No Duty to Defend No Possible Duty to Indemnify

Legal Conclusions are Not Allegations of Fact
Post 4734
Zox LLC ("Zox") appealed the district court's grant of summary judgment in favor of West American Insurance Company. The district court held that West American had no duty to defend or indemnify Zox in an underlying trademark dispute between Zox and a group of entrepreneurs known as the "Zox Brothers" ("the Zox Litigation"). Zox contends the district court erred because the Zox Brothers sought damages for three potentially covered claims: (1) malicious prosecution; (2) disparagement; and (3) use of an "advertising idea."

In ZOX LLC, a California Limited Liability Company, v.  West American Insurance Company; et al., No. 23-55125, United States Court of Appeals, Ninth Circuit (February 9, 2024) the Ninth Circuit resolved the dispute.

ANALYSIS

Under California law, a liability insurer owes a broad duty to defend its insured against claims that potentially seek damages within the coverage of the policy. Coverage turns not on the technical legal cause of action pleaded by the third party but on the facts alleged.

While the duty to defend is broad, an insurer will not be compelled to defend its insured when the potential for liability is tenuous and farfetched. To determine whether the duty to defend was triggered, the Ninth Circuit was compelled to compare the allegations in the Zox Brothers' pleadings ("the Pleadings") with the terms of West American's Insurance Policy ("the Policy").

Malicious Prosecution

To plead a malicious prosecution claim, the Zox Brothers must plead facts to prove that an underlying action was initiated or maintained (i) by, or at the direction of, [Zox] and pursued to a legal termination in favor of the Zox Brothers; (ii) without probable cause; and (iii) with malice. The Zox Brothers did not plead facts, nor provide extrinsic evidence, to satisfy any of the requisite elements of a malicious prosecution claim. The Pleadings did not trigger coverage for malicious prosecution.

Disparagement

To plead a disparagement claim, the Zox Brothers must plead facts to show a false or misleading statement that (1) specifically refers to the Zox Brothers' product or business and (2) clearly derogates that product or business. The Ninth Circuit was required to look past labels and at the facts alleged. Zox was unable to cite a single factual pleading in support of a disparagement claim.

Appropriation of Advertising Ideas

Zox contends that the Zox Brothers triggered coverage by claiming that Zox appropriated their "advertising ideas" by using the "Zox" name and "passing off" their products as Zox Brothers' goods. An "advertising idea" is a "process or invention" used to market one's goods. The district court did not err in finding that the Pleadings did not trigger coverage for a "use of another's advertisement" claim.

CONCLUSION

For the reasons stated by the Ninth Circuit, outlined above, it found that West American did not have a duty to defend or indemnify Zox in the Zox Litigation because, there was no duty to defend.

Where there is a duty to defend, there may be a duty to indemnify; but where there is no duty to defend, there cannot be a duty to indemnify.

ZALMA OPINION

The Ninth Circuit applied the clear and unambiguous language of the policy to the "facts" alleged; found that the allegations were mostly speculative or based on legal conclusions, failure to allege facts to support the three claims failed and, therefore, the Ninth Circuit had no choice but to affirm the summary judgment find no duty to defend nor a duty to indemnify.

(c) 2024 Barry Zalma & ClaimSchool, Inc.

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