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American Legacy Foundation, Rp v. National Union Fire Insurance Company of Pittsburgh

October 12, 2010


Appeal from the United States District Court for the District of Delaware (D.C. Civ. No. 1-07-CV-00248) District Judge: Honorable Sue L. Robinson

The opinion of the court was delivered by: Weis, Circuit Judge.


Argued July 15, 2010

Before: FUENTES, VANASKIE and WEIS, Circuit Judges. (Filed: October 12, 2010)


In this appeal, a policyholder seeks to recover expenses incurred in defending against claims for which the insurance company denied coverage. Wending through a thicket of inclusions and exclusions leads to the conclusion that the District Court properly entered summary judgment in favor of the insurer. Accordingly, we will affirm.

A. Alleged Liability of The Foundation to Lorillard: The Underlying Suit

American Legacy Foundation, a Delaware non-profit corporation, was formed by the terms of the 1998 Master Settlement Agreement ("MSA") between 46 states' attorneys general and the country's largest tobacco companies. Among these was Lorillard Tobacco Company, whose dispute with the Foundation is at the root of the case now before us. The Foundation's mission, as initially set forth in the MSA and incorporated into its own bylaws, was to educate the public about the dangers of tobacco products in order to reduce their use among America's youth.

The MSA provided that the tobacco companies would fund advertising campaigns, developed by the Foundation, that demonstrated the negative impact of tobacco product usage. The ads were to be concerned only with the "addictiveness, health effects, and social costs related to the use of tobacco products." Ads that amounted to a "personal attack on, or vilification of," tobacco companies or their employees were prohibited.

The Foundation created a series of television and radio ads branded "the truth(™)." These ads were brash, edgy, impertinent, and disrespectful, to appeal to those teens and young adults who were believed to be more likely to use tobacco products. The ads portrayed Lorillard and other tobacco firms in a mocking and unfavorable light.*fn1

In 2001, Lorillard sent a cease-and-desist letter to the Foundation, threatening to file suit over one of those ads. A draft complaint included with the letter alleged various torts, including slander per se and per quod, libel per se and per quod, secondary libel, and unfair or deceptive acts or practices. Lorillard's letter also suggested that it might also pursue breach of contract claims.

In a letter of January 18, 2002, Lorillard followed up with a "Notice of Intent to Initiate Enforcement Proceeding Under MSA." There, Lorillard asserted that the Foundation had improperly used the funding designated by the MSA for public education and failed to meet its obligations under that agreement.

The Foundation peremptorily filed a declaratory judgment action against Lorillard in Delaware Chancery Court on February 13, 2002. Six days later, Lorillard brought suit against the Foundation in North Carolina state court. That complaint included no tort claims but alleged breach of the MSA and of the covenant of good faith and fair dealing.

Lorillard counterclaimed against the Foundation in the Delaware Chancery Court in September 2002, asserting breach of the MSA; breach of the duty and covenant of good faith and fair dealing implied in the MSA; violations of the Foundation's bylaws and certificate of incorporation; a declaratory judgment that the Foundation was not eligible for public funding under the MSA; and trespass to chattel. The North Carolina suit was stayed and remained pending while the parties litigated the Delaware matter.

In January 2003, the Delaware Court of Chancery held that the Foundation, though not a signatory to the MSA, could be held liable for violations of that agreement. Granting summary judgment to Lorillard on this issue, the Chancery Court found that the Foundation had adopted the MSA, both expressly and "implicitly by accepting its benefits with knowledge of its terms." Am. Legacy Found. v. Lorillard Tobacco Co., 831 A.2d 335, 348-50 (Del. Ch. 2003). Therefore, the Court concluded that the Foundation was bound by the MSA's provisions. Id. at 351.

After lengthy discovery and motions practice, including cross-motions for summary judgment, the Chancery Court found that the ads in question did not breach the MSA. Specifically, the ads did not violate the anti-vilification clause because they did not incorporate "scurrilous [or] vitriolic attacks[,]" nor did they amount to "cruel slander. . . . public ridicule, traduction, or calumny." Am. Legacy Found. v. Lorillard Tobacco Co., 886 A.2d 1, 32-33 (Del. Ch. 2005). In addition, the ads did not contain personal attacks because "none of the ads specifically identif[ied] a target of an alleged attack." Id. at 43.

Accordingly, summary judgment was granted in favor of the Foundation in August 2005. Id. at 46.

On appeal, the Delaware Supreme Court affirmed the holdings of the Chancery Court on both the standing and liability issues. Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728 (Del. 2006). Having carefully scrutinized four of the ads that Lorillard had asserted were contrary to the MSA, the court found that "[t]he advertisements are not invidious, disparaging, offensive, belligerent, nor fiercely or severely critical. Nor are they denouncements that are both unfounded and abusive or slanderous. . . . [They] do not qualify as personal attacks or vilifications." Id. at 742.*fn2

Moreover, because Delaware law provided that a corporation was bound by its preincorporation agreement "if [it] expressly adopts th[at] . . . agreement or implicitly adopts it by accepting its benefits with knowledge of its terms," the Delaware Supreme Court found the Foundation's cross-appeal to be "without merit." Id. at 745.

B. The Foundation v. National Union: The Current Litigation

During the time it was publishing the ads at issue in the Lorillard suits, the Foundation had in effect a number and variety of insurance policies. Of the four comprehensive general liability ("CGL") policies, three had been written by Travelers Indemnity Company of America and another by Scottsdale Insurance Company. In addition, National Union Fire Insurance Company of Pittsburgh, Pa., had issued an Individual and Organization ("I&O") Policy as well as umbrella insurance to the Foundation.

After receiving Lorillard's November 13, 2001, cease- and-desist letter, outside legal counsel for the Foundation instructed its broker to "immediately put on notice - and demand defense and indemnity from - all insurers (primary, umbrella and excess; general liability, D&O, etc.) that issued potentially applicable policies." The broker responded by sending a notice of occurrence form to National Union and Travelers on December 4, 2001.

In April 2002, Travelers denied coverage for the North Carolina claim but did not address the Delaware litigation. In a letter of December 6, 2002, two months after Lorillard filed its counterclaims, National Union similarly advised that the claims presented in the North Carolina suit were not insured under the I&O Policy because suits arising out of breach of contract were excluded. In addition, that insurer - evidently unaware of Lorillard's counterclaims, filed two months earlier - wrote that no costs from the Delaware action would be covered because "affirmative prosecution of a lawsuit is not a Claim under the Policy."

Nearly three months later, on February 26, 2003, the Foundation advised its broker that the Delaware suit was moving forward on Lorillard's counterclaims and requested that the broker "immediately contact all insurers . . . and demand any defense and indemnity as may be owed."

In April 2003, National Union told the Foundation that its umbrella policies would not insure liability from the lawsuits under either of the two coverage options, A or B. On August 13, 2003, that insurer further advised that it did not believe coverage was applicable under the I&O Policy. Notwithstanding its denials of coverage, National Union requested, and ...

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