Houbigant, Inc.; Establissement Houbigant v. Federal Insurance Com Pany

PRECEDENTIAL
UNITED STATES COURT OF
APPEALS
FOR THE THIRD CIRCUIT
No: 03-1286
HOUBIGANT, INC.;
ESTABLISSEMENT HOUBIGANT,
Appellants
v.
FEDERAL INSURANCE COM PANY;
FIREMAN’S FUND INSURANCE
COMPANIES
Appeal from the United
States District Court
for the District of New Jersey
(Civil Action No. 01-cv-05993)
District Judge: Hon. Mary L. Cooper
Argued: November 7, 2003
Before: McKEE, SMITH, and
GREENBERG, Circuit Judges.
(Opinion Filed July 6, 2004)
JOHN W. SCHRYBER (argued)
Patton and Boggs
2550 M Street, N.W.
Washington, D.C. 20037
ROBERT D. CHESLER
Lowenstein Sandler
65 Livingston Avenue
Roseland, N.J. 07068
Attorneys for Appellants
GERARD H. HANSON
MARILYN S. SILVIA
(argued)
Hill Wallack
202 Carnegie Center
Princeton, N.J. 08543
Attorney for Federal Insurance
Company, Appellee
ALFRED C. CONSTANTS, III
Caron, Constants & Wilson
201 Route 17 North
Rutherford, N.J. 07070
Attorney for Fireman’s Fund Insurance
Companies, Appellee
OPINION OF THE COURT
McKEE, Circuit Judge.
Houbigant, Inc. and Establissment
Houbigant (collectively, “Houbigant”)
appeal the district court’s order granting
Federal Insurance Company’s (“Federal”)
motion for summary judgment and
denying Houbigant’s cross motion for
summary judgment.1 For the reasons
discussed below, we will reverse the
judgment of the district court and remand
for further proceedings consistent with this
opinion.
1 Houbigant also appealed the district
court’s grant of summary judgment in
favor of Fireman’s Fund Insurance
Companies, an excess insurer. However,
the parties have indicated that the dispute
between Houbigant and Fireman’s Fund
has been settled. Thus, that appeal is
moot.

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I. BACKGROUND
Houbigant has been in the business
of creating and manufacturing fragrances
for more than 200 years. Between 1994
and 1996 Houbigant entered into a series
of licensing agreements with Dana
Perfumes Corporation and Houbigant
(1995) Ltee. Ltd. (“Insureds”). R. at 734;
see also R. at 815-57. Under the
agreement, the Insureds were granted a
license to manufacture and sell certain
Houbigant fragrances and use the
trademarks associated with them. R. at
818-19. However, the Insureds were
required to manufacture, package, and
label Houbigant products in accordance
with particular specifications in order to
ensure authenticity and quality. R. at 824.
The Insureds eventually filed for
Chapter 11 bankruptcy. Shortly thereafter,
Houbigant filed a bankruptcy claim against
the Insureds alleging that they had directly
or contributorily infringed Houbigant’s
“trademarked titles” and breached
Houbigant’s contractual obligations by: (1)
selling a “watered-down” version of
Houbigant’s “Chantilly” fragrance; (2)
selling the “know-how” and physical
components required to make Chantilly
and three other fragrances to unlicensed
fragrance producers who sold the products
worldwide;2 (3) using the Houbigant name
to sell non-Houbigant products; and (4)
indicating that the Chantilly fragrance was
produced by the Insureds. R. at 728-48.
Houbigant claimed tort damages in excess
of $99 million3 and a separate claim for
contractual damages in excess of $105
million resulting from the Insured’s
conduct. R. at 744-54. The Insureds
notified their insurer, Federal, of the
pending claim.
At that time, the Insureds were
covered by two policies issued by Federal:
(1) the Commercial General Liability
policy (“CGL policy”); and (2) the
Commercial Excess Umbrella policy
(“Umbrella policy”). The CGL policy
provides coverage for “advertising injury,”
R. at 499, which is defined, in relevant
part, as “injury . . . arising solely out of . .
. infringement of trademarked or service
marked titles or slogans,” where such
infringement is “committed in the course
of advertising of [the insured’s] goods,
products or services . . . .” R. at 512.
However, the policy excludes coverage of
any advertising injury “arising out of
breach of contract,” R. at 505, or “an
infringement, violation or defense of any .
. . trademark or service mark or
certification mark or collective mark or
trade name, other than trademarked or
service marked titles or slogans.” R. at
507.
2 The other fragrances involved were
“Lutece,” “Rafinee,” and “Demi-Jour.”
R. at 739.
3 Houbigant also sought treble
damages, attorneys fees, and
prejudgment interest under §1117(b). In
total, Houbigant alleged that the Insureds
tort liability was in excess of $320
million.

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The Umbrella policy contains two
separate coverage provisions. Coverage
A, entitled “Excess Follow Form Liability
Insurance,” covers “that part of the loss . .
. in excess of the total applicable limits of
[the] underlying insurance [policy] . . .”
under the same terms as said policy. R. at
278. Coverage B of the Umbrella policy,
entitled “Umbrella Liability Insurance,”
covers “damages the insured becomes
legally obligated to pay by reason of
liability imposed by law or assumed under
an insured contract because of . . .
advertising injury . . . .” R. at 279. This
includes injury “arising solely out of . . .
infringement of copyrighted titles, slogans
or other advertising materials,” where such
infringement is “committed in the course
of advertising . . . .” R. at 288-89.
Coverage B also excludes breach of
contract claims. R. at 285.
Federal denied coverage under both
policies. Nonetheless, Houbigant and the
Insureds agreed to settle the tort claims for
an unsecured $50 million. Under the terms
of the agreement, Houbigant obtained the
right to “prosecute any cause of action
against [Federal], at Houbigant’s sole
expense, arising from any failure by
[Federal] to indemnify the [Insureds]
liability to Houbigant with respect to [the
tort claims].” R. at 760. The parties also
agreed that Houbigant’s recovery would be
limited to indemnification under the
implicated Federal insurance policies. The
bankruptcy court approved the settlement,
finding that it was “fair, reasonable, . . .
and entered into following good faith,
arms length negotiations . . . .” R. at 813.
Houbigant subsequently initiated
this diversity action against Federal
seeking indem nification under the
implicated policies pursuant to the
assignment it received as part of the
settlement with the Insureds. The court
ruled that there was no coverage under
either policy, and that Federal was not
bound by the settlement approved by the
bankruptcy court. This appeal followed.4
II. A. Policy Coverage
Although we find that both policies
cover the conduct of the Insureds, the story
takes some telling. Thus, we will address
each policy in turn.
1. CGL Policy
a. Trademarked Titles
As stated above, Houbigant
alleged that the Insureds: (1) sold a
“watered-down” version of Houbigant’s
“Chantilly” fragrance; (2) sold the
“know-how” and physical components
required to make Chantilly and three
other fragrances to unlicensed fragrance
producers who sold the products
worldwide; (3) used the Houbigant name
to sell non-Houbigant products; and (4)
indicated that the Chantilly fragrance
4 We have jurisdiction to consider this
appeal under 28 U.S.C. § 1291. We
review the district court’s grant of
summary judgment de novo, applying the
same standard as the district court. Penn.
Coal Ass’n. v. Babbitt, 63 F.3d 231, 236
(3d Cir. 1995).

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was produced by the Insureds. R. at 728-
48. There is no question that these
allegations, if true, constitute trademark
infringement in violation 15 U.S.C. §
1125(a)(1)5 and that Houbigant would be
entitled to damages pursuant to § 1117.
However, the CGL policy “does
not apply to . . . advertising injury . . .
arising out of . . . infringement, violation
or defense of any . . . trademark or
service mark or certification mark or
collective mark or trade name, other than
trademarked or service marked titles or
slogans.” R. at 507 (emphasis added).
Based on the wording of this exclusion,
it is clear that a trademarked title is
regarded as a subset or type of
trademark. However, the policy does not
offer any further explanation or
definition of the term. Thus, we must
first determine whether Houbigant’s
marks constitute “trademarked titles.”
The insurance contracts in
question were entered into in New
Jersey, and we are thus bound by the
controlling law of that state.6 However,
the New Jersey Supreme Court has yet to
define the term “trademarked title.”
Therefore, “we must consider relevant
state precedents, analogous decisions,
considered dicta, scholarly works, and
any other reliable data tending
convincingly to show how the highest
court in the state would decide the issue
at hand.” Packard v. Provident Nat.
Bank, 994 F.2d 1039, 1046 (3d
5 Section 1125(a)(1) provides:
Any person who, on or in connection
with any goods or services, or any
container for goods, uses in commerce
any word, term, name, symbol, or device,
or any combination thereof, or any false
designation of origin, false or misleading
description of fact, or false or misleading
representation of fact, which–
(A) is likely to cause confusion, or to
cause mistake, or to deceive as to the
affiliation, connection, or association of
such person with another person, or
as to the origin, sponsorship, or approval
of his or her goods, services, or
commercial activities by another person,
or
(B) in commercial advertising or
promotion, misrepresents the nature,
characteristics, qualities, or geographic
origin of his or her or another person’s
goods, services, or commercial activities,
shall be liable in a civil action by any
person who believes that he or she is or
is likely to be damaged by such act.
6We must apply the forum state’s
choice of law rule. General Star Nat.
Ins. Co. v. Liberty Mut. Ins. Co., 960
F.2d 377, 379 (3d Cir. 1992) (citation
omitted). With respect to insurance
disputes such as this, the New Jersey
Supreme Court has held that “the law of
the place of the contract will govern the
determination of the rights and liabilities
of the parties under the insurance
policy.” State Farm Mut. Auto. Ins. Co.
v. Simmons’ Estate, 84 N.J. 28, 37
(1980).

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Cir.1993).
We begin our analysis with Villa
Enters. Mgmt., Ltd. v. Fed. Ins. Co., 821
A.2d 1174 (N.J. Super. Ct. Law Div.
2002), a New Jersey trial court decision
that addresses the very issue before us.7
In fact, not only does Villa address the
same issue, it actually involves the same
insurer, Federal. In Villa, Federal
refused to defend or indemnify the
insured against damages stemming from
an alleged advertising injury arising out
of the insured’s use of the term “VILLA
PIZZA,” a trademark and service mark
owned by another company.
The court in Villa began its
analysis with a review of the law
governing interpretation of insurance
policies in New Jersey. See id. at 1182-
83. The court found two principles
particularly helpful. First, “the words of
an insurance policy should be given their
ordinary meaning.” Id. at 1182 (quoting
Longobardi v. Chubb Ins. Co. of New
Jersey, 582 A.2d 1257, 1260 (N.J. Sup.
Ct. 2002) (internal quotation marks
omitted)). Second, “any ambiguity must
be resolved in the insured’s favor.” Id.
(citing Voorhees v. Preferred Mut. Ins.
Co., 607 A.2d 1255, 1259 (N.J. Sup. Ct.
1992)). The Villa court then considered
the term, “trademarked title.” Inasmuch
as that New Jersey court’s analysis is so
germane to our inquiry, we will quote its
analysis at length:
In this policy, coverage is
not extended for titles and
slogans generally but only
for trademarked and
service-marked titles and
slogans. The ordinary
insurance consumer faced
with Federal’s language of
coverage and exclusion
would not begin with the
assumption that
‘trademarks, service marks,
certification marks,
collective marks and trade
names’ are a subset of
‘trademarked or service-
marked titles or slogans,’
but rather would begin with
the converse assumption.
The question thus
becomes: How are
trademarked or service-
marked titles or slogans
different from all other
trademarks and service
marks?
Trademarks and service
marks are devices used in
connection with the sale or
advertisement of products
7 It is important to note that the Villa
decision, although decided prior to the
district court’s decision in this case, was
not published until several months after
the district court ruled on the parties’
cross motions for summary judgment.
Thus, the district court did not have the
benefit of the reasoning in Villa when it
adjudicated this dispute.

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or services of particular
merchants to distinguish
them from similar products
or services of others and
identify the source of the
trademarked products or
service-marked services.
The Lanham Act states that
the term ‘trademark’
includes ‘any word, name,
symbol, or device, or any
combination thereof,
adopted and used by a
manufacturer or merchant
to identify his goods and
distinguish them from
those manufactured or sold
by others.’ 3 Callmann on
Unfair Competition,
Trademarks and
Monopolies, § 17:1 (Louis
Altman ed., 4th ed. 2002).
According to Callmann, an
even broader definition
was proposed for Article 6
of the Paris Convention
and that was ‘any mark or
medium that can be
conceived by the senses,
that is capable of
distinguishing
merchandise, products or
services of a ... person
from those of another.’
Although trademarks and
service marks certainly
may be trademarked or
service-marked titles
(Corel ® WordPerfect ®)
or slogans (Ponds’ ‘The
Skin You Love to Feel’),
they may also be symbols
or emblems (McDonalds’
golden arches M ®).
Indeed, a color
configuration is a ‘device’
for the purposes of the
Lanham Act definition.
Shakespeare Co. v. Silstar
Corp. of America Inc., 802
F.Supp. 1386 (D.S.C.
1992), rev’d on other
grounds, 9 F.3d 1091 (4th
Cir. 1993). Purely audible
marks may be registered, 3
Callmann, supra, at n. 4,
and so too may a fragrance
be registered as a mark.
See In re Clark, 17
U.S.P.Q.2d 1238 (TTAB
1990).
Viewed in this fashion, no
tortured examination of
various definitions of ‘title’
need be made. Under the
Federal policy before us,
advertising injuries arising
from a claim of
infringement of a
trademarked or service-
marked title (i.e., any
trademarked or service-
marked name) is entitled to
defense and
indemnification whereas
advertising injuries arising

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from a claim of
infringement of other
trademarked or service-
marked words, symbols or
devices are not covered,
nor claims of infringement
based on certification
marks, collective marks
and unregistered trade
names. This analysis is
consistent with the plain
meaning of the clauses in
ordinary language using the
broadest definition of ‘title’
recognized by all cited
authorities, legal and
linguistic, and follows the
mandate of Longobardi to
give insurance policy
language its plain meaning.
Id. at 1185-87 (footnotes omitted).
Ultimately, the Villa court found that a
reasonable insured would believe the
term “title” includes “any name, . . .
appellation, . . . epithet, [or] . . . word by
which a product or service is known.”
Id. at 1187.
However, Federal argues that the
California Supreme Court’s decision in
Palmer v. Truck Ins. Exchange, 988 P.2d
568 (Cal. 1999) offers a more persuasive
basis for distinguishing trademarked
titles from other types of trademarks.
The applicable California insurance law
is essentially the same as the relevant
New Jersey law.8 Nevertheless, the
Palmer court came to a different
conclusion than the Villa court. The
Palmer court first noted that the
“definition of ‘title’ cannot subsume the
definition[] of trademark . . . .
Otherwise, all or part of the exclusion
clause becomes meaningless.” Id. at
574. The court concluded that “defining
‘title’ to mean ‘any name’ would
abrogate the policy language excluding
coverage for trade name infringement
because trade names . . . are the subset of
names used by a person to identify his or
her business or vocation.” Id. (citation
and internal quotation marks omitted).
In order to avoid this result, the Palmer
court limited the meaning of “title” to
“the name of a literary or artistic work.”
Id.
We are not required to follow
Villa, see C.I.R. v. Bosch’s Estate, 387
U.S. 456, 465 (1967),9 and we are
8 Under California law: (1) “[the
court] must give [policy] terms their
ordinary and popular sense”; and (2)
“ambiguities are generally construed
against the party who caused the
uncertainty to exist (i.e., the insurer) . . .
.” Palmer, 988 P.2d at 572-73 (internal
citations and quotations marks omitted).
9 In C.I.R., the Supreme Court held
that the ruling of a “lower state court[]”
is “not controlling . . . where the highest
court of the State has not spoken on the
point.” 387 U.S. at 465 (citation and
internal quotation marks omitted).

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certainly not bound by Palmer.
However, the court’s reasoning in Villa
persuades us that the New Jersey
Supreme Court would agree with that
trial court’s analysis if faced with this
issue. As an initial matter, there can be
no dispute that “title” has several
meanings, including: (1) “[a]n
identifying name given to a book, play,
film, musical composition or work of
art”; (2) “[a] general or descriptive
heading, as of a book chapter . . .”; and
(3) “[a] descriptive appellation:
EPITHET . . . .” Villa, 821 A.2d at 1181
(quoting Webster’s II New College
Dictionary at 1157). Under New Jersey
law, “[w]here the policy language
supports two meanings, one favorable to
the insurer and the other to the insured,
the interpretation favoring coverage
should be applied.” Id. at 181 (quoting
Lundy v. Aetna Casualty, 458 A.2d 106,
111 (N.J. 1983) (internal quotation marks
omitted)). Thus, the only basis for
Palmer’s more narrow interpretation of
trademarked title was its concern that
defining “title” broadly to include any
name would conflict with the policy’s
exclusion of coverage of advertising
injury arising out of trade name
infringement. However, this concern
ignores the statutory distinction between
“trademarks” and “trade names.” The
Lanham Act defines a “trademark,” in
relevant part, as “any word, name,
symbol, or device, or any combination
thereof . . . used by a person . . . to
identify and distinguish his or her goods
. . . from those manufactured or sold by
others and to indicate the source of the
goods . . . .” 15 U.S.C. §1127 (emphasis
added). In contrast, “trade name” is
defined as “any name used by a person to
identify his or her business or vocation.”
Id. (emphasis added). Thus, the statutory
definition of trademark limits the scope
of the term trademarked title and
distinguishes it from trade names.
Another more fundamental
problem with the analysis in Palmer is
that it ignores the purpose of a
commercial insurance policy. As the
Villa court points out, “[w]ho, reading
the policy at issue, would think for a
second that it would cover infringement
of Catcher in the Rye Bread ® but not
Wonder Bread ®?” 821 A.2d at 1187.
An insured would not reasonably assume
that a commercial insurance policy only
covers literary or artistic titles and not
ordinary product titles. Moreover,
However, “an intermediate appellate
state court [decision] . . . is a datum for
ascertaining state law which is not to be
disregarded by a federal court unless it is
convinced by other persuasive data that
the highest court of the state would
decide otherwise.” Id. (citation and
internal quotation marks omitted).
Because Villa is only a trial court
decision, it is not necessarily entitled to
such deference. Nonetheless, we
consider the Villa decision to the extent
that the quality of its analysis convinces
us that the New Jersey Supreme Court
would decide the issue similarly.
Packard, 994 F.2d at 1046.

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limiting trademarked titles to literary or
artistic works would “create an
ambiguity rather than resolve one . . . .”
id. Not only would it “send insureds on a
quixotic quest for literary works the title
of which coincidently mirrored the
registered title alleged to have been
infringed,” Id., it would create endless
litigation over what constitutes literary or
artistic work. As Justice Blackmun has
so aptly noted, “[r]easonable people
certainly may differ as to what
constitutes literary or artistic merit.”
Pope v. Illinois, 481 U.S. 497, 506
(1987) (Blackmun, J., concurring in part
and dissenting in part).
Thus, we accept the more
straightforward definition of “title” set
forth in Villa, and define trademarked
title as any name, appellation, epithet, or
word used to identify and distinguish the
trademark holder’s goods from those
manufactured or sold by others.
Houbigant’s house mark and product
mark (e.g., “Chantilly”) falls within this
definition. See Hugo Boss Fashions, Inc.
v. Fed. Ins. Co., 252 F.3d 608, 619 n.7
(“The term ‘house mark’ refers to a
company name or line of products, while
the term ‘product mark’ refers to the
name of a particular product. Thus,
‘Ford’ is a house mark and ‘Mustang’ is
a product mark.”) (citing McCarthy on
Trademarks and Unfair Competition §
7:5 (4th ed.)).10
b. Advertising Injury
In order for the advertising injury
provision of the CGL policy to apply, the
conduct in question must have been
“committed in the course of adverting of
[the insured’s] goods, products or
services.” R. at 512. In Tradesoft
Technologies, Inc. v. Franklin Mut. Ins.
Co., Inc., 746 A.2d 1078 (N.J. Super. Ct.
App. Div. 2000), the court also addressed
the same policy language at issue here.
There, the insured was sued for patent
and trademark infringement as well as
several common law causes of action.
Id. at 140.11 The court held that “in order
for there to be coverage [under the
policy] there must be a causal connection
between the advertising and the injury . .
. .” Id. at 152 (citing Frog, Switch &
Mfg. v. Travelers Ins. Co., 193 F.3d 742,
751 n.8 (3d Cir. 1999)). In other words,
“the advertising activities must cause the
injury–not merely expose it.” Id. at 152
(citation and internal quotation marks
omitted). The court held that the patent
infringement claim, which simply
consisted of an alleged offer to sell the
patented product, was not covered by the
advertising injury provision of the policy
10 Federal also relies on the decision
in Hugo Boss in support of its definition
of trademarked title. However, Hugo
Boss involved “trademarked slogans,”
and offers no insight into the meaning of
trademarked title.
11 The additional causes of action
were misappropriation of trade secrets,
breach of contract, tortious interference
with a contractual relationship, and
unfair competition.

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because such conduct was “not within
the commonly understood meaning of
‘advertising ideas’ or ‘style of doing
business.’” Id. at 150. On the other
hand, the court noted that the trademark
infringement claim was “obviously
covered by the policy . . . .” Id. 151 n.1
(emphasis added).
As stated above, Tradesoft relied,
in part, on our opinion in Frog, Switch.
There, a competitor of the insured filed a
complaint alleging that the insured
entered the particular product market by
using the competitor’s proprietary trade
secrets, confidential business
information, and technology
misappropriated by a former employee.
Frog, Switch, 193 F.3d at 745. The
competitor also alleged that the insured
“falsely represented that it had developed
a new and ‘revolutionary’ design for [the
product], and falsely depicted [the
product] with [its own] logo.” However,
“[t]he parts and components sold in
commerce by [the insured] as its own
were really [the competitors’s] products
made by use of stolen drawings . . . .” Id.
In considering whether this was an
advertising injury, we observed: “to be
covered by the policy, allegations of
unfair competition or misappropriation
have to involve an advertising idea, not
just a nonadvertising idea that is made
the subject of advertising.” Id. at 748.
We then considered several district court
cases where a “passing off” claim was
held to have caused an advertising injury.
See id. at 749 (citations omitted). We
noted that each of those cases “involved
allegations that an insured was trading on
the recognizable name, mark, or products
configuration (trade dress) of the
underlying plaintiff.” Id.
In contrast, the underlying
plaintiff in Frog, Switch simply alleged
that the insured “took the [product]
design and lied about the design’s
origin.” Id. We therefore held that the
advertising injury provision of the policy
was not implicated by the complaint. As
we later noted in Green Mach. Corp. v.
Zurich-American Ins., 313 F.3d 837, 840
(3d Cir. 2002), “[a]dvertising injury is
not . . . the same thing as advertising per
se. Rather, “[a]dvertising injury is the
misappropriation of another’s advertising
idea or concept.” Id. Similarly, in Green
Machine, a competitor filed a complaint
against the insured, alleging infringement
of a patented method of cutting concrete.
The only connection to advertising was
an allegation that the insured advertised
the method to others. See id. In other
word, the only advertising idea in
question was the very idea to advertise,
nothing more. As in Tradesoft, this was
insufficient to implicate the advertising
injury provision of the policy. See id.
Thus, in order to invoke the
advertising injury provision, the injury in
question must have been caused by the
advertising activity itself. The insured
must have misappropriated an
advertising idea, not just an idea that
later became the subject of an advertising
campaign. Here, the injury in question
was the result of alleged trademark
infringement. In Frog, Switch, we

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discussed the close relationship between
trademarks and advertising: “[a]
trademark can be seen as an ‘advertising
idea’ [because] [i]t is a way of marking
goods so that they will be identified with
a particular source.” Id. (citing Northam
Warren Corp. v. Universal Cosmetic,
Co., 18 F.2d 774, 774 (7th Cir. 1927)
(“[a] trademark is but a species of
advertising, its purpose is to fix the
identity of the article and the name of the
producer in the minds of the people who
see the advertisement . . . .”)).
Trademarks, therefore, have the same
purpose as advertising.
Federal cites several cases from
other circuits that it argues more
narrowly proscribe the scope of
“advertising.” However, we are not
persuaded. For example, Federal cites
EKCO Group, Inc. v. Travelers Indem.
Co. of Ill., 273 F.3d 409 (1st Cir. 2001).
There, the Court of Appeals for the First
Circuit found that “a real teapot intended
for sale as a kitchen utensil” was not an
advertising idea. Id. at 413. The court
held that there was a “distinction
between producing and selling the goods
on the one hand and ‘advertising’ them
on the other . . . .” Id. at 414. The same
distinction exists here. That is to say,
there is a distinction between the
Houbigant’s trademarks (i.e., the
advertising), and the production and sale
of its perfumes (i.e., the goods). In fact,
without the use of Houbigant’s marks,
there would be no claim against the
Insureds in the first instance. Therefore,
EKCO is clearly distinguishable from the
matter at hand.
Federal also cites Advance Watch
Co., Ltd. v. Kemper Nat. Ins. Co., 99
F.3d 795 (6th Cir. 1996). In Advance
Watch, a competitor of the insured filed a
complaint alleging, inter alia, that
writing instruments sold by the insured
diluted the distinctiveness of the
competitor’s mark and thereby infringed
the competitor’s trademark. In finding
no coverage under the policy, the Court
of Appeals for the Sixth Circuit
reasoned:
In the present action, we
conclude that the
reasonable expectation of
these parties as to coverage
rests on the fact that
‘misappropriation of
advertising ideas or style of
doing business’ refers to a
grouping of actionable
conduct fairly well
delimited by case law, and
does not refer to another,
distinct grouping of
actionable conduct which
has come to be commonly
referred to in case law and
in legal treatises as
‘trademark and trade dress
infringement.’
Id. at 804. Thus, Advance Watch is at
odds with Tradesoft as well as our
decision in Frog, Switch, both of which
hold that trademark infringement is an
advertising injury. However, Advance

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Watch has been “sharply criticized for
ignoring the real contours of intellectual
property litigation . . . .” Frog, Switch,
193 F.3d at 747. Therefore, we are not
persuaded by the reasoning in Advance
Watch. Instead, we hold that the injury
caused by the Insureds’ infringement of
Houbigant’s trademarks is an advertising
injury.12
c. Contract Exclusion
Federal’s CGL policy expressly
excludes coverage for “advertising injury
arising out of breach of contract.” R. at
505 (emphasis added). Although their
bankruptcy claim against the Insureds
contains both breach of contract and tort
allegations, R. at 728-48, Houbigant only
seeks to enforce the underlying insurance
policy insofar as it relates to the latter.
We must therefore determine if the
alleged torts are excluded from coverage
by the “arising out of” contract
exclusion.
At least one state court has
construed such language broadly to
include injury “originating from,”
“having its origins in,” “growing out of,”
or “flowing from” the contractual
relationship. Callas Enters., Inc. v.
Travelers Indem. Co. of Am., 193 F.3d
952, 955-56 (8th Cir. 1999) (citing
Assoc. Indep. Dealers, Inc. v. Mutual
Service Ins. Co., 229 N.W.2d 516 (Minn.
1975)). Other courts have employed a
“but for” test; in other words, the injury
is only considered to have arisen out of
the contractual breach if the injury would
not have occurred but for the breach of
contract. Hugo Boss, 252 F.3d at 623
n.15 (citing Mount Vernon Fire Ins. Co.
v. Creative Hous. Ltd., 668 N.E. 2d 404
(N.Y. 1996)).
While the New Jersey Supreme
Court has not endorsed either test, at
least one New Jersey appellate decision
applied a “but for” analysis under similar
circumstances. The policy in Tradesoft
also contained a breach of contract
exclusion, and the injury there
undoubtedly flowed from the contractual
relationship between the parties.13 Yet,
in determining if the exclusion applied,
the court considered whether any of the
tort claims constituted an advertising
injury. Moreover it did this without
further reference to the contract
exclusion. Tradesoft, 746 A.2d 1085-
12 Following argument in this matter,
Federal submitted two additional cases
pursuant to Federal Rule of Appellate
Procedure 28(j), Information Spectrum,
Inc. v. Hartford, 834 A.2d 451 (N.J.
Super. Ct. App. Div. 2003) and Westport
Reinsurance Mgmt., LLC v. St. Paul Fire
& Marine Ins. Co., 80 Fed. Appx. 277
(2003). However, we do not need to
discuss these cases because they simply
follow the causation analysis set forth in
Tradesoft and Frog, Switch.
13 The insured–a company formed by
two former employees of the underlying
plaintiff–was only able to engage in the
alleged torts because of information
those employees obtained while under
contract with the plaintiff.

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1087.
Our situation is analogous.
Although the relationship between
Houbigant and the Insureds is
contractual, the actions of the Insureds
were independently tortious.14 The
contractual relationship was not endemic
to the Insureds infringing of Houbigant’s
trademarks. Therefore, the contract
exclusion does not apply to Houbigant’s
tort claims.
2. Umbrella Policy
Federal also issued an Umbrella
policy, which contains two separate
coverage provisions, Coverage A and
Coverage B. We must also examine each
of these provisions.
a. Coverage A
Coverage A of the Umbrella
policy is entitled “Excess Follow Form
Liability Insurance” and covers “that part
of the loss . . . in excess of the total
applicable limits of [the] underlying
insurance [policy] . . . .” R. at 278. This
is known as a “follow form” policy.
Under such a policy, “the parties agree
that the coverage issues presented turn
solely on the interpretation of the
underlying polic[y].” Piper Jeffray Co.,
Inc. v. Nat’l Union Fire Ins. Co., 967
F.Supp. 1148, 1151 (D. M inn. 1997).
Here, the underlying policy is the CGL
policy. Thus, based upon the foregoing
discussion, we conclude that Houbigant’s
claim is covered by Coverage A of the
Umbrella policy.
b. Coverage B
Coverage B of the Umbrella
policy is entitled “Umbrella Liability
Insurance” and covers “damages the
insured becomes legally obligated to pay
by reason of liability imposed by law or
assumed under contract because of . . .
advertising injury . . . .” R. at 279.
Under Coverage B “advertising injury”
includes “injury . . . arising solely out of .
. . infringement of copyrighted titles,
slogans or other advertising materials”
and “committed in the course of
14 Federal also argues that under New
Jersey law we must look at the gravamen
of Houbigant’s complaint, which it
contends lies in contract. In support of
this proposition, Federal relies primarily
on Harleysville Ins. Cos. v. Garitta, 785
A.2d 913 (N.J. 2001). In Harleysville,
the New Jersey Supreme Court looked at
the gravamen of a wrongful death action
to determine the applicability of a policy
exclusion barring coverage for bodily
injury that was “expected or intended” by
the insured. However, Harleysville is not
inconsistent with Tradesoft; the two
cases simply address different questions.
In Harleysville, the court was forced to
make a decision about the focus of a
single claim (i.e., whether the injury was
expected or intended). On the other
hand, in Tradesoft, there were two types
of claims (tort and contract), which the
court considered separately. Thus, the
decision in Harleysville has no bearing
on the matter at hand, which, like
Tradesoft, deals with two independently
actionable types of claims.

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advertising.” Id. at 288-89 (emphasis
added). Basic rules of grammar suggest
that “copyrighted” modifies “titles,”
“slogan,” and “other advertising
material.” However, in Platinum Tech.,
Inc. v. Fed. Ins. Co., 2000 WL 875881
(N.D. Ill., June 28, 2000) (“Platinum I”),
the Northern District of Illinois
considered the same policy language and
found that “the term ‘copyrighted’ did
not modify ‘other advertising materials.’”
Id. at *4 (emphasis added).15 The court
reasoned:
A reading of the plain
language of the umbrella
policy does not support a
requirement that
‘advertising material’ be
copyrighted. Moreover,
Federal’s prior
interpretation of the
umbrella policy only
further supports this court’s
finding. Federal
specifically denied
coverage because it found
that the PSC’s trademark
was not an ‘advertising
material’ as defined by the
umbrella policy and never
mentioned that the
‘advertising material’
needed to be copyrighted.
(Complaint, Ex. H, at 11).
More importantly, the
umbrella policy states the
‘umbrella liability adds a
broadening measure of
coverage against many of
the gaps in and between the
underlying coverages’ of
the primary policy.
(Complaint, Ex. F, at
Introduction). The primary
policy covers only
infringement of
copyrighted advertising
materials as an advertising
injury. (Complaint, Ex. E,
at 19). Thus, based on the
fact that the umbrella
policy broadens the
coverage, it is consistent
with this court’s finding
that advertising materials
need not be "copyrighted"
in order to be covered
under the umbrella policy.
Id.
Even though we disagree with
much of the court’s reasoning, we will
look to New Jersey’s collateral estoppel
rules to determine if the Platinum I
decision estops Federal from re-litigating
the same issue here. Semtek Intern. Inc.
15 The Northern District of Illinois
issued a subsequent decision granting in
part and denying in part cross motions
for summary judgment. 2001 WL
109814 (N.D. Ill., Feb. 2, 2001). This
decision was later reversed and
remanded by the Seventh Circuit Court
of Appeals on issues unrelated to the
meaning and scope of the policy
provision at issue here. 282 F.3d 927
(7th Cir. 2002).

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v. Lockheed Martin Corp., 531 U.S. 497,
508-09 (2001). Under new Jersey law,
[c]ollateral estoppel may
apply if the party asserting
the bar demonstrates that:
(1) the issue to be
precluded is identical to the
issue decided in the first
proceeding; (2) the issue
was actually litigated in the
prior action, that is, there
was a full and fair
opportunity to litigate the
issue in the prior
proceeding; (3) a final
judgment on the merits was
issued in the prior
proceeding; (4)
determination of the issue
was essential to the prior
judgment; and (5) the party
against whom issue
preclusion is asserted was a
party to or in privity with a
party to the prior
proceeding.
Pace v. Kuchinsky, 789 A.2d 162, 171
(N.J. Super. Ct. App. Div. 2002). There
is no question that the latter four
requirements are met in this case.
However, we are not as certain about the
first requirement. The Platinum I court
relied on the fact that “Federal
specifically denied coverage because it
found that the [the insured’s] trademark
was not an ‘advertising material’ as
defined by the umbrella policy and never
mentioned that the ‘advertising material’
needed to be copyrighted . . . .”
Platinum I, 2000 WL 875881, at *4
(emphasis added). The court’s decision
was therefore based, at least in part, on
an argument that was specific to the facts
of that case. Here, however, Federal
denied coverage based on the entire
advertising injury provision in Coverage
B, quoting the clause in its entirety in its
denial letter. R. at 716, 721. Given the
different circumstances, we conclude that
Federal is not estopped from re-litigating
the scope of the term “other advertising
material.” Moreover, based on the plain
meaning of the statute and the clarity of
Federal’s denial letter, we find that
“copyrighted” does modify “other
advertising material.” Thus, Coverage B
is inapplicable since none of the
trademarks at issue are copyrighted.
However, given our conclusion that the
Insureds satisfy the requirements of the
CGL policy and Coverage A, the absence
of Coverage B is of little import.
B. Settlement Agreement
Having addressed all of the issues
related to policy coverage, the only
question remaining is whether the
settlement of the bankruptcy claim was
“reasonable in amount and entered into in
good faith.” Griggs v. Bertram, 443 A.2d
163, 173 (N.J. 1982). This, of course, is a
question of fact, which we cannot resolve
in the first instance. However, Houbigant
argues that Federal is bound by the
bankruptcy court’s finding that the
settlement agreement was fair, reasonable,
and entered into in good faith. R. at 813.

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We disagree.
In a diversity action, we apply the
preclusion rules of the forum state, unless
they are incompatible with federal
interests. Semtek, 531 U.S. at 508-09.
Under New Jersey law, a court must
clearly state its rationale for finding that a
settlement agree men t is fair and
reasonable. See Jefferson Ins. Co. v.
Health Care Ins. Exch., 588 A.2d 1275
247 (N.J. Super. Ct. App. Div. 1991)
(remanding, in part, because the record did
not indicate the reasoning behind the trial
judge’s finding that a settlement was fair
and reasonable). As we noted in Vargas v.
Hudson County Bd. of Elections, 949 F.2d
665, 674 (3d Cir. 1991), “[i]n deciding
whether a settlement is prudent and
reasonable, a court must consider the risk
to the settling parties. It is the extent of
the defendants’ exposure to liability and
not mere allegations in the plaintiffs’
complaint that govern the appraisal of
reasonableness.”16 Here, the bankruptcy
court merely voiced the words “fair” and
“reasonable,” but failed to state any
specific basis for such a finding. The
court only noted that it had considered the
“statements of all parties and any
objections thereto,” as well as the
“pleadings and proofs of claim.” R. at
813. This is insufficient to support a
finding of reasonableness under state law,
nor does it afford us a basis of review.
The same would be true even assuming
that the Insureds’ motion in support of the
settlement is incorporated by reference
into the bankruptcy court’s decision. The
Insureds’ motion, like the bankruptcy
court’s order, fails to address the merits of
the tort claim; rather, it simply states that
litigating the tort claims would be
“complex and expensive.” R. at 775. We
therefore conclude that the bankruptcy
court’s settlement is not binding on
Federal.
IV.
Based on the foregoing analysis, we
will reverse the judgment of the district
court and remand the case for a plenary
hearing to determine whether the
bankruptcy settlement was reasonable and
entered into in good faith.17
16 There is no evidence that these
rules are inconsistent with federal law.
In fact, we have held that a bankruptcy
court must consider, inter alia, “the
probability of success in litigation. . . .”
before approving a settlement. In re
Martin, 91 F.3d 389, 393 (3d Cir. 1996).
17 Our ruling does not suggest that the
district court would be unjustified in
finding the settlement fair and reasonable
on remand if it reaches that conclusion
after a proper analysis and articulates that
analysis on the record.

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