate cases correcting district courts improperly rejecting policyholders’ arguments of potential coverage. Much like the Ninth Circuit in My Choice,[3] the First Circuit ruled that an exclusion had been interpreted too broadly by the district court. The court’s statements suggested that this error stemmed from looking too closely at the labels given to the causes of action in the underlying complaint rather than the factual allegations therein.

Underlying Facts

In the underlying case, Lionbridge was alleged to have inappropriately gained access to the trade secret of a competitor (TPG) by faking interest in acquiring the competing business.[4] As part of that scheme, Lionbridge allegedly “‘falsely told TPG’s customers that Lionbridge was purchasing TPG and that they should contract with Lionbridge directly before the sale’” and “‘contacted TPG’s existing and prospective clients, and both misrepresented the nature of the underlying litigation and introduced doubt regarding the stability of TPG in bad faith for the purpose of damaging TPG and advantaging Lionbridge.’”[5] The underlying complaint also alleged that “‘these statements caused actual confusion among TPG’s clients, some of whom have decreased or reduced their business with TPG.’”[6]

Lionbridge sought coverage under the “Personal and Advertising Injury Liability” section of its Commercial General Liability (“CGL”) policy.[7] Though the district court denied potential coverage, the First Circuit concluded potential coverage arose under offenses (d) (“Oral or written publication, in any manner, of material that . . . disparages a person's or organization's goods, products or services”).[8]

Underlying Facts, Not Labeled Causes of Action, Trigger the Duty to Defend

It is long-settled that factual allegations, not the chosen labels for causes of action, are the basis of determining whether a complaint triggers an insurer’s duty to defend.[9] The court took guidance from Billings v. Commerce Ins. Co.,[10] emphasized that a defense arose where “an underlying complaint alleged that the insured spread falsehoods, ‘pleaded in support of’ an intentional tort claim (swap fraud for intentional infliction of emotional distress), but nevertheless ‘roughly sketched a defamation claim,’ because the same falsehoods allegedly resulted in reputational damage to the insured.”[11]

Even though the recitations by the court in the underlying action were conclusory in character, they evidenced conduct revealing a “roughly sketched” claim for defamation sufficient to implicate the duty to defend. In effect, the court inferred from these allegations that the facts sufficed to require a defense. The court looked past the lack of specific fact allegations evidencing statements which in and of themselves were defamatory of competitor’s products.[12] The court emphasized that “the ‘expectation of protective insurance reasonably generated by the terms of the policy’ fits the ‘kinds of losses [that] may be proved as lying within the range of allegations of the complaint.’”[13] In so doing, they relied on inferences rather than specific allegations. Forgiving such deficiencies in the pleadings is a significant development as past decisions typically required great specificity in the underling complaint as evidence of a potential disparagement claim.[14]

Although not cited in Lionbridge, El Grp. v. Utica National Insurance Grp., another case from Massachusetts, noted latent disparagement where Clegg alleged that “the plaintiffs falsely told third parties that Clegg's products were the result of a ‘design team,’ rather than having been designed by Clegg alone. More specifically, Clegg alleged that one of the plaintiffs, Joseph P. Lotuff, III, falsely told potential consumers that he designed or contributed to the design of Clegg's products, and that the backlog of orders for their products was due to ‘improper actions of the Clegg parties.’”[15] The underlying allegations included an accusation that the policyholder’s false statements “‘impugn[ed] the professional reputation of Frank Clegg as a designer and manufacturer.’”[16]

Knowledge of Falsity Exclusion

The First Circuit held that the knowledge of falsity exclusion did not apply because the allegation of intentional conduct was ambiguously worded in the underlying complaint.

Read in the context of the whole allegation -- that Lionbridge “both misrepresented the nature of the underlying litigation and introduced doubt regarding the stability of TPG in bad faith for the purpose of damaging TPG . . .” -- we think Lionbridge could have reasonably understood the allegation of bad faith and purposeful damage to apply only to the latter “introduced-doubt” conduct. In other words, Valley Forge has not shown that the complaint conclusively alleges intentional conduct as to Lionbridge's employees “misrepresent[ing] the nature of the underlying litigation.”[17]

The court’s determination relied on the contrasting language used in other parts of the underlying complaint where the underlying plaintiff made specific assertions of knowledge. The court found significance in the choice to include specific assertions of knowledge for some allegations but not for others.[18]

The court also considered the insurer’s argument that the exclusion applied “because the TPG complaint does not claim or allege negligence,” but rejected it as improperly attempting to shift the burden of proof because “[the insurer] must disprove all potential liability as a matter of law.”[19]

 Conclusion

With the Lionbridge decision, the First Circuit provides an important reminder. Exclusionary language cannot be construed broadly as even a small ambiguity in language can invoke coverage since insurer’s bear the burden of proving exclusions apply in “all possible worlds.”[20] Further, it serves to highlight how often district courts can be misled by insurers shining a spotlight on the labeled causes of action, improperly ignoring the underlying facts. For this reason, policyholders should not immediately give up hope if they receive a poor judgment. Appellate courts are becoming more and more conditioned to correcting the shortsighted coverage decisions of their district counterparts.

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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] Lionbridge Techs., LLC v. Valley Forge Ins. Co., No. 21-1698, 2022 U.S. App. LEXIS 32057 (1st Cir. (Mass.) Nov. 21, 2022).

[3] My Choice Software, Ltd. Liab. Co. v. Travelers Cas. Ins. Co. of Am., 823 F. App'x 510, 512 (9th Cir. (Cal.) 2020).

[4] Lionbridge, 2022 U.S. App. LEXIS 32057 at *3–4.

[5] Id. at *4.

[6] Id. at *14.

[7] Id. at *5.

[8] Id. at *5.

[9] Holyoke Mut. Ins. Co. in Salem v. Vibram USA, Inc., 106 N.E.3d 572, 577 (Mass. 2018) (“[T]he analysis focuses on envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy.”)

[10] Billings v. Commerce Ins. Co., 458 Mass. 194, 936 N.E.2d 408 (2010).

[11] Lionbridge, 2022 U.S. App. LEXIS 32057 at *15–16.

[12] Id. at *13 (Stating it was error for the district court to focus on these “pleading infirmities.”)

[13] Id. at *16.

[14] See, e.g., Crisp Enters. v. Golden Eagle Ins. Co., 698 F. App'x 910, 910 (9th Cir. (Cal.) 2017) (No potential disparagement coverage arose because “[n]either the complaint nor the correspondence expressly mentioned false or misleading statements that specifically referred to and clearly derogated American Reprographics. Nor did these materials clearly implicate disparagement, for example, by requesting damages for loss of reputation or goodwill as a result of disparagement.”)

[15] El Grp. v. Utica National Insurance Grp., 2022 Mass. App. Unpub. LEXIS 12, *5 (Mass. App. Ct. Jan. 6, 2022).

[16] Id. at *5–6.

[17] Id. at *19.

[18] Id. at *19–20 (“By contrast, TPG alleged in the fraud count that ‘Lionbridge employees deliberately misrepresented to TPG's clients that Lionbridge would be acquiring TPG, and that future business inquiries should be directed to Lionbridge.’ Such allegation clearly alleges knowledge, leaving no room for a reasonable interpretation otherwise, and suggests that TPG chose not to allege intentional conduct as to the allegation concerning Lionbridge's misrepresentations about the underlying litigation.”)

[19] Id. at *20 (emphasis in original).

[20] Atl. Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1039 (2002).