prairieFyre Software Inc. et al. v. St. Paul Fire and Marine Insurance Co. [Indexed as: prairieFyre Software Inc. v. St. Paul Fire and Marine Insurance Co.]
71 O.R. (3d) 712
[2004] O.J. No. 2555
Docket No. C40558
Court of Appeal for Ontario,
Laskin, Simmons and Cronk JJ.A.
June 16, 2004
Insurance -- Insurer's obligation to defend -- Commercial general liability insurance policy including coverage for advertising injury -- Policy stipulating that advertising injury coverage applied only to "injury . [page713]. . caused by an offence . . . committed in the course of advertising" -- Policy specifically requiring direct causal link between advertising activity and "offence" as condition of coverage -- Company bringing action against insured alleging that insured misused confidential and proprietary information in development and sale of insured's software, in breach of company's copyright and various duties allegedly owed by insured to company -- Statement of claim not making any allegation of copyright infringement or misappropriation of style of doing business committed in course of advertising -- Company not alleging causal link between insured's advertising activity and company's injuries sufficient to trigger potential claim for advertising injury coverage and duty to defend.
P Inc. carried on business as a developer and vendor of call centre management software products. L was its Chief Executive Officer. P Inc. was insured under a commercial general liability insurance policy which included coverage for advertising injury and extended to the officers and directors of P Inc. The insuring agreement provided that the insurance applied to advertising injury "only if caused by an offence during the policy period". Moreover, the coverage clause restricted coverage for advertising injury to "injury . . . caused by an offence . . . committed in the course of advertising the Insured's goods, products or services". T Inc. brought an action against P Inc. and L claiming compensatory damages for infringement of copyright, breach of contract, breach of confidence, breach of fiduciary duty, unjust enrichment and misappropriation of business opportunities. T Inc. alleged that L was formerly associated with T Inc., that he worked with T Inc.'s founder to develop a distinctive call centre mana gement software product, and that after L sold his interest to T Inc.'s founder and signed a release agreement acknowledging that T Inc. was the owner of all proprietary rights developed by L in relation to T Inc., he began developing and selling a competing call centre management software product incorporating T Inc.'s proprietary technology, thereby infringing T Inc.'s copyright, breaching various duties owed to T Inc., and breaching the release agreement. P Inc.'s insurer denied coverage for the claims. P Inc. and L applied for a declaration that the advertising injury coverage applied and that the insurer had a duty to defend. The application judge dismissed the application. P Inc. and L appealed.
Held, the appeal should be dismissed.
T Inc. did not allege a causal link between the appellants' advertising activity and its injuries sufficient to trigger a potential claim for advertising injury coverage and a duty to defend. The coverage clause in the policy stipulated that advertising injury coverage applied only to "injury . . . caused by an offence . . . committed in the course of advertising". Accordingly, the policy specifically required a direct causal link between advertising activity and "an offence" as a condition of coverage. "Advertising injury" was defined in the policy as injury arising out of, inter alia, misappropriation of advertising ideas or style of doing business, or infringement of copyright, title or slogan. The action focused on P Inc.'s alleged misuse of confidential and proprietary information in the development and sale of its software. The statement of claim failed to make any allegation of copyright infringement or misappropriation of style of doing business committed in the course of adverti sing.
APPEAL from a judgment of Lalonde J. (2003), 2003 64298 (ON SC), 66 O.R. (3d) 331, [2003] O.J. No. 3116 (S.C.J.) dismissing an application for a declaration that the insured had an obligation to defend a claim against an insurer.
Cases considered prairieFyre Software Inc. v. St. Paul Fire and Marine Insurance Co. (2003), 2003 64298 (ON SC), 66 O.R. (3d) 331, [2003] O.J. No. 3116, [2003] O.T.C. 725 (S.C.J.) [page714]
Thomas G. Conway, for appellants/respondents on cross-appeal. J. Stephen Cavanagh and C. Jill Alexander, for respondent/ appellant on cross-appeal.
The judgment of the court was delivered by
[1] SIMMONS J.A.: -- The issues on this appeal [See Note 1 at the end of the document] concern an insurer's duty to defend an action commenced against its insured. The application judge dismissed the insured's application for a declaration that its insurer has a duty to defend under an advertising injury coverage clause contained in an insurance policy. For somewhat different reasons than those given by the application judge, I agree that, in the circumstances of this case, the insurer does not have a duty to defend. I would therefore dismiss the insured's appeal.
I. Background
(a) The insured and the insurance policy
[2] PrairieFyre Software Inc. ("prairieFyre") carries on business as a developer and vendor of call centre management software products. Clarke LaPrairie is the Chief Executive Officer of prairieFyre. In November 1998, St. Paul Fire and Marine Insurance Co. ("St. Paul") issued a commercial general liability insurance policy to prairieFyre (the "1998 policy"). Subsequently, St. Paul issued renewal policies to prairieFyre in November 1999 (the "1999 policy") and November 2000 (the "2000 policy").
[3] The 1998 policy [See Note 2 at the end of the document] includes coverage for advertising injury and extends to the officers and directors of the insured corporation. The insuring agreement in this policy provides that the insurance applies to advertising injury "only if caused by an offence during the 'policy period'" (emphasis added). Moreover, the coverage [page715] clause restricts coverage for advertising injury to "injury . . . caused by an offence . . . committed in the course of advertising the Insured's goods, products or services" (Emphasis added).
[4] Four provisions of the 1998 policy are important for the purpose of this appeal. Paragraph 1 of the policy is the insuring agreement, which sets out the advertising injury coverage:
- INSURING AGREEMENTS
Coverage B -- Personal Injury and Advertising Injury Liability
To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of . . . "advertising injury" to which this insurance applies. This insurance applies to . . . "advertising injury" only if caused by an offence during the "policy period" committed in the course of advertising the Insurer's goods, products or services.
(Emphasis added)
[5] Paragraph 2 of the policy defines the scope of the duty to defend:
- DEFENCE -- SETTLEMENT -- SUPPLEMENTARY PAYMENTS
As respects insurance afforded by this Part, the Insurer shall:
(i) defend in the name and on behalf of the Insured and at the costs of the Insurer any civil action which may at any time be brought against the Insured on account of such . . . "advertising injury" . . . but the Insurer shall have the right to make such investigation, negotiation and settlement of any claim as may be deemed expedient by the Insurer;
[6] Paragraph 5 of the policy sets out the policy exclusions:
- EXCLUSIONS
This insurance does not apply to:
P. "advertising injury" arising out of:
(i) breach of contract, other than misrepresentation of advertising ideas under an implied contract, . . .
(Emphasis added)
[7] Paragraph 7 of the policy sets out the definition of advertising injury:
- DEFINITIONS
A. "Advertising injury" means injury arising out of one or more of the following offences:
(i) 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,
(ii) oral or written publication of material that violates a person's right of privacy, [page716]
(iii) misappropriation of advertising ideas or style of doing business, or
(iv) infringement of copyright, title or slogan.
(b) Taske Technology Inc.'s actions against prairieFyre
[8] This appeal relates to an action commenced against prairieFyre and Mr. LaPrairie by Taske Technology Inc. ("Taske") on June 29, 2001 (the "June 29, 2001 action"). On July 21, 2000, prior to commencing the June 29, 2001 action, Taske issued a statement of claim against prairieFyre and Mr. LaPrairie, claiming damages for libel, breach of trademark and breach of copyright (the "July 21, 2000 action"). The July 21, 2000 action focused on the contents of a sales brochure that Taske alleged was prepared and disseminated by prairieFyre and Mr. LaPrairie in June 2000. On being notified of the July 21, 2000 action, St. Paul undertook the defence. After the June 29, 2001 action was commenced, St. Paul settled the July 21, 2000 action.
[9] In the action forming the subject matter of this appeal (the June 29, 2001 action), Taske claims compensatory damages against prairieFyre and Mr. LaPrairie for infringement of copyright, breach of contract, breach of confidence, breach of fiduciary duty, unjust enrichment, and misappropriation of business opportunities. In particular, Taske alleges that Mr. LaPrairie was formerly associated with Taske, and that he worked with Dennis Johns, the founder of Taske, to develop a distinctive call centre management software product known as Taske ACD Toolbox.
[10] In August 1998, Mr. LaPrairie triggered the shotgun clause in a shareholder agreement and named a price for the purchase of Mr. Johns' interest in Taske. Mr. Johns reversed the shotgun and purchased Mr. LaPrairie's interest. As part of completing the sale, Mr. LaPrairie signed a Release Agreement dated October 5, 1998, in which he acknowledged that Taske was the owner of all proprietary rights developed by Mr. LaPrairie or his holding company in relation to Taske.
[11] Taske claims that, following the sale of his interest, Mr. LaPrairie and prairieFyre began developing, and eventually selling, a competing call centre management software product incorporating Taske's proprietary technology, thereby infringing Taske's copyright, breaching various duties owed to Taske, and breaching the Release Agreement.
[12] PrairieFyre and Mr. LaPrairie rely on several specific paragraphs in Taske's statement of claim as alleging advertising injury and as triggering their claim for advertising injury coverage. Paragraph 48 of Taske's statement of claim illustrates the basis of their position: [page717]
- The Defendants, with full knowledge of the exclusive copyrights of the Plaintiffs in the Taske ACD Toolbox software, and without consent of the Plaintiffs, have distributed, exposed, offered for sale, and exhibited in public by way of trade, unauthorized copies of the Taske ACD Toolbox software, or substantial parts thereof, within the prairieFyre software product.
(c) The application judge's reasons
[13] By letter dated July 17, 2001, St. Paul denied coverage for claims made in the June 29, 2001 action. PrairieFyre and Mr. LaPrairie then applied for a declaration that the advertising injury coverage applies and that St. Paul has a duty to defend. The application judge dismissed their application. In doing so, he noted that, at this stage, the sole issue for determination was whether St. Paul had a duty under the policy to defend the claim initiated against its insured by Taske. He focused on determining whether Taske's allegations of copyright infringement fall within the wording of the advertising injury coverage as set out in the November 1998 policy and cautioned himself not to go behind the pleadings to determine the authenticity of Taske's claims.
[14] The application judge noted that "advertising" is not a defined term in the policy. He found that Taske's allegations amount to a claim that the appellants had "targeted their new software towards a sophisticated audience for the purpose of bringing their product out into the open" and therefore fall within the rubric of "advertising activity". Further, he found that there was a sufficient connection between the allegations of copyright infringement and the allegations of advertising activity to trigger St. Paul's duty to defend. He said (2003), [2003 64298 (ON SC)](https://www.canlii.org/en/on/onsc/doc/2003/2003canlii64298/2003canlii64298.html), 66 O.R. (3d) 331, [2003] O.J. No. 3116 (S.C.J.), at para. [48]:
As long as there is some connection or requisite nexus between the injury and the infringement, this is sufficient -- Amos v. Insurance, 1995 66 (SCC), [1995] 3 S.C.R. 405 at 417. Otherwise, if no connection needs to be established then just about everything would be covered under a policy. A direct nexus need not be established.
(Emphasis added)
[15] Despite these findings, the application judge held that St. Paul did not have a duty to defend because the exclusion clause in para. 5(P)(i) applied. He concluded that the advertising injury arose from a breach of the Release Agreement and therefore fell within the breach of contract exclusion contained in the 1998 policy.
(d) The positions of the parties
[16] The parties raised several issues on appeal. The appellants' main submission was that the application judge erred in holding that the exclusion clause relating to breach of contract [page718] applied to Taske's claims. They also asserted that the defined offence of "misappropriation of style of doing business", defined under the 1998 policy as "advertising injury", should be considered in assessing Taske's claims and the duty to defend; [See Note 3 at the end of the document] that the statement of claim issued in the July 21, 2000 action should inform the interpretation of the statement of claim issued in the June 29, 2001 action, and that the application judge should have decided the coverage issue based on the language of the 2000 policy. Finally, the appellants sought to introduce a fresh as amended statement of claim delivered after the application judge's decision as fresh evidence on the appeal.
[17] By way of cross-appeal, the respondent submitted that the application judge erred in two respects: first, in concluding that Taske's statement of claim alleged advertising activity by the appellants; and second, in holding that Taske alleged a causal link between the appellants' advertising activity and its injuries sufficient to trigger a potential claim for advertising injury coverage and a duty to defend.
II. Analysis
[18] In my view, the respondent's second submission is dispositive of this appeal.
[19] Assuming, without deciding, that the allegations made by Taske in the June 29, 2001 action fall within the ambit of "advertising activity", I conclude that the application judge erred in holding that there was a sufficient connection between Taske's allegations of advertising activity and copyright infringement (and, on appeal, misappropriation of style of doing business) to trigger St. Paul's duty to defend.
[20] Contrary to the application judge's finding that it is unnecessary to find a "direct nexus" between Taske's allegations of advertising activity and its alleged injuries in order to trigger a duty to defend, the coverage clause in the 1998 policy stipulates that advertising injury coverage applies only to "injury . . . caused by an offence . . . committed in the course of advertising". Accordingly, the policy specifically requires a direct causal link between advertising activity and "an offence" as a condition of coverage. The "offences" for which advertising injury coverage is available are set out in the definitions section of the 1998 policy. For ease of reference, parts of the coverage clause and the definitions section are repeated below: [page719]
- INSURING AGREEMENTS
This insurance applies to . . . "advertising injury" only if caused by an offence during the "policy period" committed in the course of advertising the Insured's goods, products or services.
- Definitions
A. "Advertising injury" means injury arising out of one or more of the following offences:
(iii) misappropriation of advertising ideas or style of doing business, or
(iv) infringement of copyright, title or slogan.
(Emphasis added)
[21] Unlike the July 21, 2000 action, which dealt with the contents of alleged defamatory statements in a sales brochure and therefore related directly to advertising, the June 29, 2001 action focuses on prairieFyre's alleged misuse of confidential and proprietary information in the development and sale of its software. Taske's allegation that prairieFyre and Mr. LaPrairie "exhibited in public by way of trade, unauthorized copies of the Taske ACD Toolbox software, or substantial parts thereof, within the praireFyre software product" falls short of asserting that the appellants actually displayed any portion of Taske's product as a form of advertising. On a generous reading, Taske's statement of claim fails to make any allegation of copyright infringement or misappropriation of style of doing business committed in the course of advertising.
[22] I reject the appellants' submission that Taske's July 21, 2000 statement of claim should somehow inform the interpretation of Taske's June 29, 2001 statement of claim. Taske discontinued the action commenced by its July 21, 2000 statement of claim after issuing its June 29, 2001 statement of claim, and it has not amended the latter pleading to include the allegations contained in its July 21, 2000 statement of claim. However, even if I accepted the appellants' submission, it remains my view that the June 29, 2001 statement of claim fails to make any allegation of copyright infringement or misappropriation of style of doing business committed in the course of advertising.
[23] As for the question of which policy applies, I agree with St. Paul's submission that Taske's allegations appear to relate to [page720] a timeframe soon after October 1998. Accordingly, the 1998 policy is clearly applicable. However, even if Taske's allegations relate to continuing conduct, in my view, the language of the 2000 policy does not assist the appellants on the issue of causation. The 2000 policy provides as follows:
What This Agreement Covers
We'll pay amounts any protected person is legally required to pay as compensatory damages for . . . advertising injury that's caused by an offence committed while this agreement is in effect.
Advertising injury means injury caused by any of the following offences that result from the advertising of your products or work . . .
(Emphasis added)
[24] Although the language of the 2000 policy differs somewhat from the language contained in the 1998 and 1999 policies, nothing turns on that difference. The 2000 policy still requires a direct causal link between advertising and the offence alleged. Once again, I note that the June 29, 2001 statement of claim contains no such allegation.
[25] Finally, I observe that the fresh as amended statement of claim that the appellant sought to tender as fresh evidence adds nothing new to the issue of causation.
III. Disposition
[26] I conclude that the application judge erred in finding that Taske's June 29, 2001 statement of claim includes allegations that are capable of triggering the appellants' advertising injury coverage. However, in the result, I agree with his disposition of the application. In light of my conclusion on the causation issue, it is unnecessary that I finally determine the issues concerning the meaning of advertising and the scope of the exclusion clause. [See Note 4 at the end of the document]
[27] For the reasons given, the appeal is dismissed with costs to the respondents on a partial indemnity basis fixed at $25,000 inclusive of disbursements and applicable GST.
Appeal dismissed. [page721]
Notes
Note 1: I would not formally dispose of the cross-appeal as the issues raised simply supported the application judge's decision and were not the proper subject matter of a cross-appeal.
Note 2: The relevant language of the 1998 and 1999 policies is the same. I will address the language of the 2000 policy in the Analysis section of these reasons.
Note 3: The respondent claimed that this issue was not raised before the application judge.
Note 4: The appellants abandoned their costs appeal at the hearing before us.