Insurers owe no duty to defend in a trademark and trade secret lawsuit, a Pennsylvania federal court has ruled, citing policy exclusions.
The decision from the Middle District of Pennsylvania involved Harleysville Insurance Company, Nationwide Affinity Insurance Company, Nationwide Mutual Insurance Company, and Harleysville Worchester Insurance Company – collectively referred to as the Nationwide Plaintiffs – who had issued a series of commercial general liability and umbrella policies to SKM Industries, a manufacturer of industrial inks, paints, and marking devices.
When SKM found itself on the receiving end of a trademark and trade secret lawsuit in New Jersey, the insurers went to court seeking a declaration that they owed nothing: no defense, no indemnification.
The underlying lawsuit, brought by competing manufacturer Arro-Mark Co. LLC, alleged that SKM had misappropriated its intellectual property, trade secrets, and confidential business information to develop competing products.
According to Arro-Mark, two of its former employees – a chemist and a web and graphic designer – secretly funneled confidential formulas, customer lists, pricing data, and website code to SKM while still on Arro-Mark's payroll. The chemist allegedly handed over proprietary product formulations and trade secrets. The designer allegedly used his knowledge of Arro-Mark's website, which had taken him roughly 18 to 24 months to build, to construct a visually and functionally identical site for SKM in roughly a month. Arro-Mark also claimed that SKM used its trademarks, including "Mighty Marker" and "Bleed-Thru," on competing products and promotional materials distributed at trade shows.
The coverage question turned on the interplay between what the policies covered and what they excluded. The policies provided coverage for "personal and advertising injury," which includes injury arising from the use of another's advertising idea in the insured's own advertisement.
The court found that Arro-Mark's allegations – that SKM used its trademarks on the SKM website and in marketing materials – were enough to potentially trigger that coverage. Under Pennsylvania law, a trademark qualifies as an advertising idea because it functions as a way of identifying a product with a particular source, which is the essence of advertising.
But triggering coverage turned out to be only half the story. The policies also contained two exclusions that, in the court's view, shut the door entirely.
The first was an intellectual property exclusion, which removes coverage for advertising injury arising out of the infringement of copyright, patent, trademark, trade secret, or other intellectual property rights.
The court found that every remaining claim in the Arro-Mark lawsuit – whether styled as a trade secret claim, a trademark claim, or a common law theory like unjust enrichment or breach of loyalty – traced back to alleged intellectual property infringement.
The policies did carve out an exception for trade dress infringement in advertisements, but the court found that exception inapplicable. The New Jersey court handling the underlying case had already dismissed Arro-Mark's trade dress claim for failure to identify the specific elements that would constitute protectable trade dress, and the refiled complaint did not cure that deficiency.
The second was a confidential information exclusion, added by endorsement, which removes coverage for advertising injury arising out of any access to or disclosure of confidential or nonpublic information, including trade secrets, processing methods, customer lists, and financial information. The court found that this exclusion swept up any remaining allegations that might have slipped past the intellectual property exclusion. The underlying complaint was built around claims that SKM obtained and used Arro-Mark's confidential formulas, website code, pricing structures, customer lists, and product processes – all of which fit comfortably within the exclusion's reach.
The insurers also asked the court to order SKM to reimburse defense costs already incurred under one of the policies, which contained a provision allowing recoupment when an insurer initially provides a defense but later determines that none of the claims are covered. The court declined that request, noting that the insurers had not specified an amount, provided an accounting, or addressed potential disputes over the figure. The request was denied without prejudice, leaving the door open for a future attempt with better documentation.
The decision is a reminder that advertising injury coverage and its exclusions do not operate in isolation. A claim can clear the initial coverage threshold and still be entirely shut out by exclusion clauses – particularly intellectual property and confidential information exclusions like those at issue here. The case also highlights the importance of proper documentation when seeking recoupment of defense costs; a contractual right to reimbursement means little if the insurer cannot back it up with specific figures and a clear accounting.
Magistrate Judge Phillip J. Caraballo granted the motion for judgment on the pleadings in part and denied it in part. The Nationwide Plaintiffs owe no duty to defend or indemnify SKM Industries or its CEO in the Arro-Mark litigation.
