UNPUBLISHED
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
No. 04-1176
PERDUE FARMS, INCORPORATED,
Plaintiff - Appellant,
versus
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA; THE FEDERAL INSURANCE COMPANY,
Defendants - Appellees,
and
AMERICAN NATIONAL INSURANCE COMPANY,
Defendant.
--------------------
COMPLEX INSURANCE CLAIMS LITIGATION ASSOCIATION,
Amicus Supporting Appellees.
Appeal from the United States District Court for the District of Maryland, at Baltimore. Benson Everett Legg, Chief District Judge. (CA-99-2818-L)
Argued: March 16, 2005 Decided: June 2, 2005
Before MICHAEL and KING, Circuit Judges, and James R. SPENCER, Chief United States District Judge for the Eastern District of Virginia, sitting by designation. Affirmed by unpublished per curiam opinion.
ARGUED: Stephen Richard Mysliwiec, DLA PIPER RUDNICK GRAY CARY US, L.L.P., Washington, D.C., for Appellant. M. Elizabeth Medaglia, JACKSON & CAMPBELL, P.C., Washington, D.C.; Jeffrey Roger Schmieler, SAUNDERS & SCHMIELER, Silver Spring, Maryland, for Appellees. ON BRIEF: Glen K. Allen, DLA PIPER RUDNICK GRAY CARY US, L.L.P., Baltimore, Maryland, for Appellant. Barbara M. R. Marvin, JACKSON & CAMPBELL, P.C., Washington, D.C., for Appellee National Union Fire Insurance Company of Pittsburgh, Pa.; Alan B. Neurick, William E. Hutchings, Jr., SAUNDERS & SCHMIELER, P.C., Silver Spring, Maryland, for Appellee Federal Insurance Company. Laura A. Foggan, John C. Yang, Paul J. Haase, WILEY, REIN & FIELDING, L.L.P., Washington, D.C., for Amicus Curiae, Complex Insurance Claims Litigation Association, Supporting Appellees.
Unpublished opinions are not binding precedent in this circuit. See Local Rule 36(c).
2 PER CURIAM:
After a Florida appellate court affirmed awards for actual
damages and for unjust enrichment against it, Perdue Farms Inc.
(“Perdue”) brought suit in the District Court of Maryland against
National Union Fire Insurance Co. of Pittsburgh, PA (“National
Union”), Federal Insurance Company and American National Fire
Insurance Company seeking indemnification under the advertising
liability provisions of the insurance policies at issue.1 The
parties agreed to present the question of coverage to the District
Court on cross-motions for summary judgment. The District Court
concluded that no reasonable jury could find Perdue’s damages
covered by the advertising liability provision and awarded summary
judgment to National Union. For the reasons that follow, we affirm
the grant of summary judgment in favor of the insurance companies.
I.
In 1991, Dennis Hook (“Hook”) and his business partner
approached Pizza Hut with a unique process for cooking chicken
which would allow a fast-service restaurant to prepare and serve a
chicken product with the appearance of rotisserie chicken in less
1 The insurance companies are collectively referred to as “National Union” or “the insurer.” National Union’s policy provided $15 million in commercial liability coverage with Federal Insurance Company covering damages in excess of National Union’s limit. Federal’s liability is capped at $25 million. Federal’s policy is referred to as a “follow form” policy because it provides the same coverage as the National Union policy.
3 than 10 minutes. The Hook process involved placing pre-seasoned
pieces of chicken in a vacuum-sealed bag, refrigerating the chicken
after cooking and reheating the chicken by using a microwave in
combination with a conventional or pizza impinging oven. In 1992,
Pizza Hut and Hook entered into a development agreement with the
potential to pay Hook $20 million in royalties.
Pizza Hut and Hook then contacted Perdue as a possible source
of chicken for the project. In 1993, Pizza Hut and Perdue signed
a confidentiality agreement regarding Hook’s process. The parties
recognized that the disclosing party, Pizza Hut, possessed certain
secret information and the receiving party, Perdue, acknowledged
that Pizza Hut intended to develop that secret information but that
Pizza Hut would disclose the information to Perdue “for the purpose
of development, improvement, and/or possible manufacturing thereof
for the sole and exclusive ownership and use by [Pizza Hut].”
Furthermore, the parties agreed that Pizza Hut would disclose its
secret information for the purpose of “seasoning, process, and
product development work related to the development of oven roasted
chicken.” In exchange, Perdue agreed not to use the secret
information for its own account or purposes or for the purposes of
any other party. With the Agreements in place, Hook divulged the
secrets of his process to Perdue.2 After a testing period, Pizza
Hut decided not to pursue the project and terminated its agreement
2 The Florida jury hearing Hook’s case against Perdue would later determine that Hook was a third party beneficiary of the confidentiality agreements.
4 with Hook. Unknown to Hook, about six months after his visit to
the Perdue plant where he shared the secrets of his process, Perdue
began to develop a product, using the same preparation techniques,
that it would eventually sell under the name “TenderReady.”
Not until October 1996, while attending a trade show in
Europe, did Hook discover Perdue’s efforts to market and sell a
pre-marinated, fully-cooked roasted chicken product using Hook’s
process. Hook read the sales brochures and other literature and
realized that Perdue’s marketing materials described the essential,
previously confidential nature of his process. When Hook’s demands
on Pizza Hut to enforce their confidentiality agreement with Perdue
went unheaded, Hook brought suit against Perdue in Florida circuit
court to enforce the confidentiality agreements and collect damages
for the misappropriation of his trade secret.
In Count I, Hook alleged that Perdue misappropriated his trade
secret in violation of the Florida Uniform Trade Secrets Act
(“FUTSA”). Hook claimed that the “use of the Process without [his]
express or implied consent constitute[d] a misappropriation of the
Process because: (1) Perdue acquired the Process under
circumstances giving rise to a duty to maintain its secrecy and
limit its use, and (2) Perdue derived the Process from or through
Pizza Hut, and therefore owed a duty to plaintiffs to maintain its
secrecy and limit its use.” Hook charged Perdue with gaining both
a commercial advantage and causing “the actual loss of the
independent economic value of the Process.”
5 Counts III and IV charged Perdue with breach of the two
confidentiality agreements “by misappropriating, using and
disclosing the Process without written or implied consent.”3
Notably, in Count IV, Hook asserted that Perdue “breached its duty
under the Perdue Confidentiality Agreement by misappropriating and
using the Process without express or implied consent.”
In the wake of a three week trial, the jury found Hook’s
process to be a trade secret and that Perdue misappropriated that
secret. The Verdict Form specifically asked the jury to find
whether “plaintiffs proved by the greater weight of the evidence
that their method or process of preparing, storing and serving
fresh roasted chicken in a commercial setting is a trade secret?”
The next question on the form asked whether “plaintiffs proved by
the greater weight of the evidence that defendant misappropriated
plaintiff’s trade secret?”
The jury also determined Hook to be a third party beneficiary
of the two confidentiality agreements and found Perdue in breach.
The jury awarded Hook $25 million in actual damages together with
$2 million in damages for unjust enrichment which Hook presented as
the development costs Perdue saved by co-opting his process. In
post-trial proceedings, the trial court awarded Hook $6.75 million
in punitive damages based on the jury’s finding that Perdue acted
3 The district court referred to these Counts as Counts II and III, however Count II charged only Pizza Hut with breach of contract.
6 willfully and maliciously in misappropriating Hook’s trade secret
and assessed pre-judgment interest in the amount of $14,896,602.74
based on the jury’s determination that Hook’s damages accrued on
October 29, 1993, the date Perdue began to develop its
“TenderReady” product.
Perdue appealed the decision to the Florida Second District
Court of Appeal. The appellate court affirmed the $25 million
damage award as well as the $2 million award for unjust enrichment.
However, the court reversed the punitive damage award, finding that
Perdue’s conduct fell below the level of egregiousness necessary to
support such an award. As to the prejudgment interest amount, the
court found the award “grossly inequitable” and determined that the
underlying damage award of $25 million could not be liquidated to
a date certain. The court held that the jury’s verdict liquidated
the amount of Hook’s damages and awarded prejudgment interest from
April 9, 1999 through May 3, 1999, the date of the final judgment.
Before the appeals court entered its decision, Hook and Perdue
signed a “high-low” settlement agreement which guaranteed Hook a
minimum of $10 million regardless of the court’s decision and
capped Perdue’s liability at $30 million. Perdue eventually paid
Hook $30 million. Perdue then looked to its insurance companies
for indemnity and they denied coverage. Perdue sued the insurance
companies claiming that coverage existed under the Advertising
Liability provision of the insurance policy. Perdue claimed that
7 its brochures and other advertising literature created its
liability to Hook by disclosing, i.e. misappropriating, the details
of the Hook “re-thermalization” process.
The contract of insurance provided coverage for liability
incurred because of (i) personal injury, (ii) property damage, or
(iii) advertising liability. Advertising Liability is defined as
liability for damage because of: (a) unintentional libel, slander
or defamation of character; (b) infringement of copyright or title
or of slogan; (c) piracy or unfair competition or idea
misappropriation under an implied contract; or (d) invasion of the
rights of privacy, arising out of Perdue’s advertising activities.
However, coverage is limited by the exclusion provision which
disclaims coverage under advertising liability for claims made
against Perdue due to its “failure of performance of contract.”
Before the district court, the insurers argued that
advertising liability is not triggered simply because the insured
advertises a product developed using misappropriated trade secrets.
They argued that their liability only arises if the offense
occurred within the four corners of the advertisement itself.
National Union asserted that the jury held Perdue liable because
Hook presented evidence that Perdue misappropriated his process by
developing and marketing TenderReady in 1993 and not by disclosing
the process in its 1995 advertisements. Additionally, the insurers
relied on the “failure of performance of contract” exclusion. The
8 insurers argued that this exclusion is applicable because Perdue’s
liability grew out of its breach of the confidentiality agreement;
in other words, Perdue’s failure to perform its contractual
obligations.
The parties asked the District Court of Maryland to “examine
the Florida record, including Hook’s Complaint, the [trial]
transcript, and the decision of the Florida Appellate Court” to
determine whether the underlying judgment captured conduct within
the policy’s coverage. Specifically, the parties requested that
the Court determine what the jury necessarily decided because the
jury did not specify the basis for its finding that Perdue
misappropriated Hook’s trade secret.
The district court held for the insurance companies and denied
coverage. Judge Legg thoroughly reviewed the record and determined
that it admitted only one conclusion – “the jury found that Perdue
misappropriated the Hook process by developing and marketing the
TenderReady line of chicken.” Perdue Farms Inc. v. Nat’l. Union
Fire Ins. Co., 197 F. Supp. 2d 370, 375 (D. Md. 2002) (hereinafter
“Perdue Farms I”).4 The court found that Hook pursued a
“preemption” theory of damages throughout his litigation and that
Hook based Perdue’s liability on the fact that Perdue’s product
4 Judge Legg issued two opinions in this case. In the second opinion, Perdue Farms, Inc. v. National Union Fire Insurance Co. of Pittsburgh, P.A., Civil No. L-99-2818 (D. Md., Sept. 10, 2003), the district court found that National Union had a duty to defend Perdue in the underlying Hook lawsuit.
9 prevented, i.e. preempted, him from licensing his process because
restaurants would not license the proprietary process if they could
simply purchase the end result from Perdue.
The district court cited three specific instances in the
record which demonstrated the jury’s acceptance of Hook’s
preemption theory:
(i) Perdue’s appellate brief before the Florida Court of Appeals stated that, “Hook’s theory of actual damages was that the availability of Perdue’s TenderReady product deprived Hook of the ability to earn royalties on his process.”
(ii) The Florida Court of Appeals concluded that, “Hook’s theory of liability was that Perdue’s TenderReady product destroyed his ability to market his process.”
(iii) The jury’s determination that Hook’s damages accrued as of October 29, 1993, two years prior to Perdue’s advertising at issue.5
Perdue Farms I, 197 F. Supp. 2d at 376. The court also examined
the individual counts in Hook’s Complaint and focused on the
relevant exclusion provision in the policy. The court found the
exclusion to be fatal to extending coverage for Perdue’s liability
under Counts III and IV and rejected Perdue’s argument that any
meaningful distinction exists between the breach of a contract and
the failure to perform that same contract. Moreover, the district
court found that the confidentiality agreements were express
5 The district court relied on this finding despite the fact that the Florida Court of Appeals subsequently vacated the prejudgment interest award and remanded with instructions to enter an award of prejudgment interest between the dates of the jury verdict and the final judgment.
10 contracts and therefore liability for their breach was not covered
under subsection (c) of the Advertising Liability provision.
Finally, with regard to the Florida Uniform Trade Secrets Act,
the court found it unlikely that the jury relied upon any factor to
impose liability on Perdue other than Perdue’s breach of its
confidentiality agreements.
This appeal followed. In the present dispute, Perdue relies
heavily on perceived inconsistencies between the two opinions
issued by the district court to help make its argument.6 Perdue
also asserts an alternate theory of coverage that because the
evidence was sufficient for the jury to find either
misappropriation of the trade secret by use or by disclosure, the
district court should have erred on the side of extending coverage
rather than denying it.
II.
The parties dispute the standard of review on appeal, with
Perdue urging the Court to apply traditional summary judgment
6 In the second opinion, Perdue Farms, Inc. v. National Union Fire Insurance Company of Pittsburgh, P.A., Civil No. L-99-2818 (D. Md., Sept. 10, 2003) (hereinafter “Perdue Farms II”), Judge Legg found that National Union had a duty to defend Perdue when Hook filed his complaint. National Union did not appeal that decision. Perdue’s reliance on the second opinion is misplaced as it simply recognizes the long-standing position in Maryland law that the duty to defend is broader than the duty to indemnify in that it is based on the potentiality of coverage. See Litz v. State Farm Fire & Cas. Co., 346 Md. 217, 225 (1997).
11 review principles to the district court’s decision. National Union
argues that the parties requested that the district court make
factual inferences from undisputed facts and that those factual
findings should be upheld unless clearly erroneous. Nothing about
this case requires that this Court abandon the familiar refrain
that we review the district court’s order granting summary judgment
de novo. Smith v. Continental Cas. Co., 369 F.3d 412, 417 (4th
Cir. 2004). The question before the district court was whether
Perdue was entitled to indemnification under its insurance contract
with National Union. Such a coverage determination is a legal
question which Maryland courts resolve de novo on appeal. See
Fister v. Allstate Life Ins. Co., 366 Md. 201, 210 (Md. 2001)
(“Because the facts are undisputed, we are left to determine
whether the trial court correctly interpreted and applied the
relevant law to the uncontested facts.”).
In analyzing this appeal, this Court stands in the same
position as the district court and will only uphold an award of
summary judgment “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment
as a matter of law.” Fed. R. Civil P. 56(c). As this matter was
presented to the District Court of Maryland sitting in diversity,
we shall apply Maryland’s substantive law in interpreting the
12 insurance policy. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 82
L. Ed. 1188, 58 S. Ct. 817 (1938).
III.
In determining coverage under an insurance policy, Maryland
courts “initially focus on the terms of the insurance policy to
determine the scope and limitations of its coverage.” Chantel
Assocs. v. Mount Vernon Fire Ins. Co., 388 Md. 131, 142 (1995). In
a typical declaratory judgment action to determine coverage under
a policy, “it is the function of the court to interpret the policy
and decide whether or not there is coverage.” Mitchell v. Md.
Cas., 324 Md. 44, 56 (1991). To carry out this task, we begin as
we would with any other contract – with the terms of the policy
itself, see Cole v. State Farm Mut. Ins. Co., 359 Md. 298, 305
(2000), giving the terms their “customary, ordinary, and accepted
meaning.” Mitchell, 324 Md. at 56.
In the instant summary judgment action, the parties asked the
district court to determine whether the underlying judgment in the
Florida court triggered National Union’s duty to indemnify Perdue
under the policy. While the duty to defend is broader than the
duty to indemnify, see Litz v. State Farm Fire & Cas. Co., 346 Md.
217, 225 (1997) (basing the duty to defend on the potentiality of
coverage), the insurer’s duty to indemnify depends on the
resolution of facts alleged in the complaint. See Penn-America
13 Ins. Co. v. Coffey, 368 F.3d 409, 413 (4th Cir. 2004); Steyer v.
Westvaco Corp., 450 F. Supp. 384, 389 (D. Md. 1978) (“[T]he
question whether the insurer has a duty to pay a final judgment
against the insured turns on a comparison of the ultimate findings
of fact concerning the alleged occurrence with the policy
coverage.”).
In this case, Perdue asked the district court to find that
National Union owed a duty to indemnify Perdue based on the
Advertising Liability provision in the policy. To require National
Union to indemnify Perdue, we must determine whether Perdue’s
liability to Hook in the underlying action was because of “idea
misappropriation under an implied contract” arising out of Perdue’s
advertising activities. We first look to see whether Perdue
demonstrated that its liability to Hook arose out of its
advertising brochures.
National Union’s duty to indemnify Perdue for its liability
under Counts III and IV of the Complaint are the easiest to dispose
of on summary judgment. Whether or not we conclude that the jury
based its misappropriation finding on Perdue’s disclosure of Hook’s
process in its advertising activities, we find as a matter of law
that the exclusion for “failure of performance of contract” bars
coverage under the breach of contract claims. Hook’s Complaint and
the jury verdict make this conclusion obvious.
14 Hook clearly charged Perdue with breaching the two
confidentiality agreements. Although Count III alleged that Perdue
breached its duty under the agreement “by misappropriating, using
and disclosing” the process, the evidence before the jury clearly
established that Hook’s injury occurred because Perdue used his
process contrary to the confidentiality agreements to develop a
product that would preempt him from licensing his process. The
jury weighed the evidence and concluded that Perdue breached both
of the agreements.
No matter how artfully Perdue attempts to construe its
actions, Perdue failed to perform its obligations under the
confidentiality agreements. Perdue expressly agreed not to use any
proprietary information it gained under the confidentiality
agreement. Whether or not Perdue used the information to develop
the process, which the jury determined to be a trade secret, or
disclosed the process in its advertisements, the jury found that
Perdue breached the agreements and therefore the coverage exclusion
applies.
Disposition of Count I requires further discussion. FUTSA
defines “misappropriation,” in relevant part, as
[d]isclosure or use of a trade secret of another without express or implied consent by a person who ... [a]t the time of disclosure or use, knew or had reason to know that her or his knowledge of the trade secret was ... acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use.
15 Fla. Stat. § 688.002. FUTSA provides for injunctive relief, Fla.
Stat. § 688.003, and damages based on actual loss and unjust
enrichment based on the misappropriation as well as exemplary
damages up to twice the amount awarded for actual loss and unjust
enrichment, Fla. Stat. § 688.004. Under Count I, Hook alleged that
“Perdue’s use of the Process without plaintiffs’ express or implied
consent constitute[d] a misappropriation of the Process.”
The question the Court must answer is whether the jury based
Perdue’s liability on its disclosure or use of Hook’s trade secret.
The best place to start is with the jury’s verdict. After
concluding that Perdue misappropriated Hook’s trade secret and
breached the two confidentiality agreements, the jury determined
that Hook was entitled to $25 million in actual damages and $2
million for unjust enrichment. Additionally, the jury found that
Hook’s damages accrued on October 29, 1993.
As noted by the Florida Court of Appeals, the damage award
derives factual support from the confidential development agreement
between Hook and Pizza Hut. Titled “Project Feathers,” the
agreement consisted of three phases. During the first phase, the
parties set to developing the process and product. Phase Two
implemented the final result of the development phase in which
Pizza Hut agreed to pay a royalty of $0.036 per pound of chicken
product sold up to $5 million. Phase Three, labeled “earn out,”
reduced the per pound royalty and capped the payout at $15 million.
16 Hook also entered into a separate agreement with KFC Corporation,
a Pizza Hut affiliate, for a capped royalty of $5 million.
Although this gives a basis for the jury’s award, the unjust
enrichment award and the accrual date indicate that the jury
focused its attention on Perdue’s use of the process to develop its
own product rather than its advertising activities. Certainly
Perdue was not unjustly enriched because it co-opted Hook’s
advertising idea and so did not have to spend its time and effort
on creating a marketing strategy. Rather, Perdue benefitted from
Hook’s disclosure of his process and was able to forego some of the
development costs in bringing its product to market. The jury
valued those foregone development costs at $2 million, an amount
the Florida Court of Appeals upheld without discussion. Finally,
the jury concluded that Hook’s damages began to accrue on October
28, 1993, presumably relying on an internal Perdue memorandum
describing a request for a new product sample: eight pieces of
chicken marinated and seasoned with Perdue (and not Pizza Hut)
seasoning utilizing the cook-in-the-bag process. Each of these
facts,7 taken together, cause us to conclude that the jury based
Perdue’s liability on its use and development of Hook’s process in
violation of the confidentiality agreements.
7 The jury also rejected Perdue’s argument that Hook’s process was not a trade secret.
17 Finally, although we do not have the benefit of over 3000
pages of trial transcript from the three week jury trial, the
record does contain excerpts of Hook’s testimony in which he
describes how Perdue’s product preempted him from selling his
chicken technology. Hook testified that when he discovered the
TenderReady product brochure at the Paris trade show, he contacted
Genevieve Friedman, with Perdue, and questioned her about the
product. According to Hook, he inquired whether TenderReady was
“the Pizza Hut product” and Ms. Friedman affirmed that it was.
Hook next contacted his business partner and informed him that the
Pizza Hut chicken was “out on the street and its new name is
TenderReady.”
Hook testified that he could no longer make money licensing
the technology for his process because of the Perdue product’s
presence “on the street.” Hook also claimed that he was entitled
to a consulting fee for the time period that Perdue began selling
the product back in 1993. Hook’s business partner testified that
Perdue’s sales of TenderReady “effectively completely pre-empts us
from the marketplace.” He explained that Hook was selling
technology and that
[i]f we were to go to any one of these companies at any time, today, for example, and we were to say to them ... “We think that we’ve got this great idea, and we would like you to pay us consulting fees and rights on the product that would amount to a lot of money. By the way, you don’t have to buy – you don’t have to do this. You can go to Perdue, and they will sell it to you for none of this.”
18 Trial Transcript at 529. The witness clearly referred to the fact
that by developing the end product, Perdue prevented Hook from
licensing his process. In addition, Hook’s expert witness
testified “that the TenderReady product was copied from the Dennis
Hook process” and that Perdue essentially “stole or used the same
process from Dennis Hook to produce their product.”
The record before us leads to the obvious conclusion that the
ultimate findings of fact from the Hook trial take the instant case
outside of the policy coverage. Perdue’s liability did not result
from its advertising activities and, therefore, any
misappropriation under FUTSA resulted from Perdue’s use of Hook’s
trade secret to develop a product in violation of the
confidentiality agreements.8
IV.
Accordingly, we hold that the Hook jury determined that Perdue
misappropriated Hook’s process by using it to develop its own
product. Perdue’s liability did not arise out of its advertising
8 It does not appear that the FUTSA requires a duty external to a contract in order to impose liability for its violation. See Fla. Stat. § 688.008; Tender Boat Ramp Sys., Inc. v. Hillsborough County, 54 F. Supp. 2d 1300, 1302 (M. D. Fla. 1999) (discussing the two elements for a claim of misappropriation of a trade secret under FUTSA). Although the district court noted that the trial court in the underlying action did not “advise the jurors that the duty of confidentiality must have arisen from a source other than the confidentiality agreements themselves,” we need not address this issue in deciding whether National Union owes a duty to indemnify.
19 activities or disclosure of the trade secret but even if it did,
the underlying action was premised on Perdue’s breach of the
confidentiality agreements, precluding coverage under the policy
exclusion for “failure of performance of contract.” We therefore
affirm the order granting summary judgment to National Union.
AFFIRMED