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Jeffrey R. Schmieler, Esquire
Alan B. Neurick, Esquire
Lucas F. Webster, Esquire
Saunders & Schmieler, P.C.
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© Saunders & Schmieler, P.C. 2002

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

Perdue Farms Incorporated Loses $30+ Million Bid for Advertising Liability Insurance Coverage

Perdue Farms Incorporated v. National Union Fire Insurance Company of Pittsburgh, P.A. & Federal Insurance Company, Civil No. L-99-2818, 2002 WL 537643 (D.Md. April 8, 2002).

On April 8, 2002, Judge Benson Everett Legg of the United States District Court for the District of Maryland granted summary judgment in favor of National Union Fire Insurance Company of Pittsburgh, P.A. ("National Union") and Federal Insurance Company ("Federal"), finding that the insurers did not owe a duty to indemnify Perdue Farms Incorporated ("Perdue") for a claimed "advertising liability" under its policies. The case presented "advertising liability" issues novel to the District Court of Maryland and to the Fourth Circuit and resulted in a precedent ruling. Federal was represented by Saunders & Schmieler, P.C., Jeffrey R. Schmieler, Esq., Alan B. Neurick, Esq., and Lucas F. Webster, Esq. Perdue had brought suit against National Union and Federal seeking coverage for damages of $30,000,000 paid to Dennis Hook for misappropriating his trade secret process for making cook in a bag chicken by creating its own derivative "TenderReady" chicken product. Perdue asserted that these damages arose out of its advertisement of TenderReady in 1995 and was therefore entitled to coverage for "advertising liability" under National Union's and Federal's policies. Perdue also sought its attorney's fees. The parties filed cross-motions for summary judgment, which were extensively briefed and supported by hundreds of pages of the record. The Court then conducted five separate hearings, which centered around twenty-seven written questions that the Court submitted to counsel.

Following the extensive briefing and oral arguments, the Court held that the damages paid by Perdue to Mr. Hook did not arise out of its advertising and those damages were not covered by National Union or Federal's policy. The Court also held that the "failure of performance of contract" exclusion in the policies also excluded coverage of Perdue's liability to Mr. Hook because breach of its breach of two confidentiality agreements.

Perdue's suit against its insurers stems from a suit filed by Mr. Hook in Florida against Pizza Hut and Perdue. Hook alleged in that suit that Perdue had misappropriated his process for preparing, storing and reheating roasted chicken. Mr. Hook's idea involved cooking specially seasoned pieces of chicken in a vacuum?sealed bag (commonly referred to as "sous vide"), refrigerating the chicken after cooking, and then reheating the chicken using a microwave in combination with one of four other types of ovens: an "impingement" or pizza oven, a deep fryer, a convection oven, or a conventional broiler oven.

Mr. Hook shared his process with Perdue as part of a test market program with Pizza Hut. Prior to doing so, Perdue entered into two written confidentiality agreements designed to protect Mr. Hook's secret process. Nevertheless, in 1993, without any authority to do so, Perdue began to produce its own TenderReady product, which was based on the process Mr. Hook shared with Perdue. Mr. Hook thereafter brought suit in Florida against Perdue arguing that Perdue had misappropriated his trade secret in violation of the Florida Uniform Trade Secret Act and in violation of the two written confidentiality agreements.

A jury returned a verdict awarding Mr. Hook damages in the amount of $48,000,000. These damages were reduced on appeal by the Florida Court of Appeals for the Second District to $27,000,000. However, Mr. Hook and Perdue entered into a "high-low" settlement agreement whereby, because of the Florida appellate court's affirmation, Perdue paid Mr. Hook $30 million. Perdue thereafter filed suit in the United States District Court for the District of Maryland claiming its policies with National Union and Federal provided coverage to it for its actions and damages paid to Mr. Hook.

At oral argument in the insurance coverage action, Jeffrey R. Schmieler, on behalf of Federal, argued in support of Federal's summary judgment motion that the misappropriation of Mr. Hook's trade secret was not an enumerated offense for advertising liability coverage and that the damages awarded in the underlying Hook litigation did not arise out of Perdue's advertising activities. For coverage to exist, the insurance policies required that Perdue's actions have been "piracy, unfair competition, or idea misappropriation under an implied contract." Perdue claimed that it had committed each and all of these enumerated offenses in the underlying Hook litigation. Federal argued that unfair competition and piracy were not the equivalent of misappropriation of a trade secret. Federal also argued that Perdue did not commit idea misappropriation under an implied contract because Perdue's trade secret misappropriation was a violation of two expressed written contracts. Perdue had signed two confidentiality agreements to which Mr. Hook was a third party beneficiary, an assignee, or both. The District Court agreed that the two confidentiality agreements signed by Perdue were expressed contracts and misappropriation under an implied contract offense could not exist here.

Federal also argued that "advertising liability" coverage could not exist because its definition required a causal nexus between the enumerated offense (piracy, unfair competition, idea misappropriation under an implied contract) - regardless of what the enumerated offense was - and Perdue's advertising activities, and that none existed in this case. Federal argued that the insured's advertising must cause the injury, and, further, that when the insured's advertising occurs after the misappropriation, there is no causal connection. The Court agreed. In its written opinion, the Court stated that the advertising liability must be found within the four corners of the advertisement. In finding for Federal, Judge Legg held that the Jury's verdict against Perdue, and damages awarded to Mr. Hook., were based upon Perdue's misappropriation of the Hook secret process to develop TenderReady and the presence of TenderReady in the marketplace -- and not any disclosure of the Hook secret process in Perdue's advertising.

Courts outside of Maryland and the Fourth Circuit have examined what is required to satisfy the causal connection between an enumerated offense and an insured's advertising activities in for coverage to exist. One case presented to the court by the Federal and which was central to the court's memorandum in this case was McDonald's Corp. v. American Motorist Ins. Co., 748 N.E.2d 771 (Ill. App. Ct. 2001). In McDonald's Corp., the plaintiffs in the underlying case alleged that McDonald's had misappropriated its trade secret oven design and that McDonald's promotion of that oven "exposed plaintiffs' trade secrets to the marketplace." 748 N.E.2d at 775. McDonald's insurer refused to defend and indemnify for any damages related to the underlying suit. At the coverage case the McDonald's trial court held that "there was no 'causal connection' between the content of McDonald's promotional activity and the commission of an enumerated offense," and "that the theft of the trade secret occurred before any promotion commenced." 748 N.E.2d at 776. The final pretrial order from the underlying case requested "special damages for lost profits as a result of 'reduction of market opportunity due to uncertainty of ownership.'" 748 N.E.2d at 781.

On appeal, the Appellate Court of Illinois held that "McDonald's cannot meet the direct causal connection requirement because said requirement requires that the offense be caused by the promotion, not merely the damages," and "[e]ven assuming that the allegations of misappropriation of trade secrets constitutes an enumerated offense, McDonald's is unable to demonstrate that the misappropriation of trade secrets was caused by its promotional activities." 748 N.E.2d at 779. "The MSP policies do not afford coverage if the only causal connection is between an insured's promotional activities and the measure of damages asserted by an underlying plaintiff." 748 N.E.2d at 782.

Federal argued that, similar to the McDonald's case, the misappropriation of Mr. Hook's trade secret process did not occur in any advertising. Rather, it was Federal's position that it was Perdue's actions in producing its own TenderReady product, by improperly using Mr. Hook's trade secret as well as the presence of TenderReady in the marketplace, which caused Mr. Hook's damages. Hook's damages were not a result of any advertisements by Perdue of its TenderReady product.

The District Court agreed and found that the advertising was not the basis of the jury's award and, thus, no advertising liability existed for which coverage would otherwise be provided.

Finally, Federal argued that the exclusion for failing to perform a contract excluded coverage not only for Perdue's breach of the two confidentiality contracts for which the Florida jury assessed damages, but also for the Florida jury's finding that Perdue had misappropriated Mr. Hook's secret process. The District Court agreed. With respect to the two confidentiality agreements, the Court ruled that they were express contracts. Therefore, the Court held that the enumerated offense of "misappropriation of an implied contract" was not implicated and that, in addition, the failure of performance of contract exclusion also applied. With respect to the misappropriation of a trade secret count, the Court agreed with Federal's argument and noted that but for Perdue's failure to perform its obligations under the confidentiality agreements, Mr. Hook's misappropriation of trade secret claim could not survive.

The Court therefore granted Federal's Motion for Summary Judgment and denied Perdue's, and held that no coverage existed under the National Union and Federal insurance policies for Perdue's misappropriation of a trade secret and breach of two express confidentiality contracts.

For more information contact Saunders & Schmieler at e-mail schmielerj@sslawfirm.com or visit our website at www.sslawfirm.com

For full text of the above opinion, click on: http://www.mdd.uscourts.gov/Opinions152/Opinions/perdue0402.pdf or e-mail schmielerj@sslawfirm.com