Paul Dolan is a fourth generation winemaker. In 2004, he and a family named Thornhill formed the Mendocino Wine Group (Mendocino). Dolan initially served as president and agreed to permit the company to develop wine using his name as a trademark, so long as he "was able to control the nature and quality of wine that would be sold under his name." The company then began selling wine under the Paul Dolan trademark.
According to Dolan, in 2012, he was "ousted" from the company. He then filed a lawsuit against the company, alleging claims for (1) a declaration that the company could no longer use the Paul Dolan trademark; (2) unfair competition in violation of the Lanham Act; violation of the common law right of publicity and statutory right of publicity under California Civil Code § 3344; and cancellation of the Dolan trademark registration.
Dolan asserted that he never intended the company could use his name forever, and he revoked his consent for the company to use his name in connection with any Dolan trademark. Nevertheless, he alleged, the company continued to distribute and sell wine under the Paul Dolan trademark, and continued to use his name to market, advertise and promote its products. His lawsuit against the company claimed the continued use of the trademark violated his right of publicity and caused damage to Dolan because it directly conflicted with his own ability to use his name in connection with wine and related products and services, and because it falsely suggested the goods the company was selling and distributing were connected with him.
Mendocino tendered Dolan's claims to its insurer, Unigard Insurance Company, for coverage under a commercial general liability insurance policy. The policy stated the insurer would pay "those sums that the insured becomes legally obligated to pay as damages because of 'personal and advertising injury' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages for 'personal and advertising injury' to which this insurance does not apply..."
The policy also defined "personal and advertising injury" to mean "[o]ral 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" and "[o]ral or written publication, in any manner, of material that violates a person's right of privacy."
The policy contained an intellectual property exclusion, which expressly excluded coverage for infringement of copyright, patent, trademark or trade secret, which was defined to mean "'personal and advertising injury' arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your 'advertisement.'
"However, the exclusion does not apply to infringement, in your 'advertisement,' of copyright, trade dress, or slogan."
Unigard denied coverage of the claims, asserting the claims alleged in the underlying action did not give rise to coverage under the policy's insuring provisions and there was no duty for it to defend Mendocino, and also because coverage was excluded based on the intellectual property exclusion. In turn, Mendocino sued Unigard for breach of contract and bad faith. Unigard filed a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting that Mendocino's complaint failed to state a legal claim for which relief could be granted. The Court agreed and dismissed Mendocino's lawsuit.
The Court explained that, under California law, an insurer must defend its insured against claims that create a potential for indemnity under the policy. Dolan's claims were based on his allegations that Mendocino had misappropriated his likeness without authorization. The Court found these claims did not create even a potential for coverage.
The Court explained there are two types of appropriation claims, which are distinguished by the nature of the plaintiff's right and the resulting injury. The first type - - the right of publicity - - is essentially that the public's reaction the to the individual's name and likeness, which endows them with "commercially exploitable opportunities."
The second type of appropriation brings injury to the feelings. It concerns the plaintiff's peace of mind. It is mental and subjective.
The right of publicity is considered an intellectual property right that protects a form of intellectual property which society deems to have some social utility. The "mental and subjective" type of appropriation, on the other hand, does not.
The Court found that the exclusion applied to bar coverage. While the policy covered damages for violations of privacy rights, it excluded coverage for injuries arising out of violations of intellectual property rights, such as Dolan's right of publicity claim. Dolan did not assert a claim based on injured feelings, but only that Mendocino's use of his name and likeness diminished his marketability and publicity value and deprived him of his right of publicity - - a violation of his intellectual property right, which was excluded by the plain language of the intellectual property exclusion.
Mendocino also argued that there was coverage because the allegations in Dolan's complaint alleged the elements of a defamation claim. Unigard countered that there were no allegations of the publication of defamatory material. Defamation involves a publication that is false, defamatory, and unprivileged, and has a natural tendency to injure or that causes special damage, and that the publication is to a third person who understands both the defamatory meaning of the statement and its application to the referenced person. Similarly, disparagement concerns a false or misleading statement that specifically refers to the plaintiff's product or business and clearly derogates that product or business. Ordinarily, damage caused by defamation involves injury to a person's reputation. However, a party's attempt to copy or infringe another's intellectual property, without more, does not constitute disparagement.
Here the Court found Dolan's allegations did not allege Mendocino's misappropriation constituted a defamatory statement. Rather, Dolan contended his reputation was harmed because Mendocino's unauthorized continued sale, distribution and marketing of wine under the Paul Dolan trademark, which damaged him because it directly conflicted with his ability to use his own name in connection with wine and related products and services, and because it falsely suggested the goods Mendocino was distributing were connected with Dolan. As the court found, while these allegations supported a violation of the right of publicity, they did not support a claim for disparagement or defamation. Indeed, the Court found, Mendocino's alleged attempt to falsely sell its wine under Dolan's name is "more akin to flattery" than disparagement, and therefore did not trigger a duty to defend. (The Court's observation may find support in reports that the company subsequently settled with Dolan in a deal that permitted Mendocino to continue to sell wine under the Dolan name.)
Without a breach of the insurance contract, moreover, there can be no breach of the implied covenant of good faith and fair dealing as a matter of law. The court therefore dismissed Mendocino's claims under Rule 12(b)(6), both for breach of contract and for bad faith.
The case is Mendocino Wine Grp., LLC v. QBE Ams., Inc., U.S. District Court for the Northern District of California Case No. 15-cv-06342-HSG (August 5, 2016).