MEMORANDUM AND ORDER RE: MOTION TO DISMISS
Plaintiffs Basalite Concrete Products, LLC ("Basalite"), and Pacific Coast Building Products, Inc. ("Pacific"), brought suit against defendants National Union Fire Insurance Company of Pittsburgh, PA, ("NUFIC"), and Chartis Specialty Insurance Company, ("Chartis"), alleging breach of the duty to defend in an underlying lawsuit brought by Keystone Retaining Wall Systems against plaintiffs (the "Keystone Matter"). Defendants now move to dismiss the action under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.
I. Relevant Facts and Procedural History Plaintiffs are in the business of manufacturing and distributing hardscape products, including structural blocks, interlocking paving stones, wall systems, and retaining walls, as well as ornamental and garden products. (First Am. Compl. ¶ 22 ("FAC") (Docket No. 26).) NUFIC allegedly issued Pacific a general commercial liability insurance policy with an effective starting date of September 29, 2009. (Id. ¶ 17, Ex. A.) Chartis allegedly issued Basalite a general commercial liability insurance policy with an effective starting date of September 29, 2008. (Id. ¶ 18, Ex. B.) The policies have substantially similar terms and are referred to together as "the Policies" in plaintiffs' FAC. (Id. ¶¶ 19-21.)
A. The Policies 1. Personal and Advertising Injury Clause Under the Policies, defendants agree to "pay those sums that the insured becomes legally obligated to pay as damages because of personal and advertising injury to which this insurance applies," and defendants "will have the right and duty to defend the insured against any suit seeking those damages." (Id. Ex. A at 7-8, Ex. B at 14.) In relevant part, "personal and advertising injury means injury . . . arising out of one or more of the following offenses: . . . (d) Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services; . . . (f) the use of another's advertising idea in your advertisement; [or] (g) infringing upon another's copyright, trade dress, or slogan in your advertisement." (Id. Ex. A at 40-41, Ex. B at 13.) "Advertisement" is defined as "a notice that is broadcast or published to the general market or specific market segments about [the insured's] goods, products, or services for the purposes of attracting customers." (Id. Ex. A. at 35, Ex. B at 11.)
The Policies contain two relevant exclusions to the "personal and advertising injury" clause. First, the Policies exclude personal and advertising injury "arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights." (Id. Ex. A at 9; Ex. B at 6.) This exclusion, however, does not apply "to infringement, in [the insured's] advertisement, of copyright, trade dress or slogan." (Id.)
Second, the Policies exclude personal or advertising injury "arising out of breach of contract." (Id. Ex. A at 8, Ex. B at 5.) This exclusion, however, does not apply to "an implied contract to use another's advertising idea in [the insured's] advertisement." (Id.)
2. Property Damage Clause
The Policies also provide that defendants will defend the insured against any suit seeking damages for "property damage." (Id. Ex. A at 1, Ex. B at 1.) "Property damage" is defined as "physical injury to tangible property" or "loss of use of tangible property that is not physically injured." (Id. Ex. A at 42, Ex. B at 13.) The property damage, however, must be caused by an "occurrence," (id. Ex. A at 1, Ex. B at 1), which is defined as an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Id. Ex. A at 40, Ex. B at 13).
On or about September 29, 2010, Keystone filed suit against plaintiffs in the United States District Court for the District of Minnesota, eventually filing a First Amended Complaint and a Second Amended Complaint. (FAC ¶¶ 23-24, Exs. C & D). The Keystone Matter included factual allegations that plaintiffs improperly used Keystone's trademarks and patents after breaching licensing agreements which granted plaintiffs the "the right and license to utilize the Know-How, Molds, Patent Rights, and Trademarks to manufacture, market and sell the Products." (Id. Ex. D ¶¶ 18-30, 54-74.) Keystone alleged that plaintiff breached the licensing agreement but continued to use Keystone's trademarks and patents after Keystone requested that they cease doing so. (Id. ¶¶ 54-74.) Keystone brought claims for breach of contract, trademark infringement, patent infringement, and violations of 15 U.S.C. § 1125(a) and (c). (Id. ¶¶ 75-508).
C. Plaintiffs' Allegations and Procedural History Plaintiffs allege that the pleadings in the Keystone
Matter triggered a duty to defend under the Policies because the Keystone pleadings alleged facts that could potentially state claims for disparagement, slogan, and trade dress infringement in plaintiffs' advertising, as required for coverage under the "personal and advertising injury" clause. (FAC ¶¶ 25-41.)
Plaintiffs also appear to allege that the Keystone pleadings give rise to a duty to defend under the "property damage" clause. (Id. ¶¶ 26, 28.)
Plaintiffs allege to have first tendered the defense to defendants on or about November 18, 2011, and defendants denied the defense on or about January 23, 2012. (Id. ¶¶ 42-43.) Plaintiffs again allegedly tendered the defense on or about August 22, 2012 and August 31, 2012, this time including "approximately 1,200 pages of marketing materials, brochures, and other advertisements" which "were the actual documents which comprised of [sic] the subject matter of the Keystone Matter." (Id. ¶ 45.)
Defendants allegedly failed to pay for plaintiffs' defense in the Keystone matter, which led to plaintiffs incurring over $1,000,000 in defense costs. (Id. ¶ 55) The Keystone Matter was allegedly settled in excess of $1,500,000. (Id. ¶ 56.)
Plaintiffs bring a claim for declaratory relief on the issue of defendants' duty to accept plaintiffs' tenders of defense in the Keystone Matter. (Id. ¶¶ 58-62.) Pacific also brings a breach of insurance contract claim against NUFIC, (id. ¶¶ 63-68), and a claim for bad faith breach of the covenant of good faith and fair dealing against the same, (id. ¶¶ 75-81). Basalite brings similar claims against Chartis. (Id. ¶¶ 69-74, 82-88.)
Defendants filed a motion to dismiss on January 8, 2013. (Docket No. 10.) In ruling upon that motion, as for plaintiffs' allegations that a duty to defend arose under the Policies' personal and advertising injury clause, the court held that "plaintiffs do not adequately allege that the pleadings in the underlying Keystone Matter included facts related to advertisements," and "do not allege that they ever submitted [the extrinsic] materials to defendants when tendering their defense and thus fail to allege how defendants knew of these materials at the time of tender." (Feb. 13, 2013 Order at 2-3 (Docket No. 22).) The court also held that plaintiffs failed to adequately allege a duty to defend under the property damage clause, since "plaintiffs fail to allege how the underlying Keystone Matter ...