Third Circuit Issues Ruling on Insurer’s Broad Duty to Defend

On January 5, 2022, the Third Circuit Court of Appeals handed down its opinion in Vitamin Energy, LLC v. Evanston Insurance Company, which reaffirmed the broad manner in which Pennsylvania courts will construe an insurer’s duty to defend.

Vitamin Energy arose out of an underlying intellectual property lawsuit filed by the companies that own the trademarks for 5-hour Energy liquid energy shots. Per the complaint, Vitamin Energy engaged in “false and misleading comparative advertising” regarding the benefits of its own products versus 5-hour Energy and misrepresented the effects Vitamin Energy’s products would have on the users’ performance. 5-hour Energy also claimed that Vitamin Energy advertised that its product would provide “up to 7 HOURS of Energy” by using language and a typeface that was confusingly similar to 5-hour Energy’s registered trademarks.

Subsequent to the filing of the underlying action, Vitamin Energy sought a defense and indemnification from its CGL insurer, Evanston, which disclaimed coverage on the basis that the complaint did not assert claims qualifying as “advertising injury” and that, even if such claims were asserted, coverage was otherwise barred by various exclusions. As a result, Vitamin Energy filed a declaratory judgment complaint against Evanston, seeking a declaration of its entitlement to coverage.

In November 2020, Judge Joel H. Slomsky of the United States District Court for the Eastern District of Pennsylvania granted summary judgment to Evanston, ruling that the allegations of the underlying complaint did not allege “advertising injury” as defined by the subject CGL policy. The Third Circuit, in its recent opinion drafted by Judge Kent A. Jordan (and joined in by Judge David J. Porter and Judge Marjorie O. Rendell), reversed that decision and found that Evanston owed a duty to defend based upon the broad and liberal construction required for determining an insurer’s defense obligation.

In so ruling, the Circuit court engaged in a granular discussion of the allegations set forth in  5-hour Energy’s complaint. Ultimately, it was a single claim—that 5-hour Energy’s products do not contain 100% of the recommended daily value of vitamin B—which the Third Circuit found differentiated the claims against Vitamin Energy from previous cases in which courts found insurers did not owe a duty to defend their insureds and triggered Evanston’s duty to defend. More specifically, the court acknowledged that various aspects of the complaint were outside the scope of the coverage afforded by Evanston’s policy (including those with respect to representations regarding Vitamin Energy’s own products and those involving trademark infringement), but noted that, under Pennsylvania law, “the question for us is whether a claim against an insured is potentially covered, not whether the most salient claim is potentially covered.” (Italics in original.) The Third Circuit also rejected the applicability of various exclusions in Evanston’s policy to excuse the carrier’s duty to defend, as it focused upon their irrelevance to the sole “covered” claim—for allegedly false or misleading representations regarding the contents of 5-hour Energy’s products. 

In the end, the Third Circuit couched its decision in the context of Pennsylvania’s broad construction of an insurer’s duty to defend. Simply put, where a complaint asserts a variety of claims, and any one of them falls within the scope of the coverage provided by a policy, the insurer owes the obligation to defend its insured against the entirety of the action. That said, and as the Third Circuit took pains to note, that preliminary determination does not decide the ultimate issue of whether the insurer will owe a duty to indemnify. The outcome of that question will depend upon the proofs that are adduced through discovery and trial.
 

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