Free MEMORANDUM in Support - District Court of Delaware - Delaware

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 1 of 26

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

The American Legacy Foundation,
Plaintiff,
v.

National Union Fire Insurance Company of Pittsburgh, Pennsylvania,

) ) ) ) ) )

) Civil Action No. 07-248 (SLR)
) )

Defendants.

) )

MEMORANDUM IN SUPPORT OF PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
GILBERT RANDOLPH LLP
Richard Shore

Kami E. Quinn 1100 New York Avenue, NW Suite 700 Washington, DC 20005
Telephone: (202) 772-2200

and

PACHULSKI STANG ZIEHL & JONES LLP Laura Davis Jones (Bar No. 2436) Timothy P. Cairns (Bar No. 4228)
919 North Market Street, 17th Floor

P.O. Box 8705 Wilmington, DE 19899-8705 (Courier 19801)
Telephone: (302) 652-4100

Facsimile: (302) 652-4400
Counsel for Plaintiff American Legacy Foundation

Date: March 12, 2008

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 2 of 26

TABLE OF CONTENTS
TABLE OF AUTHORITIES......................................................................................................... iv
NATURE AND STAGE OF PROCEEDINGS .................... ............................... ............................1

STATEMENT OF UNDISPUTED MATERIAL FACTS ..............................................................3
A. The Underlying Litigation With Lorillard And The Foundation's

Requests For Coverage............................................................................................3
B. Lori 11 ard ' s Allegations.............................................................................................4

C. The Insurance Policies Purchased By The Foundation............................................5
1. The National Union CGL Policies ...............................................................5

2. The National Union D&O Policy ................................................................7

ARGUMENT........................................................................................................................ ...........7

A. Summary Of Argument............................................................................................ 7
B. Choice Of Law..... ................. ....... ....... ............... .............. ........................................8

C. Applicable Legal Standards..................................................................................... 9

1. Summary Judgment Standard.............................................. ........................9
2. Standards Applicable To National Union's Duty To Defend

Or Pay Defense Costs. ...............................................................................10
a. Basic Principles Of Insurance Policy Construction .......................1 0
b. An Insurer Must Defend Or Pay Defense Costs If

The Allegations In The Underlying Complaint Are Potentially Within The Coverage At Issue ....................................10
D. National Union Is Obligated Under The National Union CGL

Policies To Pay The Defense Costs Incurred By The Foundation In The Lorillard Litigation........................................................................................ .12
1. Lorillard Alleged An "Occurrence" During The Policy

Period. . . . . . . . . . . .. ........ ............................................................................. ...12

11

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 3 of 26

2. Lorillard Alleged "Personal Injury" Arising From The

truthçI Broadcast Spots ............................................ ...... ............... .............13
3. The Injuries Alleged By Lorillard Are Not "Advertising

Injury" ....................................................................................................... .15
4. Lorilard's Allegations Do Not Fall Within The Coverage
Of

The Underlying Travelers Policies .......................................................17

E. National Union Is Obligated Under The National Union D&O

Policy To Pay The Defense Costs Incurred By The Foundation In The Lorillard Litigation........................................................................................ .17
1. Lorillard First Made A "Claim" Against The Foundation

"During The Policy Period" ...................................................................... .17
2. The "Claim" Alleged A "Wrongful Act" By The

Foundation................................................................................................ .18
3. National Union's Duty To Advance Defense Costs Under

Its D&O Policy Is As Broad As Its Duty to Defend (And Pay) Under Its CGL Policies................................................................... ...18
CONCLUSION........................................................................................................................... .. .20

11

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 4 of 26

TABLE OF AUTHORITIES
CASES
Federal Cases

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).................................................................................................................... 9
Brown v. Am. Int'l Group, Inc., 339 F. Supp. 2d 336 (D. Mass. 2004) ....................................................................................... 19

Dover Downs, Inc. v. TIG Ins. Co.,
2004 WL 1812703 (D. DeL. Aug. 11,2004) .......................................................................11,12

Hurley v. Columbia Cas. Co., 976 F. Supp. 268 (D. DeL. 1997)......................................................................................... 10, 19
In re Am. Metrocomm Corp., 274 B.R. 641 (Bank. D. DeL. 2002) ........................................................................................... 8
In re WorldCom,

354 F. Supp. 2d 455 (S.D.N.Y. 2005)....................................................................................... 19
Interstate Fire & Cas. Co. v. 1218 Wisconsin, Inc.,

136 F.3d 830 (D.C. Cir. 1998) .................................................................................................. 11
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

475 U.S. 574 (1986).................................................................................................................... 9
Nebraska v. Wyoming,

507 U.S. 584 (1993).................................................................................................................... 9
New Castle County, Delaware v. Nat'l Union Fire Ins. Co. of Pittsburgh, P A,

243 F .3d 744 (3d Cir. 2001).............................................................. ................................. passim

Sherman v. Ambassador Ins. Co., 670 F.2d 251 (D.C. Cir. 1981)............................................................................................ 10, 11
Wiliams v. Stone,
109 F .3d 890 (3d Cir. 1997).................. ..... ................................................................................. 9

iv

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 5 of 26

State Cases
Am. Chem. Soc'y v. Leadscope, Inc.,

2005 WL 1220746 (Ohio Ct. App. May 24,2005)................................................................... 19
Am. Continental v. Pooya, 666 A.2d 1193 (D.C. 1995) ............................................................................................... passim
Am. Ins. Group v. Risk Enter. Mgmt., Ltd., 761 A.2d 826 (DeL. 2000) ......................................................................................................... 10

Am. Legacy Found. v. Lorilard Tobacco Co.,
886 A.2d 1 (DeL. Ch. 2005)......................................................................................................... 4

Continental Cas. Co. v. Alexis I duPont School Dist.,

317 A.2d 101 (DeL. 1974) ......................................................................................................... 11
Davis v. West Center City Neighborhood Planning Advisory Comm., Inc.,

2003 WL 908885 (DeL. Super. Ct. Mar. 7,2003), affd, 836 A.2d 513 (DeL. Super. Ct. 2003) ............................................................................... 14

Doe v. Cahil,
884 A.2d 451 (DeL. 2005) ......................................................................................................... 14

Emmons v. Hartford Underwriters Ins. Co.,
697 A.2d 742 (DeL. 1997) ......................................................................................................... 10

Hoechst Celanese Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, P A, 1994 WL 721651 (DeL. Super. Ct. Mar. 28,1994) .....................................................................9

Johnston v. Tally Ho, Inc., 303 A.2d 677 (DeL. Super. Ct. 1973) .................................................................................. 13, 14
Lorilard Tobacco Co. v. Am. Legacy Found.,

903 A.2d 728 (DeL. 2006) ..................................................................................................... 4, 15

Meade v. Prudential Ins. Co. of Am.,

477 A.2d 726 (D.C. 1984) ........................................................................................................ 10
Natl Union Fire Ins. Co. of

Pittsburgh, PA v. Rhone-Poulenc, 1992 WL 22690 (DeL. Super. Ct. Jan. 16, 1992), affd sub nom. Rhone-Poulenc Basic Chems. Co. v. Am. Motorist Ins. Co., 616 A.2d 1192 (DeL. 1992) ........................................................ 12

Steigler v. Ins. Co. ofN Am.,
384 A.2d 398 (DeL. 1978) ................................................................................................... 10, 13

v

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 6 of 26

Stevens v. United Gen. Title Ins. Co., 801 A.2d 61 (D.C. 2002) .............................................................................................. 11, 13, 16
Travelers Indem. Co. of Illnois v. United Food Commercial Works Int'l Union, 770 A.2d 978 (D. C. 2001) ................................................................................................. passim
Twin City Fire Ins. Co. v. DeL. Racing Ass'n,

840 A.2d 624 (DeL. 2003) ................................................................................................... 10, 12

Statutes
Fed. R. Ci v. P. 5 6( e) ....................................................................................................................... 9

vi

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 7 of 26

NATURE AND STAGE OF PROCEEDINGS
In this action, the American Legacy Foundation (the "Foundation"), a charitable organization whose mission is "building a world where young people reject tobacco and anyone
can quit," seeks to recover the nearly $17 million in legal fees and costs the Foundation incurred

defending itself in litigation with Lorillard Tobacco Company ("Lorillard"). Lorillard's attacks
focused on broadcast spots that were a part of

the Foundation's award-winning anti-youth-

smoking education campaign known as truthçI. Using various television and radio broadcasts,
among other things, truthçI discourages youth from smoking by providing straightforward

information about the health effects, addictiveness, and social costs related to tobacco products

and the marketing practices associated with those products. The broadcast spots are blunt, hard-

edged, fast-paced, and sometimes humorous, designed to capture and hold the attention ofthe
target teen audience.

The Foundation purchased two types of insurance policies from National Union Fire
Insurance Company of Pittsburgh, Pennsylvania ("National Union") to protect itself

from

potential

liability to third parties and related litigation expenses. i One type, comprehensive

general

liability ("CGL") insurance, covers the Foundation for alleged offenses by it during the

policy period that result in "Personal Injury" as defined in the National Union policies. The
other type, directors' and officers' ("D&O") insurance, covers the Foundation for "Claims" made
against it during the policy period as a result of alleged "Wrongful Acts" by the Foundation. Here, both the CGL and the D&O policies issued by National Union provide coverage to the

Foundation for the defense costs incurred in the Lorillard litigation. The alleged offenses - the

i The Foundation also purchased insurance coverage from the Travelers Indemnity Company of America

("Travelers"). While Travelers was originally named as a defendant in this action, the Foundation has since dismissed Travelers with prejudice from the litigation.

DOCPROPERTY "DodD" \* MERGEFORMAT I003691-001\DOCS_DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 8 of 26

broadcast spots - occurred during the CGL policy periods, the resulting claims were made during
the D&O policy period, and all of the other requirements for coverage under the policies were
satisfied. Nonetheless, when the Foundation notified National Union of

Lorilard's claims-

claims that cut at the very heart of

the Foundation's educational mission - National Union denied

coverage under both the CGL and the D&O policies, leaving the Foundation to fend for itself.

The Foundation went on to defend itself successfully against Lorilard's claims in the Delaware
Chancery and Supreme Courts. National Union, however, persists in its refusal to pay the nearly $17 milion in legal fees and costs the Foundation incurred to defend itself against Lorillard's
massive litigation effort.

As discussed below, under the "eight corners" rule applicable here, an insurer is obligated
to defend its policyholder (and pay the legal fees and costs of defense) in any action in which the
allegations in the underlying complaint are arguably or potentially within the coverage of the

insurer's policies. Set forth in the next section of this Memorandum are the undisputed material
facts relevant to National Union's duty to defend and pay defense costs under this framework.

Based on those facts and for the foregoing reasons, as set forth more fully below, the Foundation respectfully requests that this Court grant summary judgment that it is entitled to recover from
National Union the full amount of

the legal fees and costs it incurred in the Lorillard litigation.

2
0369 I -OOI\DOCS _DE: I 35960. I

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 9 of 26

STATEMENT OF UNDISPUTED MATERIAL FACTS
A. The Underlying Litigation With Lorilard And The Foundation's Requests

For Coverage
In November 2001, Lorillard threatened to sue the Foundation for defamation based on a

truthçI radio broadcast spot known as "Dog Walker." National Union Brief, D.l. 17 at 4;
Affdavit of

Ellen Vargyas, Al il3 (letter threatening legal action attached as Exhibit A to

Vargyas Aff., A5-A7). In Dog Walker, a telephone caller identifies himselfto a tobacco
company receptionist as a professional dog walker and offers to collect urine produced by the
dogs he walks and sell it to the tobacco company because "dog pee is full of urea, one of

the

chemicals that (tobacco companies) put in cigarettes." National Union Brief, D.l. 17 at 3-4
(quotation and alteration as set forth in National Union Brief). In January 2002, Lorillard sent a
further letter (attached as Exhibit B to Vargyas Aff., A8-A9) providing notice of

its intent to file

suit against the Foundation in 30 days to enforce alleged prohibitions against vilification and
personal attack allegedly violated by truthçI broadcast spots. Al il5.

On February 13, 2002, seeking to avoid the possibility of a nationwide litigation blitz and

to avail itself of a Delaware forum, the Foundation filed a declaratory judgment action (attached
as Exhibit C to Vargyas Aff., A10-A32) in the Delaware Chancery Court, captioned

American

Legacy Foundation v. Lorilard Tobacco Co., C.A. No. 19406-NC, DeL. Ch. (Feb. 13,2002) (the

"Delaware Action"). A2 il6. The Foundation sought a declaration that Lorillard had no standing
or basis to assert the claims against the Foundation threatened in the January 2002 letter and that,

in the alternative, Lorillard's claims that the Foundation had vilified or attacked it were without

merit. National Union Brief, D.l. 17 at 4; A28 il58 and A29 il65. Several days later, Lorillard
filed its threatened suit against the Foundation in North Carolina, in the Wake County Superior

Court, captioned Lorilard Tobacco Company v. American Legacy Foundation, No. 02 CvS
3
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 10 of 26

02170 (Feb. 19,2002) (the "North Carolina Action," attached as Exhibit D to Vargyas Aff., A33-

A46). National Union Brief, D.l. 17 at 4. The North Carolina Action was later stayed to allow
the Delaware Action to proceed. Id. Lorillard also asserted various counterclaims in the
Delaware Action, seeking damages and other relief (the "Counterclaims," attached as Exhibit E

to Vargyas Aff., A47-A89). A2 il8.
The Foundation provided prompt notice to National Union ofthe November 13, 2001

letter

from Lorillard, the January 18, 2002 letter from Lorillard, the Delaware Action, the North Carolina

Action, and the Counterclaims asserted by Lorillard. Id., A2-A3 il10. National Union flatly denied
its obligation to defend the Foundation under the National Union CGL Policies or to advance

defense costs under the National Union D&O Policy, leaving the Foundation to fend for itself. Id.,

A3 il11. The Foundation successfully defended itself against Lorillard's claims in both the
Delaware Chancery Court and the Delaware Supreme Court, id., A3 il12, and in doing so incurred

approximately $17 millon dollars in legal fees and costs. Id., A4 il17; see Am. Legacy Found. v.
Lorilard Tobacco Co., 886 A.2d 1,45-46 (DeL. Ch. 2005) (attached as Exhibit H to Vargyas Aff., Al15-A161); Lorilard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728,745 (DeL. 2006) (attached
as Exhibit I to Vargyas Aff., A162-A180).
B. Lorilard's Allegations

In its claims against the Fo~ndation, Lorillard alleged, among other things, that, in
"broadcasts reaching milions of members of

the public," the Foundation had accused tobacco

companies of

"lying to the public," engaging in the "destruction of evidence" and "add(ing) dog

4
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 11 of 26

urine to (their) cigarettes." A70-A71 il31.2 Lorillard accused the Foundation's President and
CEO of

"making malicious statements about Lorillard to the public." Id., A73 il40. Lorillard

also asserted that the Foundation had created and facilitated through its website "vitriolic,

hateful, and vulgar personal attacks upon Lorillard's employees," id., A64 il8, and had

"personally attacked and vilified Lorillard, its employees, and tobacco companies. . . ." Id.,
A 70 il31. Additionally, Lorillard asserted that the Foundation's personal attacks on Lorillard's

employees "evidence the malice that (the Foundation) bears toward Lorillard." Id., A63-A64

il5. Lorillard also alleged that the Foundation "has publish( ed) or broadcast a number of
advertisements that. . . included personal attacks on . . . , and the vilification of Lorillard, its
employees, and tobacco companies collectively," id., A63 il4, and that one of

the Foundation's

representatives issued false statements at a press conference about Lorillard's efforts "to crush

the truth campaign." Id., A64 il7 (internal quotations omitted). Lorillard went on to allege that
these acts violated the Master Settlement Agreement, a 1998 agreement among 46 U.S. States
and terrtories and certain tobacco companies, including Lorillard, pursuant to which the

Foundation was later established, as well as the Foundation's bylaws and articles of
incorporation. Id., A73 il41.3
c. The Insurance Policies Purchased By The Foundation

1. The National Union CGL Policies.

The Foundation purchased umbrella CGL policies from National Union for consecutive
2 Lorilard's allegations in both the North Carolina Action, which was stayed to allow the Delaware Action to

proceed, and its Amended Counterclaims filed in the Delaware Action on January 1,2005 (attached as Exhibit J to Vargyas Aff., A181-A229), are in material respects essentially the same as the Counterclaims in the Delaware the public, members of Action. E.g., A37-A38 ii 23 ("in broadcasts and other advertisements reaching millions of
(the Foundation) has personally attacked and vilified Lorilard, its employees, and tobacco companies collectively"); A209 ii 35 (same). 3 The North Carolina Complaint does not allege a breach of the Foundation's Certificate ofIncorporation or Bylaws. See A33-A46.
5
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 12 of 26

annual policy periods from April

24, 2001 through April

24, 2003 (the "National Union CGL

Policies," attached as Exhibit K to Vargyas Affidavit). See A230-A283 and A284-A397. The
National Union CGL Policies require National Union "to defend any Suit against (the

FoundationJ that seeks damages covered by" the policies, A255, Section II il A, and to pay all
"( e Jxpenses incurred to defend any Suit or to investigate any claim. . . in addition to the
applicable Limits ofInsurance of

this policy." Id., A256, Section iv il G. The National Union

CGL Policies cover:

Personal Injury. . . not covered by Scheduled Underlying Insurance, provided that: . . . the Personal Injury. . . is caused by an Occurrence happening anywhere, and the Occurrence takes place during the Policy Period.
Id., A254, Section II il A.4

The National Union CGL Policies define an "Occurrence" as "an offense arising out of
(the insured'sJ business that causes Personal Injury or Advertising Injury." Id., A259, Section V

il 0(2). The policies define "Personal Injury" as injury, other than Advertising Injury, which is
caused by, among other things, "oral, written or electronic publication of material that slanders

or libels a person or organization, or disparages a person's or organization's goods, products or

services." Id., A260 il Q( 4). The policies define "Advertising Injury" as "injury. . . arising

solely out of (the Foundation'sJ Advertisement. . . ." Id., A257 il B. "Advertisement" is defined
as "a paid broadcast, publication or telecast to the general public or specific market segments
about (the insured's J goods, products or services for the purpose of attracting customers or

4 As an umbrella policy, the National Union CGL Policies cover "Personal Injury (that) would not be covered by

Scheduled Underlying Insurance," A255, Section II ii A(2) - that is, they are broader than the underlying insurance. primary CGL policies issued by Travelers (attached as Exhibit Here, the Scheduled Underlying Insurance consists of M to Vargyas Aff., A445-A746) (the "Travelers Policies"). The Travelers Policies, however, explicitly exclude "advertising, publishing, broadcasting or telecasting done by or for (the insured)." personal injury arising out of A496, Section I, Coverage B ii l(b)(l). 6
03691 -001 \DOCS _DE: I 35960. I

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 13 of 26

supporters." Id. il A.
2. The National Union D&O Policy.

In addition to the CGL policies, the Foundation also purchased a D&O liability policy

from National Union, which covers the period from August 26,2001 through August 26, 2002

(the "National Union D&O Policy," attached as Exhibit L to Vargyas Aff. A398-A444). A398,

Item 3. The National Union D&O Policy provides that National Union "shall pay on behalf of
the (Foundation) Loss arising from a Claim first made against (the Foundation) during the Policy
Period. . . for any actual or alleged Wrongful Act of

the (Foundation)." Id., A678 ill,

Coverage C. The National Union D&O policy also provides that National Union "shall advance

Defense Costs. . . of such Claim prior to its final disposition," subject to the $15 milion limit of the policy. Id., A401 il1, Defense Provisions. The National Union D&O Policy defines "Claim"
as "(1) a written demand for monetary relief; or (2) a civil. . . proceeding for monetary or non-

monetary relief. . . ." Id., A402 il2(b). "Wrongful Act" is defined to include "any breach of
duty. . . error. . . omission or act by or on behalf of

the (Foundation); . . . (and) shall specifically

include: . . .

libel, slander, (or) defamation. . . ." Id., A405-A406 il2(u)(2) and (u)(4)(d).

ARGUMENT
A. Summary Of Argument

Under the "eight corners" rule applicable here, an insurer must defend its policyholder
(and pay the legal fees and costs of defense) in any action in which the allegations in the
underlying complaint are arguably or potentially within the coverage of

the insurer's policies.

The policies must be read to accord with the policyholder's reasonable expectations of coverage,

and any ambiguities or doubts must be resolved against the insurer. An insurer is excused from

its duty to defend (and pay defense costs) only ifit can be determined as a matter oflaw that
7
03691 -OOI\DOCS_DE: 1 35960. 1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 14 of 26

there is no possible factual or legal basis upon which the insurer might eventually be obligated to
indemnify the insured.

The National Union CGL Policies provide coverage where the underlying litigation
includes allegations of

Personal Injury, not covered by the underlying policies, caused by an

Occurrence. Here, Lorillard alleged Personal Injury caused by an Occurrence during the policy
period because Lorillard alleged that, in public broadcasts during the policy periods, the
Foundation attacked and vilified Lorillard and otherwise defamed its reputation and disparaged

its products. Moreover, Lorillard's claims are not covered by the underlying policies issued by
Travelers.

The National Union D&O Policy provides coverage where there is a Claim first made

during the policy period arising from an alleged Wrongful Act. Here, the Claim at issue was first
made during the relevant policy period, and it arose from alleged Wrongful Acts by the
Foundation, namely, the truth broadcast spots at issue.

Accordingly, National Union is obligated as a matter oflaw to pay the defense costs
incurred by the Foundation because Lorillard's allegations are within the coverage of

the

National Union CGL Policies and the National Union D&O Policies (collectively, the "National

Union Policies"). Therefore, the Court should grant summary judgment to the Foundation.
B. Choice Of Law

The legal principles governing the interpretation of insurance policies and the duty of
insurers to defend their policyholders, including the standards set forth below, do not conflict in
Delaware and the District of

Columbia ("D.C."). Consequently, the Court need not determine

whether Delaware or D.C. law applies to decide this Motion. See In re Am. Metrocomm Corp.,

274 B.R. 641, 659 (Bankr. D. DeL. 2002) ("(t)he first step in a choice-of-law analysis is to
8
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 15 of 26

determine whether a true conflict exists between applicable state laws"); Wiliams v. Stone, 109 F.3d 890, 893 (3d Cir. 1997) (where there is no conflict, this Court should not engage in "an
extensive and complex analysis of

the thorny choice-of-law questions"). Accordingly, in the

interests of judicial economy, the Foundation will not brief the choice oflaw issue here. We
note, however, that, the Foundation's principal place of

business is in Washington, D.C., and the

insured's principal place of

business has been held to be a significant contact by Delaware courts

in determining the applicable law in an insurance dispute where the activities complained of in

the underlying lawsuit do not center in a particular jurisdiction. See Hoechst Celanese Corp. v.
Natl Union Fire Ins. Co. of

Pittsburgh, PA, No. 89C-SE-35, 1994 WL 721651, at *5 (DeL.

Super. Ct. Mar. 28, 1994). If

this Court finds that Delaware and D.C. law do conflict in any

relevant respect, the Foundation respectfully requests the opportunity to address the issue at that
time.
c. Applicable Legal Standards

1. Summary Judgment Standard.

On a motion for summary judgment, the movant bears the initial burden of proving that

no genuine issues of material fact exist and that it is entitled to judgment as a matter oflaw. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 n.10 (1986). Once the
movant has done so, "its opponent must do more than simply show that there is some
metaphysical doubt as to the material facts." Id. at 586; see also Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 249 (1986). The non-moving party must come forward with "specific facts

showing that there is a genuine issue for triaL." Id. at 587 (quoting Fed. R. Civ. P. 56(e)). Where
there are no such facts in dispute, and the issue is purely legal, the movant is entitled to summary
judgment. Nebraska v. Wyoming, 507 U.S. 584, 590 (1993). Resolution ofthe duty to defend or
9
03691 -001 \DOCS _DE: 135960. I

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 16 of 26

pay defense costs on summary judgment is appropriate because this duty rests on the
interpretation of a contract. See Twin City Fire Ins. Co. v. DeL. Racing Ass 'n, 840 A.2d 624,

626-27 (DeL. 2003); Travelers Indem. Co. of Illnois v. United Food Commercial Works Int 'i

Union, 770 A.2d 978, 985 (D.C. 2001).
2. Standards Applicable To National Union's Duty To Defend Or Pay

Defense Costs.
a. Basic Principles Of Insurance Policy Construction.

It is well settled that insurance policies should be construed in favor of coverage for the

insured. Steigler v. Ins. Co. ofN Am., 384 A.2d 398, 400 (DeL. 1978); Meade v. Prudential Ins.
Co. of Am., 477 A.2d 726, 728 (D.C. 1984). If

there is ambiguity in an insurance contract, the

contract language is construed strongly against the insurer that drafted it. E.g., Emmons v.
Hartford Underwriters Ins. Co., 697 A.2d 742, 745 (DeL. 1997); United Food, 770 A.2d at 986.

It also is well settled that "an insurance contract should be read to accord with the reasonable
expectations ofthe (insured)" and that the plain language of

the policy controls. Steigler,384

A.2d at 401; see also United Food, 770 A.2d at 986. The policy must be interpreted in a
commonsense manner, so that a reasonable policyholder can understand the scope and

limitations of coverage. Emmons, 697 A.2d at 745.
b. An Insurer Must Defend Or Pay Defense Costs

If The Allegations In The Underlying Complaint Are Potentially Within The Coverage At Issue.
An insurer's duty to defend or advance defense costs is conceptually distinct from, and
broader than, its duty to indemnify. Am. Ins. Group v. Risk Enter. Mgmt., Ltd., 761 A.2d 826,
830 (DeL. 2000) ("Risk Enterprise"); Sherman v. Ambassador Ins. Co., 670 F.2d 251, 258-59

(D.C. Cir. 1981). Courts have consistently held that the duty to advance defense costs is judged
by the same standards as the duty to defend. See, e.g., Hurley v. Columbia Cas. Co., 976 F.
10
03691 -00 I \DOCS_ DE: 135960. I

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 17 of 26

Supp. 268, 275 (D. DeL. 1997) (applying Michigan law) ("there does not exist a significant

difference between the duty to defend and the promise to advance defense costs, other than the

difference between who wil direct the defense").
Under Delaware and D.C. law, as under the law of most jurisdictions, insurers must

defend any action in which the complaint arguably or potentially states a claim that is covered by
the policy. New Castle County, Delaware v. Nat' i Union Fire Ins. Co. of Pittsburgh, P A,

243 F.3d 744, 749 (3d Cir. 2001); Sherman, 670 F.2d at 259 (holding that where the "allegations

of a plaintiffs complaint may bring the claim within the coverage of defendant's policy, the
insurance company must honor its duty to defend, even if

ultimately relieved of any duty to

indemnify") (emphasis added).

In determining whether an action arguably or potentially states a claim that is covered by

the policy, Delaware and D.C. courts apply the "eight corners" rule - that is, they focus solely on
the complaint and the insurance policy. United Food, 770 A.2d at 987; Dover Downs, Inc. v.
TIG Ins. Co., No. 04-199-SLR, 2004 WL 1812703, at *5 (D. DeL. Aug. 11,2004). If

the

allegations of

the complaint (the first four corners) are arguably or potentially within the the policy (the second four corners), the insurer must pay the policyholder's defense

coverage of

costs. United Food, 770 A.2d at 986; Continental Cas. Co. v. Alexis I duPont School Dist., 317
A.2d 101, 103 (DeL. 1974). The insurer's obligation to defend is not "affected by facts

ascertained before suit or developed in the process of litigation or by the ultimate outcome of the

suit." Stevens v. United Gen. Title Ins. Co., 801 A.2d 61,67 (D.C. 2002); see also United Food,
770 A.2d at 987; Continental Cas., 317 A.2d at 103 (DeL. 1974); Interstate Fire & Cas. Co. v.

1218 Wisconsin, Inc., 136 F.3d 830, 833 (D.C. Cir. 1998).

Courts apply the following interpretive principles to determine whether the underlying
11
0369 I -001 \DOCS_DE: I 35960. I

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 18 of 26

allegations may state a claim that is covered under the policy:

(a) where there exists some doubt as to whether the complaint against the insured alleges a risk insured against, that doubt should be resolved in favor of the insured;
(b) any ambiguity in the pleadings should be resolved against the carrier;

(c) if even one count or theory ofplaintiffs complaint lies within the coverage of the policy, the duty to defend arises.
Dover Downs, 2004 WL 1812703, at *5; see also Am. Continental v. Pooya, 666 A.2d 1193,
1198 (D.C. 1995); New Castle County, 243 F.3d at 749; Twin City, 840 A.2d at 630; Sherman,

670 F .2d at 259 n.14. In sum, "(a In insurer is excused from its duty to defend only if it can be

determined as a matter of law that there is no possible factual or legal basis upon which the
insurer might eventually be obligated to indemnify the insured." Natl Union Fire Ins. Co. of

Pittsburgh, PA v. Rhone-Poulenc Basic Chems. Co., No. 87C-SE-11, 1992 WL 22690, at *8
(DeL. Super. Ct. Jan. 16, 1992), affd sub nom. Rhone-Poulenc Basic Chems. Co. v. Am. Motorist

Ins. Co., 616 A.2d 1192 (DeL. 1992); Sherman, 670 F.2d at 259; Pooya, 666 A.2d at 1198.
D. National Union Is Obligated Under The National Union CGL Policies To Pay

The Defense Costs Incurred By The Foundation In The Lorilard Litigation
Under the National Union CGL Policies, National Union must pay the Foundation's
fees and costs in defending against Lorillard' s allegations because Lorillard alleged one or more
"Occurrences" during the policy periods of

the National Union CGL Policies that gave rise to

"Personal Injury" not covered by the underlying insurance issued by Travelers.
1. Lorilard Alleged An "Occurrence" During The Policy Period.

The offenses alleged by Lorillard constitute one or more "Occurrences" that took place

during the policy periods ofthe National Union CGL Policies. The National Union CGL
Policies define an "Occurrence" as "an offense arising out of (the insured's J business. . . ."
12
03691 -00 I \DOCS _DE: I 35960. I

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 19 of 26

A259, Section V il 0(2). Here, the "offenses" alleged by Lorillard are various truthçI broadcasts
which Lorillard alleged attacked and vilified it by, among other things, making disparaging
statements about its products. A 70-A 71 il31. These offenses arose out of

the Foundation's

business: encouraging young people to reject tobacco through, among other things, public
education. Al il2. Moreover, the "Occurrence" or "Occurrences" took place "during the Policy

Period" of

the National Union CGL Policies. See A254, Section II il A(2). Lorillard specifically

challenged several television and radio broadcasts that initially were aired between April 24,
2001 and April 24, 2003, the periods of

the National Union CGL Policies. A3 il17.

2. Lorilard Alleged "Personal Injury" Arising From The truth(l

Broadcast Spots.
The National Union CGL Policies define "Personal Injury" as, among other things, "oral,
written or electronic publication of material that slanders or libels a person or organization or

disparages a person's or organization's good, products or services." A260, Section V il Q(4).
The definition of

"Personal Injury" (like all ofthe policy language) must be read as a

reasonable businessperson or ordinary purchaser would understand it. Johnston v. Tally Ho, Inc.,
303 A.2d 677, 679 (DeL. Super. Ct. 1973); see also Stevens, 801 A.2d at 67; see Steigler,

384 A.2d at 401; United Food, 770 A.2d at 986. Accordingly, Lorillard need not specifically
have alleged each of

the legal elements of any particular tort to give rise to coverage under the

13
03691 -OOI\DOCS _DE: 135960. I

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 20 of 26

National Union Policies. Johnston, 303 A.2d at 679; see also Stevens, 801 A.2d at 67.5 Indeed,

Lorillard need not have alleged by name, or in a specific count "libel," "slander," or
"disparagement;" for National Union to have a duty to defend, it is sufficient that Lorilard made
factual allegations that are within the categories of conduct covered by the policies. United
Food, 770 A.2d at 987; Pooya, 666 A.2d at 1197.
When comparing the allegations to the coverage provided under the policy, a court

"examine(s) the complaint for all plausible claims encompassed within the complaint." Id.
(emphasis added); see also New Castle County, 243 F.3d at 749 ("an insurer is required to defend

any action which potentially states a claim which is covered under the policy") (emphasis added;

internal quotations omitted). For example, in United Food, the D.C. Court of Appeals held that a
complaint filed against an insured that contained a claim for "abuse of

process" adequately

alleged an action for libel that was covered under the policy. 770 A.2d at 990 ("(b )ecause

(plaintiffs) complaint alleges that (the insured) intended to damage (plaintiffs) reputation
through the knowing and unprivileged written publication of defamatory material that on its face

suggests that (plaintiffj physically and emotionally injured its employees and, in effect, stole

from them as well, it has adequately alleged a libel. . .").

5 Even if proof of each element of a libel, slander, or defamation claim were required, the elements of such causes of

action are contained within the allegations of Lorilard' s Counterclaims. The elements of a claim for defamation under Delaware law include: (1) a defamatory statement; (2) made concerning the plaintiff; (3) that was published;

(4) that a third party would understand as defamatory. Doe v. Cahil, 884 A.2d 451,463 (DeL. 2005). Defamation
claims include both libel and slander. Davis v. West Center City Neighborhood Planning Advisory Comm., Inc.,

No. 02C-03-249JEB, 2003 WL 908885, at *2 (DeL. Super. Ct. Mar. 7, 2003), aj'd, 836 A.2d 513 (DeL. Super. Ct. Lorillard, its executives 2003). Lorilard alleges that the Foundation improperly publicly damaged the reputation of

and employees, and its product. In particular, Lorilard alleges that the Foundation made "vitriolic, hateful, and vulgar" personal attacks on Lorilard's employees. A64 ii 8. It further alleged that "in broadcasts reaching millions of members of the public," the Foundation's broadcasts, for example, "accuse tobacco companies of shredding documents, thereby implying the intentional and improper destruction of evidence" and "strongly imply that Lorilard adds dog urine to its cigarettes." A70-A71 ii 31. These allegations provide more than suffcient notice of a plausible claim under the complaint for libel, slander, or defamation. 14
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 21 of 26

Here, Lorillard's allegations plainly satisfy the definition of

"Personal Injury." The

Random House Unabridged Dictionary defines "libel" as "anything that is defamatory or that

maliciously or damagingly misrepresents." Random House Webster's Unabridged Dictionary
1107 (Random House, Inc. ed., 2d ed. 2001). "Disparagement" is defined as "something that

derogates or casts in a bad light." Id. at 567. Lorillard alleged, among other things, that the
Foundation had improperly accused tobacco companies of

"lying to the public," engaging in the

"destruction of

evidence" and "add(ing) dog urine to (their) cigarettes," A70-A71 il31, and that

such actions "evidence the malice that (the Foundation) bears toward Lorillard." A63-A64 il5.
Additionally, Lorillard accused the Foundation's President and CEO of

"making malicious

statements about Lorillard to the public." A 73 il40.
The Delaware Supreme Court has recognized the close relationship between slander or

libel, on the one hand, and "vilification" and "personal attack" on the other. Lorilard Tobacco,

903 A.2d at 742. In particular, that Court stated that: "... the meaning of 'vilification,' includes a
statement that is slanderous, defamatory, or abusive that unjustly denounces its target. The core
ordinary meaning of

vilification is a denouncement that is both unfounded and abusive or
vilification and personal attack

slanderous." Id. (emphasis added). Thus, Lorillard's allegations of

are tantamount to allegations oflibel and slander.
Accordingly, Lorillard's allegations assert "Personal Injury" as defined in the National
Union CGL Policies, and a reasonable businessperson or ordinary purchaser of insurance would understand that National Union had promised to defend against claims involving such allegations.
3. The Injuries Alleged By Lorilard Are Not "Advertising Injury."

"Personal Injury," as defined in the National Union CGL Policies, excludes any injury
that falls within the definition of

"Advertising Injury." A260, Section V il Q. Although
15

03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 22 of 26

Lorillard's Counterclaims assert injury resulting from what it refers to as "advertisements" by the
Foundation, see e.g., A 70 il31, the injuries alleged by Lorillard are not "Advertising Injury" as the term is defined in the National Union CGL Policies because the truthçI spots (a) do not relate

to any "goods, products or services" sold or offered by the Foundation and (b) were not aired
"for the purpose of attracting customers or supporters." A257, Section V il A.

The National Union CGL Policies define "Advertising Injury" as "injury. . . arising

solely out of (the insured's) Advertisement." Id., A257, Section V il B. "Advertisement" is
defined as "a paid broadcast, publication or telecast to the general public or specific market
segments about (the insured's) goods, products or services for the purpose of attracting
customers or supporters." Id., A257, Section V il A.
Lorillard does not allege that any of

the challenged truthçI broadcasts are about any

goods, products, or services ofthe Foundation. The attachments to Lorillard's Counterclaims
demonstrate that the truthçI spots are educational and are not about any goods, products, or

services sold or offered by the Foundation. See A3 il18 (containing transcripts for the truthçI

spots attached as Exhibit N to Vargyas Aff., A747-A759). The broadcasts provide information
about the health and social effects of smoking and are intended to influence young people to
reject smoking. In fact, the truthçI campaign consists of

broadcasts to the general public about
the Foundation.

Lorilard's products, not any products of

Lorillard also does not allege that the Foundation seeks to attract customers or supporters

in the various truthçI broadcasts. In fact, as is clear from their content, the purpose ofthe
broadcasts was to educate and inform consumers about tobacco products, their social costs, and

the associated marketing practices. See id. The Foundation sought to influence the behavior of
teens to increase their likelihood of

rejecting Lorillard's tobacco products for the teens' own
16

03691-001\DOCS DE:

135960.

i

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 23 of 26

benefit - not to attract them to become customers or supporters of

the Foundation.

4. Lorilard's Allegations Do Not Fall Within The Coverage Of

The

Underlying Travelers Policies.
The National Union CGL Policies are required to pay defense costs when the underlying

Travelers Policies do not provide coverage for the claim. The Travelers Policies, like the

National Union CGL Policies, provide coverage for allegations alleging "Personal Injury." The
Travelers Policies, however, explicitly exclude personal injury arising out of "broadcasting or

telecasting done by or for (the insured)." A496, Section I, Coverage B ill (b)(1). The truthçI
spots undeniably are "broadcasting," and therefore are excluded from the scope of the Personal
Injury coverage of

the Travelers Policies.

E. National Union Is Obligated Under The National Union D&O Policy To Pay

The Defense Costs Incurred By The Foundation In The Lorilard Litigation
The National Union D&O Policy provides that National Union shall advance Defense

Costs to the Foundation for any "Claim first made against the (Foundation) during the Policy

Period. . . for any actual or alleged Wrongful Act ofthe (Foundation)." A401 il1, Coverage C.
Because Lorillard first asserted a Claim during the policy period ofthe National Union D&O
Policy alleging a "Wrongful Act," National Union is independently liable under that policy for
the defense costs incurred by the Foundation in the Lorillard litigation.
1. Lorilard First Made A "Claim" Against The Foundation "During

The Policy Period."

The National Union D&O Policy defines a "Claim" to include "(1) a written demand for

monetary relief; or (2) a civil. . . proceeding for monetary or non-monetary relief. . . . A402 il2(b). There is no dispute in this case that a "Claim" was made by Lorillard during the
policy period ofthe D&O Policy. In a December 6, 2002

letter to the Foundation, National

Union acknowledged that Lorillard's allegations against the Foundation, first made during the
17
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 24 of 26

National Union D&O Policy period, constituted a Claim under the National Union D&O Policy.

See A2 il15 (letter attached as Exhibit L to Vargyas Aff., A398-A444). In any event, both the
Delaware Action and the North Carolina Action are civil proceedings for monetary and nonmonetary relief, and therefore, constitute a Claim first made during the National Union D&O
Policy period.
2. The "Claim" Alleged A "Wrongful Act" By The Foundation.

Lorillard alleged one or more Wrongful Acts as defined under the National Union D&O

Policy. The National Union D&O Policy defines "Wrongful Act" as including "any breach of
duty. . . error. . . omission or act by or on behalf of

the (Foundation); . . . (and) shall specifically

include: . . . libel, slander, (or) defamation." A405-A406 il2(u)(2) and (u)(4)(d) (emphasis
added). Lorillard clearly alleged "act(s) by or on behalf of

the Foundation," including the airing

of

the various challenged truthçI spots. Lorillard also alleged that the Foundation breached the

MSA, its bylaws, and the Certificate of Incorporation. Moreover, Lorillard alleged that, by
airing the truthçI spots, the Foundation engaged in improper "personal attacks" on, and

"vilification" of, Lorillard. As discussed in greater detail above, these allegations include
plausible claims of defamation, slander, and libel.6
3. National Union's Duty To Advance Defense Costs Under Its D&O

Policy Is As Broad As Its Duty To Defend (And Pay) Under Its CGL
Policies.

National Union's obligation to advance defense costs to the Foundation under the National Union D&O Policy is as broad as its duty to defend (and pay the costs of defending) the

Foundation under its CGL Policies. The National Union D&O Policy provides that "(National
Union) shall advance Defense Costs of (a potentially covered claim) prior to its final

6 See Argument, supra, D.2.

18
03691 -001 \DOCS_DE: I 35960. 1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 25 of 26

disposition," subject to the $15 milion limit ofthe policy. A401 il1, Defense Provisions.
Courts consistently have found that an insurer's duty to advance defense costs holds the

insurer to the same standard as the duty to defend. See, e.g., Hurley, 976 F. Supp. at 275 ("there
does not exist a significant difference between the duty to defend and the promise to advance
defense costs, other than the difference between who will direct the defense"); Am. Chem. Soc y

v. Leadscope, Inc., 2005 WL 1220746, at *4 (Ohio Ct. App. May 24,2005) (holding that there is no distinction between "advance defense costs" policies and "duty to defend" policies with
respect to the application of the basic principles of

the duty to defend); In re WorldCom, 354 F.

Supp. 2d 455,464 (S.D.N.Y. 2005) (applying the same general principles where insurer's duty
was to advance legal costs as the court would apply to a duty to defend provision); Brown v. Am.

Intl Group, Inc., 339 F. Supp. 2d 336, 346 (D. Mass. 2004) (interpreting policy with duty to
advance defense costs and applying the same principles as applied to duty to defend cases).

19
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32

Filed 03/12/2008

Page 26 of 26

CONCLUSION
For the foregoing reasons, the Foundation respectfully requests that the Court grant the
Foundation's motion and enter summary judgment in favor of

the Foundation on its claims

against National Union and order National Union to pay in full the fees and expenses incurred by
the Foundation in defending against Lorillard's allegations.

Date: March 12, 2008

PACHULSKI, STANG, ZIEHL & JONES LLP

Laura Da is Jones (Bar No. 2436) Timothy P. Cairns (Bar No. 4228) 919 North Market Street, 17th Floor Wilmington, DE 19899-8705
Telephone: (302) 652-4100

(lN IlL- ~

Facsimile: (302) 652-4400
and

GILBERT RANDOLPH LLP Richard D. Shore Kami E. Quinn 1100 New York Avenue, NW Washington, DC 20005
Telephone: (202) 772-2200

Attorneys for Plaintiff American Legacy Foundation

20
03691-001\DOCS DE:135960.1

Case 1:07-cv-00248-SLR

Document 32-2

Filed 03/12/2008

Page 1 of 2

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

)

THE AMERICAN LEGACY FOUNDATION )

Plaintiff, )

v. )

)

CASE NO: 07-248 (SLR)

)

)

NATIONAL UNION FIRE INSURANCE COMPANY ) OF PITTSBURGH, PENNSYLVANIA, et. al. )

Defendants )

) )

AFFIDAVIT OF SERVICE
Louise L. Tuschak, being duly sworn according to law, deposes and says that she
is employed by the law firm of

Pachulski Stang Ziehl & Jones LLP, and that on the f.~ay of

March, 2008 she caused a copy of the following document to be served upon the attached service
list in the manner indicated:

MEMORADUM IN SUPPORT OF PLAINTIFF'S MOTION FOR

SUMMAY JUGMENT

Sworn to and subscribed before
me this /2 day March, 2008

~h~~cU
MARY E. CORCORAN NOTARY PUBLIC STATE OF DELAWARE
My commission expires Nov. 4, 20

Nota Pub -~ lS&f7'J Wl

My Commission Expires: J ~ '(

03691 -00 1 \DOCS _DE: 1 305 1 1.5

Case 1:07-cv-00248-SLR

Document 32-2

Filed 03/12/2008

Page 2 of 2

American Legacy Foundation Service List
Document No. 130442

02 - Hand Delivery
01 -First Class

Hand Delivery Richards Layton & Finger, P.A. John A. Parkins, Jr. Chad M. Shandler Todd A. Coomes
One Rodney Square, P.O. Box 551

Wilmington, DE 19899
Hand Delivery F ox Rothschild, LLP Neal J. Levitsky, Esquire 919 N. Market Street, Suite 1300 Wilmington, DE 198014

First Class Mail
Kramon & Graham, P.A. Lee H. Ogburn, Esquire
One South Street, Suite 2600

Baltimore, MD 21202-3201