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WINNER INTL. CORP. v. CONTINENTAL CAS. CO.

August 16, 1994

WINNER INTERNATIONAL CORPORATION, a Pennsylvania corporation, and JAMES E. WINNER, JR., Plaintiffs,
v.
CONTINENTAL CASUALTY COMPANY, Defendant.



The opinion of the court was delivered by: WILLIAM L. STANDISH

 I

 In this civil action, plaintiffs, Winner International Corporation (WIC) and James E. Winner, Jr., seek a declaratory judgment regarding the duty of defendant, Continental Casualty Company, to defend and indemnify plaintiffs in connection with a diversity action filed by Charles R. Johnson against plaintiffs in the United States District Court for the Northern District of Ohio at Civil Action No. 91-2153 (the Ohio action). Plaintiffs also seek damages from defendant for breach of contract and breach of the duty of good faith and fair dealing. *fn1"

 Presently, before the court are the parties' cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56. After consideration, and for the reasons set forth below, the motion of defendant for summary judgment will be granted, and the cross-motion of plaintiffs for partial summary judgment will be denied.

  II

 The following facts are undisputed:

 1. From August 1, 1986 until August 1, 1989, WIC was covered by three primary comprehensive general liability insurance policies issued by defendant. Policy No. 7 00144486 provided coverage to WIC from August 1, 1986 to August 1, 1987 (the 1986 policy); from August 1, 1987 to August 1, 1988 (the 1987 policy); and from August 1, 1988 to August 1, 1989 (the 1988 policy). *fn2" (Plaintiffs' Consolidated Appendix, Exhs. A, B and C).

 2. On October 24, 1991, the Ohio action was filed against plaintiffs by Charles R. Johnson, asserting claims for fraud, unjust enrichment, breach of contract, an accounting and rescission. In summary, Mr. Johnson's complaint alleges the following facts:

 
Plaintiff, Charles R. Johnson, is a high school graduate with no formal post-high school education. Plaintiff is dyslexic.
 
In 1984 and 1985, plaintiff, at his own expense and in a workshop shared with his father in his parent's home, designed and built a prototype of an anti-theft device for attachment to the steering wheel of an automobile. During this time, plaintiff kept his work and the anti-theft device he designed confidential. In addition to inventing the anti-theft device, plaintiff helped coin a name for his invention - "The Club."
 
Plaintiff intended to market The Club for profit; however, he lacked capital and business expertise. As a result, in mid-September, 1985, plaintiff met with defendant James E. Winner to seek assistance in marketing The Club.
 
Plaintiff informed defendant Winner that he had a limited educational background, and that he was unable to read and comprehend what he was reading. Nevertheless, plaintiff was able to channel his energy into inventing things. Plaintiff also informed defendant Winner that he lacked the capital and business expertise necessary to patent and market The Club, and that he was looking for a trustworthy person who had a business marketing background and sufficient capital for the purpose of forming a joint venture to patent and market The Club for profit. Plaintiff also disclosed his prototype of The Club to defendant Winner, which had been kept confidential.
 
When they met, defendant Winner held himself out to be a skilled and trustworthy businessman with a particular expertise in the marketing and sale of products like The Club. Defendant Winner also represented that he had sufficient capital to finance the patenting and marketing of plaintiff's invention for profit, and that he was agreeable to forming a joint venture for such purpose.
 
It was agreed that plaintiff would contribute The Club, the costs he expended to develop The Club, and his time and talent to the joint venture. In addition, plaintiff agreed to do anything necessary to see that The Club was patented and marketed. During this time, it was agreed that plaintiff would receive $ 1,000.00 per month to offset giving up his then current job, thereby allowing him to devote his efforts to the furtherance of the joint venture.
 
It was further agreed that defendant Winner would contribute his business skill, marketing expertise and the capital necessary to obtain patents, to market The Club and to pay all expenses reasonably incurred by the parties in furtherance of their joint venture. The parties also agreed to share equally in the profits from the sale of The Club. Plaintiff believed the representations of defendant Winner to be true and he reasonably relied upon them.
 
On November 15, 1985, the attorneys retained by the parties filed Patent Application No. 805226 with the United States Patent Office, seeking the issuance of a design patent for The Club. On April 28, 1987, Design Patent No. 289491 was issued, naming plaintiff as the inventor of The Club and defendant Winner as the assignee. Thereafter, in accordance with their agreement, the patent attorneys filed Patent Application No. 15596 with the United States Patent Office on February 17, 1987, seeking the issuance of a utility patent for The Club. On April 19, 1988, Utility Patent No. 4,738,127 was issued, naming plaintiff as the inventor of The Club and defendant Winner as the assignee. Notwithstanding the fact that plaintiff invented The Club, defendant Winner represents and holds himself out to the media and to the general public as the designer and inventor of The Club.
 
On or about April 28, 1986, defendant Winner formed a Pennsylvania corporation known as Winner International Corporation for the purpose of transferring to it the rights to sell The Club and for the purpose of concealing profits from the sale of The Club from plaintiff. Defendant Winner had, and continues to have, complete control of Winner International Corporation, which is his alter ego.
 
In late 1986, defendant Winner entered into an agreement with Sears to sell The Club to Sears for resale at Sears stores. Defendant Winner continues to sell The Club to Sears. Around this time, defendant Winner also began selling The Club to other customers, including various retailers and individuals. Around this time, defendant Winner represented to plaintiff that there would be no profits from the Sears agreement and other sales of The Club because any money generated from such sales would go to offset expenses incurred in connection with advertising The Club. He also represented that the Sears agreement would merely benefit the parties through exposure of The Club to the public. Contrary to the representations of defendant Winner, profits were realized, and continue to be realized, from the sale of The Club to Sears and others, which fact was concealed from plaintiff by defendant Winner.
 
Beginning in late 1987 or early 1988, and continuing to date, defendant Winner has sold The Club for profit to various retailers in addition to Sears, including Ace-Hardware, K-Mart, Venture and Montgomery Ward. He has also sold The Club through several hundred automobile dealers throughout the United States and through direct market advertising. Defendant Winner now markets various models of The Club, including The Econo Club, The Super Club, The Truck Club and The Boat Club. The various models of The Club sell at retail prices ranging from $ 39.00 to $ 99.00, and the sales result in substantial profits. From the date of the parties' agreement, defendant Winner has sold in excess of 2,000,000 clubs at a substantial profit.
 
Plaintiff repeatedly asked defendant Winner when he could expect to receive his share of profits from the sale of The Club in accordance with their agreement. In response, defendant Winner represented to plaintiff that the joint venture was not yet earning a profit. Therefore, plaintiff was not entitled to payment. Defendant Winner repeatedly stated and guaranteed plaintiff that sales of The Club would be highly successful; that plaintiff would reap substantial profits from such sales; and that profits would be calculated and paid on an annual basis. Despite repeated demands, plaintiff has never received any profits from the sale of The Club pursuant to the terms of the parties' agreement.

 (Plaintiffs' Consolidated Appendix, Exh. H).

 4. Plaintiffs requested a defense and indemnification in the Ohio action under the provisions of the general liability policies issued by defendant to WIC relating to "advertising injury" liability. However, the request was denied.

 5. In the 1986 policy, coverage for advertising injury liability is set forth in an endorsement to the policy, which provides in relevant part:

 
II. PERSONAL INJURY AND ADVERTISING INJURY LIABILITY COVERAGE
 
(A) The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury or advertising injury to which this insurance applies, sustained by any person or organization and arising out of the conduct of the named insured's business, within the policy territory, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be ...

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