U.K. Abba Prod. v. Northbrook Nat. Ins. Co.

Filed 2/5/03 U.K. Abba Products v. Northbrook Nat. Ins. CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or
ordered published for purposes of rule 977.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
U. K. ABBA PRODUCTS, INC.,
Plaintiff and Appellant,
v.
NORTHBROOK NATIONAL
INSURANCE COMPANY et al.,
Defendants and Respondents.
G028565
(Super. Ct. No. 818029)
O P I N I O N
Appeal from a judgment of the Superior Court of Orange County, Eleanor
M. Palk, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.) Affirmed.
John A. Belcher for Plaintiff and Appellant.
Neumeyer & Boyd, Carol Boyd and Larry Nathenson for Defendant and
Respondent Northbrook National Insurance Company.
Daniels, Fine, Israel & Schonbuch and Mark R. Israel for Defendant and
Respondent Nationwide Indemnity Company.
Barbanel, Treuer & Dantzler and Alan H. Barbanel for Defendant and
Respondent General Star Indemnity Company.
* * *

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I. Background
In 1997 and 1998, a group of distributors of U. K. Abba Products brought
claims against the shampoo maker on the theory that their distributorship agreements
amounted to franchises under California law, and Abba was guilty of certain abuses in
connection with the “sale” of those franchises. The most notable of those abuses were
that it had failed to disclose it would sell its products at trade shows in competition with
its own distributors, and that it would use its power to examine distributor books and
records to confiscate customer lists to turn over to successor distributors.
Three sets of complaints were filed against Abba executives in Superior
Court; Abba itself was the target of an arbitration action initiated with the Judicial
Arbitration and Mediation Service. After the arbitration was completed in September
1998, Abba settled with the distributors for some $2.1 million.
Abba notified the various commercial liability insurers that it had during
the mid-to-late 1990’s of the claims against it relatively late in the process. Abba’s first
notification to Northbrook National Insurance Company was by letter dated August 24,
1998, in the face of an arbitration slated to commence less than three weeks later, on
September 9. The notification to General Star was on August 27, about two weeks prior
to the start of the arbitration. Abba didn’t seek defense or indemnity from Nationwide
Indemnity Company until October 1998, or from Wausau until early November 1998,
which was after the arbitration had commenced and was in recess.
All insurers denied Abba’s requests for a “defense” (or, to be precise,
denied the request for reimbursement of defense costs Abba had already incurred on its
own) and indemnification of the distributors’ claims. This action against them was filed
in June 2000.
In U. K. Abba Products, Inc. v. Employers Insurance of Wausau (Aug. 29,
2002, G028347) [nonpub. opn.], review granted Nov. 26, 2002), this court considered
Abba’s appeal after one of the insurers, Wausau, successfully sought summary judgment

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against it. In that opinion, we held that Abba faced no potential liability to its distributors
for (1) misappropriating any advertising “ideas”; (2) misappropriating the distributors’
style of doing business; or (3) wrongfully using a trademark. Accordingly, we upheld the
trial court’s judgment, because the distributors’ claims had not raised any potential
liability for “advertising injury” as defined by the policy, which included
misappropriation of advertising ideas, style of doing business, and infringement of
trademark.
The instant case does not come to us from a summary judgment, but,
interestingly enough, from a court trial which resulted in a judgment in favor of the three
other insurers in this appeal. To the degree that this appeal raises the same issues
explored in the earlier opinion, the same analysis applies:
(1) The mere fact that Abba sold its products at the Long Beach Hair Show
does not implicate coverage for misappropriation of advertising ideas because trade show
selling is ordinarily understood to be a generic form or category of advertising, sans
content of any “advertising ideas.” As Lebas Fashion Imports of USA, Inc. v. ITT
Hartford Ins. Group (1996) 50 Cal.App.4th 548, 560, footnote 7 points out, the word
“idea” relates to a concept. There is nothing conceptual about merely going to a trade
show and doing some selling. Indeed, the notion of going to a trade show and selling is
not a concept capable of theft. That is particularly true here, in the context of the
distributors’ claims. It wasn’t as if the distributors ever claimed that Abba stole the
“idea” of going to a trade show from them. By their own account Abba had that idea
first. Their beef against Abba was that it had no right to show up at the trade show at all.
(2) Likewise, the allegation that Abba had physically stolen the tangible
customer lists worked up by the distributors does not implicate misappropriation of an
advertising idea, because the claim was one for physical taking, not misappropriation of
intellectual property. Again, the context shows the absence of any theft of ideas in the
distributors’ claims. What upset the distributors was that Abba had physically taken the

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lists so that they could be turned over to new distributors. But customer lists are
ordinarily thought of as trade secrets, not ideas. Litigation typically arises when
salespeople from one firm go to another firm and take a customer list with them. To say
that the theft of the physical list is the misappropriation of advertising ideas is tantamount
to saying that the theft of a book is plagiarism.
(3) Abba’s selling its own products at a trade show (in competition with its
distributors) did not implicate any claims for trademark infringement. Trademark
infringement is about protecting consumers from becoming confused as to who made a
particular product. But the distributors’ claims against Abba had nothing to do with
product confusion. Their claims had to do with Abba’s legal right to sell its own product,
not with any product protected by somebody else’s (including their own) trademark.
II. The Two New Theories
The present appeal, however, presents two new twists in Abba’s quest for
coverage from its insurers. As mentioned above, the Wausau case was disposed of by
way of summary judgment, but this appeal involves a judgment after a court trial. In the
trial Abba came up with two new theories as to why there should be coverage:
(1) Abba faced claims for misappropriation of “proprietary marketing
materials,” not just the theft of a physical list of customers; and
(2) Abba faced claims for defamation and disparagement, not just selling at
a trade show.
These theories are based on the testimony of the distributors’ attorney at the
coverage trial, held about two years after Abba had settled with its distributors.
A. “Proprietary Marketing Information”
The marketing materials theory is based on inferences from the testimony
in the coverage action of John Adsit, the distributors’ attorney. He testified that when
Abba exercised its right under its distributorship contracts to examine the books and
records of its distributors, it “gathered all the account information, gathered all the

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histories, gathered all the education, and gathered all this otherwise secret proprietary
information that my clients knew . . . so that they could effectively hand over the territory
to the successor distributors in such a way that it would not slow down or interrupt
business for them or sales.” Thus, he told the court “we were claiming proprietary
information had been taken.”
Preliminarily, we should note that the proprietary information theory relies
on an inference, not well delineated in the briefs, that we might as well identify now. We
have just quoted the strongest evidence, cited in Abba’s brief, for it. One must infer from
Adsit’s coverage trial testimony that when Abba allegedly “gathered all the education,”
Adsit was referring to things like sales brochures (probably pictures of beautiful people
with beautiful hair, that sort of thing) and perhaps statements as to how to train hair
stylists in the use of the products.
Even with that inference (and given the fact the case comes to us from a
court trial, Abba is not entitled to the inference), there are two reasons the new
“proprietary information” twist still does not implicate any claim for misappropriation of
advertising ideas. The first is that there was no nexus between the alleged theft of the
educational materials and Abba’s own advertising activities. (See Bank of the West v.
Superior Court (1992) 2 Cal.4th 1254, 1277 [“we hold that ‘advertising injury’ must have
a causal connection with the insured’s ‘advertising activities’ before there can be
coverage”].) By Adsit’s own testimony, the theft of the “education[al] materials” from
the distributors was to turn over those materials to successive distributors. Thus there
really isn’t any difference between the customer lists we have already discussed and the
“educational” or “proprietary” materials which are the slant of this particular appeal. The
claims of the distributors were still based on the simple physical transfer of the physical
embodiment of information.

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Merely turning over stolen materials to successor distributors is not an
advertising activity. Abba was not the target of claims by rivals for misappropriating
ideas. Its sin was in misappropriating materials.
Furthermore, even if we assume that the theft of the “proprietary
information” was an “advertising activity,” the fact is that there never was any claim for
such a theft made against Abba by the distributors prior to the conclusion of the
underlying cases.
The question of where the facts come from that can be used to establish an
insurer’s duty to defend was considered by our Supreme Court in Montrose Chemical
Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-304, though there, ironically enough,
it arose in the context of whether insurers could use extrinsic facts outside of the
complaint to eliminate the possibility of coverage. The beginning point, of course, is the
facts in the underlying complaint. That has been the law since Gray v. Zurich Insurance
Co. (1966) 65 Cal.2d 263, 276.
The universe of facts bearing on coverage, however, is not confined to
those in the complaint. “‘Facts extrinsic to the complaint also give rise to a duty to
defend when they reveal a possibility that the claim may be covered by the policy.’”
(Montrose, supra, 6 Cal.4th at p. 295.)
However, as shown in Montrose, those facts must at least be known to the
insurer (see Montrose, supra, 6 Cal.4th at p. 296). We are aware of no case that has ever
held that the duty to defend may be triggered by facts extrinsic to the underlying
complaint but never brought to the attention of the insurer until after the underlying case
was settled.
Abba responds to the problem of a lack of insurer knowledge by alluding to
a duty to investigate: Somehow the insurers should have discovered that Abba might
have been sued for theft of “proprietary information” though no such allegation was in
the underlying complaints or brought to their attention by Abba itself.

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The duty to investigate, however, necessarily turns on the type of claim
which is to be investigated. For example, the two cases which Abba relies on for its duty
of “thorough” investigation argument are first-party cases. Egan v. Mutual of Omaha
(1979) 24 Cal.3d 809 was a disability insurance case where an independent adjuster
decided that the insured was suffering from a “nonconfining” illness and on that basis
tried to terminate further payments. (Id. at pp. 815-817.) The company did not
adequately investigate whether its theory of nonconfining illness fit the actual facts. In
Egan, there were facts extrinsic to a complaint because there was no complaint -- only the
policyholder’s own claim.
Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617 fits the
same pattern. It arose out of a first-party policy (for accidental death). After an auto
accident, the insured, who had a history of heart disease, was taken to a hospital where he
died. The treating doctor wrote on the proof of loss form that the cause of death was the
auto accident, but the insurer denied the accidental death claim on the theory that the
insured had died of a heart attack, without ever interviewing the treating doctor, anybody
else involved in the accident, or even have its own doctor review certain records it did
obtain. (See id. at pp. 1621-1622.)
There is a difference between first-party claims, where coverage may turn
on a specific fact which can only be uncovered by a reasonably thorough job of gum-
shoeing (and usually that fact has to be uncovered by the insurer to sustain a position that
would otherwise be contrary to the facts as given the insurer by the policyholder), and a
third-party claim, where facts which can create coverage must come from the underlying
pleadings plus whatever facts the insured may bring to the insurer’s attention.1
1 Facts that the insurer learns outside of the complaint typically are discovered with an eye to denying coverage.
(See Montrose, supra, 6 Cal.4th at pp. 295-300 (synopsis of Court of Appeal opinions relying on extrinsic facts to
deny duty to defend).)

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The reason is this: The most likely source of extrinsic facts beyond the
complaint against the insured is the third-party claimant, who is suing the insured.
Unlike first-party claims, third-party claims entail possible liability on the part of the
policyholder, and any contact between the insurer and the third-party claimant poses the
serious risk of increasing the insured’s own liability. It thus follows that the duty of a
liability insurer to “investigate” a third-party claim cannot extend to the point of
contacting the third-party claimant. (Cf. Gunderson v. Fire Ins. Exchange (1995) 37
Cal.App.4th 1106, 1114-1117 [extrinsic facts that surfaced in discovery in underlying
proceeding but which were not ever incorporated as the bases for any claims could not be
used to establish possibility of coverage on a duty to investigate theory].)
The salient fact in the case before us is that neither the underlying
complaints nor Abba itself brought to the insurers’ attentions any allegations concerning
the theft of “proprietary information.” Bringing out those facts in the coverage action
was too late.
B. “Defamation and Disparagement”
What we have just said about extrinsic facts in the context of any claims for
the theft of proprietary information goes all the more so for the defamation and
disparagement theory. Any extrinsic facts which might have supported a defamation
claim were plainly not in the complaint, or brought to any insurer’s attention before the
claim was unilaterally settled by Abba. There were, for example, no facts in the
complaint to the effect that the distributors had alleged that Abba had made false
statements about them in some context such that the distributors might have later
amended their complaint to allege a defamation cause of action.
That the distributors in their complaints alleged injury to their reputations
was, in context, not a defamation claim, or a fact that might give rise to amended
complaint containing a defamation claim. The damage that the distributors alleged was
not the result of any allegedly false statements resulting in injury to a reputation, but was

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the result of the fact of termination of distributorships themselves. If Abba’s theory of
defamation were the law, any business act which resulted in someone losing a customer
or reputation would be defamation.
To illustrate: Let us take an act which is the paradigm of something that
isn’t covered -- the delivery of nonconforming widgets to a customer, who uses the
widgets to make its own product. Because the ordered widgets don’t fit, the customer is
delayed in meeting certain shipments, and suffers “injury to reputation.” Does that mean
there is potential liability for defamation? Of course not, and it would be sophistry to say
so.
Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co. (1993) 14
Cal.App.4th 1595, 1604 is almost directly on point. There, a cleaning firm was sued for
sexual harassment after its owner tried to rape a newly hired female employee. One of
the firm’s theories for coverage was that in falsely denying a sexual harassment claim,
there was potential liability for defamation, which was covered under the policy. (Ibid.)
The appellate court rejected that “sophistry,” noting that “no such claim” had ever been
made, nor did the facts alleged in the complaint “support the existence of such a claim.”
(Ibid.)
III. Disposition
The judgment in favor of the three insurers is affirmed. Respondents shall
recover their costs on appeal.
SILLS, P.J.
WE CONCUR:
ARONSON, J.
FYBEL, J.

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