Pennfield Oil Company v. American Feed Industry Insurance Company Risk Retention Group

MEMORANDUM AND ORDER denying {{43}} American Feed's Motion for Summary Judgment; granting in part and denying in part {{48}} Pennfield's Motion for Summary Judgment. Ordered by Judge Joseph F. Bataillon.

District of Nebraska, ned-8:2005-cv-00315

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8:05-cv-00315-JFB-TDT Doc # 65 Filed: 03/12/07 Page 1 of 17 - Page ID # 977 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA PENNFIELD OIL COMPANY,)) 8:05CV315) Plaintiff/Counterclaim) Defendant,)) v.) MEMORANDUM AND ORDER)) AMERICAN FEED INDUSTRY) INSURANCE COMPANY RISK) RETENTION GROUP, INC.,)) Defendant/Counterclaim) Plaintiff.) This matter is before the court on the parties cross-motions for summary judgment. Filing Nos. 43 and 48. This is an action for declaratory judgment under 28 U.S.C. § 2201. Jurisdiction is premised on diversity of citizenship under 28 U.S.C. § 1332. The parties seek a determination of their rights and responsibilities under certain policies of insurance issued to Pennfield Oil Company ("Pennfield" or "the insured") by American Feed Industry Insurance Company Risk Retention Group, Inc. ("American Feed" or "the insurer"). Pennfield seeks a declaration that American Feed has a duty under the policies to defend Pennfield in an action filed against it in this court, Alpharma Inc. v. Pennfield Oil Co., No. 8:03-CV-401 (D. Neb) ("the underlying litigation"), as well as in related proceedings before the Food and Drug Administration ("the FDA proceedings"). Pennfield also seeks attorneys' fees and the costs of this action under N EB. REV. STAT. § 44-359. American Feed denies that it has a duty to defend or indemnify Pennfield for the loss and has filed a counterclaim seeking a declaration that its policies do not cover the alleged loss. Both parties move for summary judgment, each asserting that it is entitled to judgment as 8:05-cv-00315-JFB-TDT Doc # 65 Filed: 03/12/07 Page 2 of 17 - Page ID # 978 a matter of law. The parties have filed briefs and evidence in support of their respective positions. Filing Nos. 44, 45, 49, 50, and 55. I. BACKGROUND A. Procedural History Some additional relevant facts are set out in the Eighth Circuit Court of Appeals' opinion reversing this court's dismissal of the underlying action for failure to exhaust administrative remedies and need not be repeated here. See Alpharma v. Pennfield Oil Co, 411 F.3d 934 (8th Cir. 2006). Briefly, the underlying action is a suit by Pennfield's competitor, Alpharma Inc., asserting claims for violations of the Lanham Act, 15 U.S.C. § 1125(a), and the Nebraska Uniform Deceptive Trade Practices Act, N EB. REV. STAT.§§ 87-301 to 87-306, unfair competition, and unjust enrichment in connection with Pennfield's allegedly false advertising and promotion of one of its products as approved for certain uses by the Food and Drug Administration (FDA). Specifically, Alpharma alleges that Pennfield falsely advertised that its animal-drug-feed-additive, known as Bacitracin MD ("BMD") and marketed as Penntracin MD 50-G, was approved by the FDA for a number of uses for which it had not been approved. Alpharma also seeks injunctive relief, compensatory and punitive damages, fees and costs in the underlying action. See Filing No. 45, American Feed Index of Evid., Ex. B, Complaint. Alpharma alleges that Pennfield disseminated the false assertion that it had FDA approval for multiple uses in advertising and loose-leaf inserts, as well as in its labeling and in entries it made in trade publications. Id. at 4-7. It asserts that Pennfield's actions have resulted in Alpharma's lost sales, profits and good will. Id. at 12. It contends that it was injured by the false representations because Alpharma is the only entity with FDA approval 2 8:05-cv-00315-JFB-TDT Doc # 65 Filed: 03/12/07 Page 3 of 17 - Page ID # 979 for multiple uses. Id. at 11. Alpharma also alleges that Pennfield's misrepresentations were made "intentionally, willfully, deliberately, maliciously, egregiously, and in bad faith." Id. at 14. The record shows that in May 2003, prior to filing suit in this court against Pennfield, Alpharma filed an action against the Commissioner of the Food and Drug Administration in the United States District Court for the District of Maryland seeking a declaration that the FDA had unlawfully granted Pennfield approval to sell BMD or "unlawfully facilitated Pennfield's false representation of FDA approval for BMD." Filing No. 45, American Feed Index of Evid., Ex. L, Complaint at 8, 14; Alpharma, Inc. v. McClellan, No. 03CV1406, Filing No. 1, Complaint (D. Md. May 13, 2003) (hereinafter, "the Maryland action"). The Maryland action was later dismissed pursuant to a stipulated order, wherein the FDA agreed that its records did not show that Pennfield's predecessor had been approved for multiple uses, but that the issue had been opened for comment and rulemaking. See Filing No. 45, Ex. M, Stipulation and Order at 3-4; Alpharma, Inc. v. McClellan, No. 03CV1406, Filing No. 15, Order at (D. Md. August 15, 2003); see also Alpharma, Inc. v. Pennfield, 411 F.3d at 939. Pennfield was not a party to the litigation, although Alpharma's complaint specifically referred to Pennfield's advertisements for and promotion of its BMD product in the marketplace. Filing No. 45, American Feed Index of Evid., Ex. L, Complaint at 12-14; Alpharma, Inc. v. McClellan, No. 03CV1406, Filing No. 1, Complaint at 12-14. As stated in the stipulated order, the FDA initiated proceedings for review of FDA approval by issuing a Notice and Opportunity for a Hearing and Notice of Proposed Rulemaking ("NOOH"). See 68 Fed. Reg. 47237 (Aug. 8, 2003); Filing No. 45, American Feed Index of Evid., Ex. N, FDA Notice. The FDA proposed withdrawal of the New Animal 3 8:05-cv-00315-JFB-TDT Doc # 65 Filed: 03/12/07 Page 4 of 17 - Page ID # 980 Drug Application ("NADA"), NADA 141-137, that applied to Pennfield's BMD product. Id. at 47333. The record shows that the FDA's action was provoked by the concerns raised by Alpharma in the Maryland litigation. See id. at 47333-34. On September 18, 2003, Alpharma issued a press release stating that "Alpharma is the sole manufacturer of Bacitracin methylene disalicylate" and "Alpharma sees this swift federal court action supporting the FDA's limit on the claims our competitor can make as an important victory." Filing No. 50, Pennfield Index of Evid., Ex. 3. Shortly thereafter, on September 30, 2003, Alpharma filed the underlying action in this court. Pennfield responded to the NOOH by entering an appearance in the FDA proceeding. It retained a Washington, D.C., law firm to represent its interests and requested a hearing before the FDA. See Filing No. 45, American Feed Index of Evid., Exs. O, P, R (letter briefs submitted to FDA). On November 6, 2003, Alpharma filed a citizen petition with the FDA seeking a determination that "the FDA does not have sufficient evidence to establish that Pennfield or its predecessor ever had appropriate FDA approval of a BMD product." Id., Ex. Q. Both the Maryland case and the FDA proceeding are referred to and relied upon in Alpharma's complaint in the underlying action. See Filing No. 1, Complaint at 3 (alleging that the FDA stipulated in the Maryland action that Pennfield did not have FDA approval and acknowledging the pendency of FDA proceedings). Pennfield moved to dismiss Alpharma's complaint in the underlying action, alleging that the FDA was the proper forum in which to address the issues. See Alpharma, Inc. v. Pennfield, No. 8:03CV401, Filing No. 26, Motion to Dismiss. On July 13, 2004, this court ruled that Alpharma's failure to exhaust remedies in the FDA proceeding required dismissal. Id., Filing No. 49, Memorandum and 4 8:05-cv-00315-JFB-TDT Doc # 65 Filed: 03/12/07 Page 5 of 17 - Page ID # 981 Order at 4. That finding was reversed by the Eighth Circuit. See id., Filing No. 58, Opinion at 7-8; Alpharma, Inc. v. Pennfield Oil Co., 411 F.3d at 941. The circuit court confirmed the viability of a Lanham Act false advertising claim. Id. at 940-41. It further found that "[t]he question of whether Pennfield's BMD has been approved as safe and effective is much different from the question of whether Pennfield's BMD should be approved as safe and effective, and it is only the latter that requires the FDA's scientific expertise." Id. at 939. B. Insurance In 2003, American Feed issued a Commercial General Liability Policy ("CGL policy"), No. AFI 03 003, a first-level Excess Policy, No. AFI 03 5003, and a Second-Level Excess Policy, No. AFI 03 5501, to Pennfield. See Filing No. 45, American Feed's Index of Evidence, Exs. C - E. Those policies were effective through April 1, 2004. Id. The policies were later renewed to provide coverage through April1 2006. 1 Id., Exs. F - K. The CGL policies provide liability coverage to Pennfield for suits involving "bodily injury," "property damage," "personal injury" and "advertising injury." See, e.g., id., Ex. C, §§ IA(1)(a) & 1B(1)(a). Similarly, the CGL policies provide that American Feed "will pay those sums that the insured becomes legally obligated to pay as damages because of. . . 'advertising injury' to which this insurance applies" and American Feed "will have the right and duty to defend any 'suit' seeking those damages." Id. at IB(1)(a). The policies further provide "[t]his insurance applies to advertising injury' only if caused by an offense 1 The subsequent policies are substantively identical to the 2003 CGL and excess policies. For ease of reference, the court will cite only provisions in the 2003 policy. There are identical provisions in the later policies. 5 8:05-cv-00315-JFB-TDT Doc # 65 Filed: 03/12/07 Page 6 of 17 - Page ID # 982 committed. . . in the course of advertising your goods, products or services." Id., Ex. C at IB(1)(c). "Advertising injury" is defined in the policy as: injury arising out of. . . oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services; oral or written publication of material that violates a person's right of privacy; misappropriation of advertising ideas or style of doing business; or infringement of copyright title or slogan. Id., § V(1)(a)-(d). "Suit" is defined as "a civil proceeding in which damages because of 'bodily injury,' 'property damage,' 'personal injury' or 'advertising injury' to which the insurance applies are alleged" and includes "an arbitration proceeding alleging such damages to which you must submit or submit with our consent." Id., § V(13). The policies exclude damages for personal injury or advertising injury "arising out of oral or written publication of material if done by or with direction of the insured with knowledge of its falsity"; or "arising out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured." Id., § IB(2)(a)(1) & (3). The policy also excludes damages for advertising injury arising out of "the failure of goods, products, or services to conform with advertised quality or performance. . . ." Id., § IB(2)(b)(2). The excess policies provide coverage up to the limit of liability for damages that exceed the retained limit as stated in the declarations of the policies. See, e.g., id., Ex. D, § IA. The excess policies also contain exclusions similar to those in the CGL policies. See id., § IB. On November 7, 2003, Pennfield provided notice to American Feed of a "claimable occurrence" under the advertising injury coverage of the policies. Filing No. 45, American Feed Index of Evid., Ex. S. The complaint in the underlying action was forwarded to American Feed several days later. Id., Ex. T. American Feed acknowledged receipt of the Alpharma claim, but reserved its rights pending completion of a coverage determination. 6 8:05-cv-00315-JFB-TDT Doc # 65 Filed: 03/12/07 Page 7 of 17 - Page ID # 983 Id., Ex. U. In correspondence dated December 9, 2003, American Feed denied liability coverage for the claims asserted in the underlying litigation. Id., Ex. V. Pennfield then wrote to American Feed expressing disagreement with the coverage determination and furnishing additional documentation. Id., Ex. W. American Feed