The issue in United National Ins. Co. v. Spectrum Worldwide, Inc., No. 07-55833 (9th Cir. Feb. 2, 2009) [here] was whether the policy's "first publication" exclusion applied to an infringement claim.
In December 1997, Sunset hired Spectrum, the insured, to advertise and distribute the "Hollywood 48-Hour Miracle Diet" drink. Two Spectrum executives later formed Celebrity Products, Inc. to market and sell a similar product, "the Original Hollywood Celebrity Diet" drink. Spectrum terminated its contract with Sunset and began marketing the Celebrity Diet drink.
Sunset then demanded that Spectrum cease infringing on its Miracle Diet trademark. When this failed, Sunset sued for infringement against Spectrum in October 2001. Sunset alleged Spectrum deliberately made Celebrity Diet's packaging and labeling similar to Miracle Diet so that it confused consumers and damaged Sunset's reputation. Sunset sought a temporary restraining order, asking the court to compare Sunset's 1998 label to Spectrum's 1998 and 2001 labels to determine whether Spectrum's 2001 label constituted an immediate harm to Sunset. The district court granted a temporary restraining order based on the dramatic change between Spectrum's 1998 and 2001 labels. At the preliminary injunction hearing, Spectrum argued it changed its 1998 label in 1999, and that its 1999 label was so similar to its 2001 label that Sunset could not experience immediate harm. The district court accepted Spectrum's position and denied the preliminary injunction. Accordingly, Spectrum was able to continue profiting from the sale of Celebrity Diet.
Meanwhile, in 2001 United issued Spectrum an excess liability policy which indemnified the insured for damages resulting from "advertising liability" injury, including infringement of copyright. The policy took effect April 26, 2001. The policy excluded an "advertising injury" arising out of a publication of material which first took place before the policy period. When Spectrum settled with Sunset, United contributed $420,000 to the settlement, and then sought reimbursement in a suit filed against Spectrum. The district court granted United's motion for summary judgment, holding Spectrum's 1999 label formed the substance of Sunset's advertising injury, and eliminated coverage because the first publication occurred before the policy's effective date.
The Ninth Circuit affirmed. The policy clearly excluded any copyright infringement injury that arose from a publication of material first published before the policy became effective. Next, the court considered whether Spectrum could argue its claim did not arise until 2001 afterit previously argued Sunset's alleged infringement claim arose from materials first published in 1999. Allowing Spectrum to change course was unfair to Sunset and to United, whose indemnification obligations increased as Sunset's damages increased after Spectrum successfully avoided an injunction and later settled. Therefore, Spectrum was judicially estopped from changing course.
