Sterngold Dental, LLC v. Hdi Global Ins. Co.

929 F.3d 1

STERNGOLD DENTAL, LLC, Plaintiff, Appellant,

v.HDI GLOBAL INSURANCE COMPANY, Defendant, Appellee.

No. 18-2084

United States Court of Appeals, First Circuit.

July 2, 2019

Sean T. O'Leary, with whom O'Leary Murphy, LLC was on brief, Warwick, RI, for appellant.

Joseph K. Scully, with whom Day Pitney LLP was on brief, Hartford, CT, for appellee.

Before Howard, Chief Judge, Torruella and Selya, Circuit Judges.

SELYA, Circuit Judge.

This appeal gives us an opportunity to sink our teeth into a sophisticated insurance coverage question: we must construe the scope of the so-called intellectual property exclusion (IP exclusion) to the personal and advertising injury coverage under a standard commercial general liability policy (the Policy) issued by defendant-appellee HDI Global Insurance Company (HDI) to plaintiff-appellant Sterngold Dental, LLC (Sterngold). Concluding, as we do, that Sterngold's arguments lack bite, we affirm the district court's dismissal of Sterngold's action for failure to state a claim upon which relief can be granted.

I. BACKGROUND

The relevant facts are undisputed. Sterngold manufactures and sells dental products. To safeguard its business operations, Sterngold purchased the Policy (which covered Sterngold's commercial activities during the calendar year 2016).

In pertinent part, the Policy obligated HDI to defend and indemnify Sterngold against claims arising out of "personal and advertising injury." Withal, coverage for such injuries was subject to certain exclusions. A specific exclusion — the IP exclusion — pretermitted coverage for personal and advertising injury "arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights." The case at hand turns on the applicability vel non of this exclusion.

The circumstances that sparked this litigation can be succinctly summarized. In May of 2016, Intra-Lock International, Inc. (Intra-Lock), a competitor in the market for dental products, sued Sterngold in the United States District Court for the Southern District of Florida. Count 3 of its complaint alleged, inter alia, that Sterngold infringed Intra-Lock's registered OSSEAN trademark — a trademark denoting a component of its osseointegrative dental implant coating product — by using nearly identical marks, OSSEO and OSSEOs, for a nearly identical product.¹ Sterngold asked HDI to defend the suit and provide indemnification pursuant to the Policy. HDI refused Sterngold's request, denying coverage under the Policy. When Sterngold reiterated its demand for defense and indemnification, HDI again demurred.

Sterngold proceeded to settle the Intra-Lock suit. At that point, it made a third attempt to engage HDI. This time around, Sterngold asserted that the Policy required that HDI reimburse Sterngold for the settlement amount. Once again, HDI turned a deaf ear to Sterngold's entreaties.

Invoking diversity jurisdiction, see 28 U.S.C. § 1332(a), Sterngold repaired to the United States District Court for the District of Massachusetts. Pertinently, its complaint against HDI alleged that the latter had breached its duty to defend and indemnify Sterngold against Intra-Lock's claim. HDI responded by moving to dismiss the complaint. See Fed. R. Civ. P. 12(b)(6). Sterngold objected, but the district court granted HDI's motion, holding that, under the Policy, HDI had no duty either to defend or indemnify Sterngold in the Intra-Lock suit. See Sterngold Dental, LLC v. HDI Global Ins. Co., No. 17-11735, 2018 WL 4696744, at *4 (D. Mass. Sept. 29, 2018). This timely appeal followed.

II. ANALYSIS

We review a district court's dismissal for failure to state a claim de novo.

See Artuso v. Vertex Pharm., Inc., 637 F.3d 1, 5 (1st Cir. 2011). "In conducting that review, we accept as true all well-pleaded facts set forth in the complaint and draw all reasonable inferences therefrom in the pleader's favor." Id. "When ... a complaint's factual allegations are expressly linked to — and admittedly dependent upon — a document (the authenticity of which is not challenged), that document effectively merges into the pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6)." Beddall v. State St. Bank & Tr. Co., 137 F.3d 12, 17 (1st Cir. 1998). Here, the Policy is such a document.

Since this case arises in diversity jurisdiction,² state law supplies the substantive rules of decision. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). This includes "rules relating to interpretation of [an] insurance policy." Eaton v. Penn-Am. Ins. Co., 626 F.3d 113, 114 (1st Cir. 2010). It is undisputed that, in the circumstances of this case, Massachusetts law controls.

In Massachusetts, an insurer's duty to defend arises when the facts — in the complaint and known to the insurer — generally demonstrate a possibility that the liability claim falls within the scope of the insurance policy. See B&T Masonry Constr. Co. v. Pub. Serv. Mut. Ins. Co., 382 F.3d 36, 39 (1st Cir. 2004). It follows that an inquiring court, tasked with assessing whether an insurer is duty-bound to its insured, should compare the allegations of the triggering complaint against the insured to the provisions of the insurance policy. See Deutsche Bank Nat'l Ass'n v. First Am. Title Ins. Co., 465 Mass. 741, 991 N.E.2d 638, 641 (2013) ; Billings v. Commerce Ins. Co., 458 Mass. 194, 936 N.E.2d 408, 414 (2010). The bar is not high, and the insured must be given the benefit of any reasonable doubt. See Sanders v. Phoenix Ins. Co., 843 F.3d 37, 43 (1st Cir. 2016) (explaining that, under Massachusetts law, "[i]f th[e] analysis yields two reasonable (but conflicting) interpretations ... the insured must be given the benefit of the [more favorable] interpretation").

An insurer's duty to indemnify the insured is narrower than its duty to defend. See id. at 46. The scope of the duty to indemnify hinges on whether the judgment — or in this case, the settlement — is for a covered claim. See Massamont Ins. Agency, Inc. v. Utica Mut. Ins. Co., 489 F.3d 71, 73 (1st Cir. 2007). It follows, then, that if there is "no duty to defend ... the insurer does not have a duty to indemnify." Sanders, 843 F.3d at 46 (quoting Bagley v. Monticello Ins. Co., 430 Mass. 454, 720 N.E.2d 813, 817 (1999) ).

As a general matter, it is the insured's burden to show that the insuring agreements — that is, the overall coverage provisions of a policy — apply in a given situation. See Vt. Mut. Ins. Co. v. Zamsky, 732 F.3d 37, 41 (1st Cir. 2013) (construing Massachusetts law). Once such a showing is made, the burden then shifts to the insurer, which has the opportunity to show that some exclusion places the claim outside the scope of coverage. See id. Should questions surface as to the meaning of the terms in the policy, we apply conventional rules of contract interpretation to elucidate the meaning of the questioned terms. See Sanders, 843 F.3d at 42.

Against this backdrop, the case at hand presents a straightforward question about the meaning and effect of the IP exclusion. Sterngold's claim is that Intra-Lock's complaint asserted an advertising injury within the scope of the coverage afforded by the Policy. As such, Sterngold insists that HDI was obligated to defend it in the Intra-Lock suit and furnish indemnification for any resulting damages (including the eventual settlement). HDI rejoins that, even if the injury alleged falls within the general language of the insuring agreements, the injury was squarely within the crosshairs of the IP exclusion and, thus, was excluded from coverage.

We set the stage. In pertinent part, the Policy affords coverage for "sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury.’ " The Policy defines "personal and advertising injury" to include the use of "another's advertising idea" or "[i]nfringing upon another's copyright, trade dress or slogan in [an] ‘advertisement.’ " The Policy further provides that publication on the internet may constitute an advertisement. Sterngold argues that the Intra-Lock complaint alleged a covered advertising injury — principally, the use of Intra-Lock's advertising idea through the inclusion of the OSSEO and OSSEOs trademarks in Sterngold's online advertising.

The phrase "advertising idea," as used in the Policy, is somewhat nebulous — but it is not without limits. The Supreme Judicial Court of Massachusetts recently offered some helpful clarification: "[i]f the insured took an idea for soliciting business or an idea about advertising, then the claim" constitutes an advertising injury for the use of another's advertising idea. Holyoke Mut. Ins. Co. v. Vibram USA, Inc., 480 Mass. 480, 106 N.E.3d 572, 579 (2018) (alteration in original) (quoting Auto Sox USA Inc. v. Zurich N. Am., 121 Wash.App. 422, 88 P.3d 1008, 1011 (2004) ). But if the underlying complaint merely alleges "that the insured wrongfully took a ... product and tried to sell that product," such an action would not constitute an injury stemming from another's advertising idea. Id. (alteration in original) (quoting Auto Sox USA, 88 P.3d at 1011 ).

In its suit against Sterngold, Intra-Lock alleged that it "acquired value, name and brand recognition, and goodwill in the OSSEAN mark as a result of continual and substantial advertising." Thus, Sterngold's use of "confusingly similar marks OSSEO and OSSEOs with osseointegrative dental implant coatings in internet advertising ... [was] likely to cause confusion, mistake, and deceive third parties" with respect to an imagined affiliation between Intra-Lock and Sterngold. Given these allegations, Sterngold contends that the sums it paid in settlement were for its appropriation of Intra-Lock's advertising idea and, therefore, fell within the coverage of the Policy.

It is not clear to us that Intra-Lock's allegations concerning the OSSEO and OSSEOs marks can be said to embody an ...