                  NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                             File Name: 14a0633n.06

                                       Case No. 13-5539                              FILED
                                                                               Aug 15, 2014
                            UNITED STATES COURT OF APPEALS                 DEBORAH S. HUNT, Clerk
                                 FOR THE SIXTH CIRCUIT


LIBERTY CORPORATE CAPITAL                         )
LIMITED,                                          )
                                                  )
          Plaintiff-Appellee,                     )       ON APPEAL FROM THE UNITED
                                                  )       STATES DISTRICT COURT FOR
v.                                                )       THE EASTERN DISTRICT OF
                                                  )       KENTUCKY
SECURITY SAFE OUTLET, dba Bud’s Gun               )
Shop; MATTHEW DENNINGHOFF,                        )
                                                  )       OPINION
          Defendants-Appellants.                  )

BEFORE: MOORE, WHITE, and DONALD, Circuit Judges.

          HELENE N. WHITE, Circuit Judge.          In 2010, BudsGunShop.com, LLC (BGS),

brought an action against Security Safe Outlet, Inc. (SSO), and its employee Matthew

Denninghoff, asserting the improper use of BGS’s customer database and name. SSO notified its

insurer, Liberty Corporate Capital Limited (Liberty), and sought a defense and indemnity under

its commercial general liability policy. Liberty filed the instant action, seeking a declaratory

judgment that it has no duty to defend or indemnify SSO and Denninghoff under the terms of the

policy.    The district court granted Liberty’s motion for summary judgment, and SSO and

Denninghoff appeal. Because the allegations in BGS’s complaint in the underlying action do not

bring the action within the scope of the coverage provided by SSO’s policy, we AFFIRM.
Case No. 13-5539
Liberty v. SSO, et al.

                                      BACKGROUND

       BGS’s claims against SSO have their roots in the two companies’ business relationship.

The following assertions of fact are taken from BGS’s second amended complaint.

       Marion E. “Bud” Wells formed SSO in June 2000, with Wells as SSO’s sole shareholder.

SSO operated a retail firearm and security safety store in Paris, Kentucky, under the name

“Bud’s Gun Shop.” In 2003, SSO expanded its business to include online sales through a

website at the internet domain name “budsgunshop.com,” and hired Rex McClanahan to assist

with the expansion. The online portion of the business was successful and, in 2006, “Wells and

McClanahan began the process of spinning out the online business operations of SSO as a

separate business entity” that became BGS. In August 2006, Wells and McClanahan executed a

document called “BudsGunShop.com LLC Operating Agreement.” In February 2007, BGS

distributed a non-compete agreement that its employees, including Denninghoff, signed. On

May 17, 2007, BGS filed its Articles of Organization as a Kentucky Limited Liability Company

with the Kentucky Secretary of State, listing Wells and McClanahan as its sole members.

       Meanwhile, Wells began to liquidate his interest in SSO. On January 1, 2007, Wells and

Earley M. Johnson II executed a Stock Purchase Agreement in which Johnson agreed to

purchase a one-half interest in SSO over a two-year period. In April 2009, Wells and SSO

entered a Stock Redemption Agreement in which SSO redeemed all shares owned by Wells. As

part of that transaction, SSO assigned its “federal and state trademark rights in the tradename

‘Bud’s Gun Shop,’ as well as permutations of that name,” to Wells. Wells licensed the rights

back to SSO in a “Tradename License Agreement.” The licensing agreement granted SSO the

right to use the name in connection with its retail firearms store in Paris, Kentucky and a

shooting or firing range business, but specified that SSO must discontinue using the name, and


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that the license would immediately terminate, “if, over any one calendar month period during the

term of this License, Licensee’s over-the-counter sales of Firearms from the retail store comprise

less than 85% of Licensee’s total sales of Firearms for that month.”

       Even after the spin-off of BGS, SSO and BGS continued to operate out of the same

building until January 2009, when BGS relocated to Lexington, Kentucky, and opened its own

retail store. Meanwhile, however, from January 2007 to April 2010, SSO acted as one of BGS’s

product suppliers and drop-ship order fulfillment agents. For this purpose, BGS provided SSO

access to certain areas of BGS’s password-protected computer system. BGS contends that,

although SSO’s access allowed SSO to “theoretically . . . view individual customer data records

one at a time,” SSO did not have access to BGS’s customer database, which had its own

password and contained hundreds of thousands of customer records.

       Denninghoff worked as a BGS employee from January 2007 through January 2010,

doing IT work. BGS contends that while still a BGS employee, Denninghoff conspired with his

sister, who was SSO’s Vice President, to further SSO’s plans to open a competing internet

firearms sales operation; that in January 2010, Denninghoff quit without notice, via email, and

within days started working for SSO; that Denninghoff “deliberately erased both the contents of

his work email account and the contents of his work computer,” but “secretly kept” a number of

backup copies of BGS’s customer database from various backup dates; and that as soon as BGS

learned that SSO planned to open a competing internet sales operation, it terminated SSO’s

access to its computer network system, but SSO then asked for and obtained from Denninghoff a

copy of a backup customer database and used customer information from the database to send

mass promotional emails to BGS’s Kentucky customers. Although BGS directed SSO to desist

in its use of the customer information, SSO continued to send mass promotional emails using the


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information. BGS filed the underlying action against SSO in November 2010, asserting eleven

claims, all grounded in allegations that SSO and Denninghoff misappropriated and used BGS’s

customer database, and continued to use BGS’s name, and permutations of its name, after its

license to do so had terminated.

       SSO had a series of commercial general liability policies with Liberty that together

provided coverage from September 2008 through September 2012 (the Policies).1 As relevant

here, the Policies afford coverage for “bodily injury and property damage liability” and for

“personal and advertising injury liability.” SSO argues that BGS’s allegations in Counts I, II,

and III of its second amended complaint—for violation of K.R.S. § 365.880, et seq.,

(misappropriation of trade secrets); violation of 15 U.S.C. § 1125 (Lanham Act); and breach of

the TradeName License Agreement—fall within the Policies’ coverage for “property damage”

and “advertising injury” liability, and that no exclusions apply.2

       The following policy terms are relevant:

       Coverage A Bodily injury and property damage liability

       1.   Insuring Agreement

       a. We will pay those sums the insured becomes legally obligated to pay as
          damages because of “bodily injury” or “property damage” to which this
          insurance applies. We will have the right and duty to defend the insured
          against any “suit” seeking those damages.

See R. 29-2, Policy No. L200805866 at 1. The Policies define “property damage”:

1
  The parties agree that the relevant provisions of the Policies are identical and that it is not
necessary to determine which policy applies.
2
  The remaining counts were: (IV) breach of fiduciary duty (Kentucky common law; (V) aiding
and abetting breach of duty of loyalty (Kentucky common law); (VI) breach of contract—non-
compete agreement (Kentucky common law); (VII) tortious interference with contract (Kentucky
common law); (VIII) violation of 18 U.S.C. § 1030(a)(2) (Computer Fraud & Abuse Act); (IX)
violation of 18 U.S.C. § 1030(a)(4) (Computer Fraud and Abuse Act); (X) violation of K.R.S.
§ 434.845 (unlawful access of computer); (XI) violation of K.R.S. § 434.855 (misuse of
computer information).
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        28.    “Property Damage” means:

        a. Physical injury to tangible property, including all resulting loss of use of that
           property. All such loss of use shall be deemed to occur at the time of the
           physical injury that caused it; or

        b. Loss of use of tangible property that is not physically injured. All such loss of
           use shall be deemed to occur at the time of the “occurrence” that caused it.

        For the purposes of this insurance, electronic data is not tangible property.

        As used in this definition, electronic data means information, facts or programs
        stored as or on, created or used on, or transmitted to or from, computer software,
        including systems and applications software, hard or floppy disks, CD-ROMS,
        tapes, drives, cells, data processing devices or any other media which are used
        with electronically controlled equipment.

Id. at 20.

        Coverage B Personal and advertising injury liability

        1. Insuring Agreement

        a. We will pay those sums that the insured becomes legally obligated to pay as
           damages because of “personal and advertising injury” to which this insurance
           applies. We will have the right and duty to defend the insured against any
           “suit” seeking those damages.

Id. at 1. The Policies define “personal and advertising injury,” in relevant part, as follows:

        25.    “Personal and advertising injury” means injury, including consequential
               “bodily injury,” arising out of one or more of the following offenses:
        ....
               d. Oral or written publication, in any manner, of material that slanders or
               libels a person or organization or disparages a person’s or organization’s
               goods, products, or services;
        ....
               f. The use of another’s advertising idea in your “advertisement”; or

               g. Infringing upon another’s copyright, trade dress or slogan in your
               “advertisement”.

Id. at 19. Coverage B is subject to exclusions, including:



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        a. Knowing Violation of Rights of Another
            “Personal and advertising injury” caused by or at the direction of the insured
            with the knowledge that the act would violate the rights of another and would
            inflict “personal and advertising injury.”
        ....
        e. Breach of Contract
            “Personal and advertising injury” arising out of a breach of contract, except an
            implied contract to use another’s advertising idea in your “advertisement.”
        ....
        h. Infringement of Copyright, Patent, Trademark or Trade Secret
           “Personal and advertising injury” arising out of the infringement of copyright,
           patent, trademark, trade secret or other intellectual property rights.

Id. at 6.
                                          DISCUSSION

        We review the district court’s award of summary judgment de novo. Westfield Ins. Co. v.

Tech Dry, Inc., 336 F.3d 503, 506 (6th Cir. 2003). Summary judgment is appropriate if, drawing

all reasonable inferences in favor of the nonmovant, “the movant shows that there is no genuine

dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.

R. Civ. P. 56.

        The parties agree that Kentucky substantive law applies in this diversity action. Under

Kentucky law, the determination whether the Policies require Liberty to defend and indemnify

SSO in the BGS action is a question of law. Stone v. Ky. Farm Bureau Mut. Ins. Co., 34 S.W.3d

809, 810 (Ky. Ct. App. 2000) (“[I]nterpretation of an insurance contract is a matter of law for the

court.”). A determination that SSO is not entitled to a defense resolves the question whether

SSO is entitled to indemnity. See James Graham Brown Found., Inc. v. St. Paul Fire & Marine

Ins. Co., 814 S.W.2d 273, 280 (Ky. 1991) (“[T]he duty to defend is broader than the duty to

indemnify.”). Kentucky courts determine whether an insurer has a duty to defend its insured by

comparing the language of the underlying complaint to the terms of the policy. Id. There is a

duty to defend “if there is any allegation which potentially, possibly or might come within the

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coverage of the policy.” Id. (citing O’Bannon v. Aetna Cas. & Sur. Co., Ky., 678 S.W.2d 390

(Ky. 1984)). Policy language is given its “plain and ordinary meaning,” Nationwide Mut. Ins.

Co. v. Nolan, 10 S.W.3d 129, 131–32 (Ky. 1999), and “interpreted according to the usage of the

average man.” James Graham Brown Found., 814 S.W.2d at 280 (citing Fryman v. Pilot Life

Ins. Co., 704 S.W.2d 205 (Ky. 1986)). Courts construe ambiguous terms against the insurer, in

favor of the insured’s reasonable expectations, True v. Raines, 99 S.W.3d 439, 443 (Ky. 2003),

and construe exceptions and exclusions “narrowly . . . to effectuate insurance coverage.”

Hugenberg v. W. Am. Ins. Co./Ohio Cas. Grp., 249 S.W.3d 174, 186 (Ky. Ct. App. 2006) (citing

Eyler v. Nationwide Mut. Fire Ins. Co., 824 S.W.2d 855, 859 (Ky. 1992)). SSO has the burden

to demonstrate that BGS’s claims fall within the Policies’ coverage. N. Am. Acc. Ins. Co. v.

White, 80 S.W.2d 577, 578 (Ky. Ct. App. 1935). Liberty has the burden to prove that an

exclusion applies. Ky. Sch. Bds. Ins. Trust v. Bd. of Educ. of Woodford Cnty., No. 2002–CA–

001748–MR, 2003 WL 22520018, at *9 (Ky. Ct. App. Nov. 7, 2003) (unpublished) (“[A]n

insurer who disclaims its duty to defend based on a policy exclusion ‘bears the burden of proving

the applicability of the exclusion.’”) (quoting Bd. of Pub. Educ. of Sch. Dist. of Pittsburgh v. Nat.

Union Fire Ins. Co. of Pittsburgh, 709 A.2d 910, 913 (Pa. Super. Ct. 1998)).

                                                 I.

       In Count I, misappropriation of trade secrets, BGS alleges that Denninghoff “secretly and

improperly kept” a copy of BGS’s customer database and disclosed the information in the

customer database to SSO in violation of the terms of his non-compete agreement, and that SSO

received and used the customer information from the database to generate mass promotional

emails with full knowledge that the information was acquired by improper means. SSO argues

that the allegations fall within the Policies’ advertising-injury coverage because BGS seeks to


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hold SSO liable for “injury arising out of . . . [t]he use of [BGS’s] advertising idea in [SSO’s]

‘advertisement.’” R. 29-2, Policy No. L200805866 at 6. Specifically, SSO contends that the

mass promotional emails are “advertisements” as defined in the Policies,3 and “BGS’s claim that

SSO stole the customer email addresses and used them to create subsequent email blasts

(advertisements) is an allegation that SSO improperly used BGS’s ‘advertising idea’ in its

advertisements.” SSO Br. 16. Liberty acknowledges that BGS alleged that SSO used the

customer database to send the emails, and that the emails may be advertisements under the

Policies, but Liberty contends that BGS’s misappropriation-of-trade-secrets claim nonetheless

does not fall within the Policies’ coverage for advertising injury because BGS did not allege that

SSO or Denninghoff used any of its “advertising ideas” in the emails, and the customer database

is not an “advertising idea.” We agree.

                                                A.

       The Policies do not define the term “advertising idea” and we found no Kentucky

decisions construing the term.4 When terms contained in an insurance policy have not acquired a

technical meaning in law, “they ‘must be interpreted according to the usage of the average man

and as they would be read and understood by him in the light of the prevailing rule that

uncertainties and ambiguities must be resolved in favor of the insured.’” Hendrix v. Fireman’s

Fund Ins. Co., 823 S.W.2d 937, 938 (Ky. Ct. App. 1991) (quoting Fryman, 704 S.W.2d at 206).


3
  The Policies define an “advertisement” as “a notice that is broadcast or published to the general
public or specific market segments about your goods, products or services for the purpose of
attracting customers or supporters.”
4
  In Educational Training Systems, Inc. v. Monroe Guaranty Insurance Company, 129 S.W.3d
850, 852 (Ky. Ct. App. 2003), the court assessed coverage under a policy defining “advertising
injury” as injury arising out of, inter alia, “[t]he use of another’s advertising idea in ‘your
advertisement,’” but the decision does not construe the term “advertising idea” or apply the term,
as would be relevant here, to a trade secrets allegation regarding misappropriation of customer
lists.
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This court, construing an insurance policy under Wisconsin law, has found the term “advertising

ideas” unambiguous. See Advance Watch Co., Ltd. v. Kemper Nat’l Ins. Co., 99 F.3d 795, 802

(6th Cir. 1996) (stating, with respect to the terms “advertising injury,” “misappropriation,”

“advertising ideas,” and “style of doing business,” “[e]ach of these terms has either an

established dictionary meaning or a meaning derived from case law”).

       BGS’s allegations regarding misappropriation and use of the customer database do not

assert the use of an “advertising idea” as that term is commonly understood. Webster’s Third

New International Dictionary (2002) defines “advertising” as “the action of calling something

. . . to the attention of the public especially by means of printed or broadcast paid

announcements.” Id. at 31. An “idea” is defined as, among other things, “a plan or purpose of

action.” Id. at 1122. Synonyms of “idea” include “plan,” “scheme,” “design,” and “concept.”

Roget’s 21st Century Thesaurus 436 (3d ed. 2013). The term “advertising idea” is therefore

reasonably understood to encompass a company’s plan, scheme, or design for calling its products

or services to the attention of the public. See Advance Watch, 99 F.3d at 801 (taking note of the

Wisconsin court’s holding that “‘advertising idea’ should be understood in its ordinary meaning

of ‘an idea for calling public attention to a product or business, especially by proclaiming

desirable qualities so as to increase sales or patronage’”); see also State Farm Fire & Cas. Co. v.

Steinberg, 393 F.3d 1226, 1232 (11th Cir. 2004) (noting circuit precedent defining an advertising

idea as “any idea or concept related to the promotion of a product to the public”).

       BGS’s allegations regarding the misappropriation of its customer database do not fit

within this understanding of the term. BGS describes the database as containing “names, email

addresses, and other data,” and alleges that SSO used the database to “send a mass promotional




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email to all of the persons in the BGS [database] having a Kentucky address.” 5 The allegations

thus describe the use of BGS’s list of customers and their contact information, but do not allege,

e.g., that SSO misappropriated and used any of BGS’s advertising plans, schemes, or designs in

its emails. Other than stating that the email blasts were sent to Kentucky residents, the complaint

does not describe the emails at all.

       SSO directs our attention to the Ninth Circuit’s decision in Sentex Systems, Inc. v.

Hartford Accident & Indemnity Company, 93 F.3d 578 (9th Cir. 1996), to support its argument

that BGS’s allegations describe the use of an “advertising idea.” But the Sentex decision is

consistent with our understanding of the term. In Sentex, the plaintiff in the underlying suit

brought a trade-secrets claim alleging that Sentex improperly obtained “knowledge, information

and trade secrets, including customer lists, methods of bidding jobs, methods and procedures for

billing, marketing techniques, and other inside and confidential information. . . .” Id. at 580.

The Ninth Circuit found that the allegations fell within the policy’s coverage for “advertising

injury,” defined in part as injury as arising out of the “misappropriation of advertising ideas.” Id.

In so deciding, the court reasoned that the ordinary meaning of the policy language was not

limited to misappropriation of an advertisement’s text; rather, it was “concerned with ‘ideas,’ a

broader term,” that “includes a wide variety of direct and indirect advertising strategies.” Id.

Because the underlying complaint alleged not only the misappropriation of “customer lists,” but

also the misappropriation of “methods of bidding jobs, methods and procedures for billing,

marketing techniques, and other inside and confidential information,” the court found that its

allegations fell within the policy’s coverage for the misappropriation of advertising ideas. See id.

at 580–81 (“While we may agree . . . that the mere misappropriation of customer mailing lists,

5
 Consistent with BGS’s allegations, at oral argument, counsel for SSO described the database as
a “customer list,” and stated that it contained merely customer names and addresses.
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standing alone, may not bring a complaint within the scope of possible coverage for ‘advertising

injury’ as ‘misappropriation of advertising ideas,’ it is clear that the scope of ESSI's lawsuit was

much broader.”). BGS’s allegations in Count I are allegations of the “mere misappropriation of

customer mailing lists,” and do not include the broader misappropriation of advertising strategies

that the Sentex court found equivalent to advertising ideas. See Steinberg, 393 F.3d at 1234 (“A

confidential customer list is a trade secret, not an idea about advertising or an outward expression

of a business’s style.”). Accordingly, the allegations do not fall within the Policies’ coverage for

misappropriation of advertising ideas. Because the allegations do not trigger coverage, we do

not address the parties’ arguments regarding whether the breach-of-contract exclusion applies.

                                                 II.

       BGS’s Counts II and III are related. In Count II, BGS alleges that its name and variations

of the name are protected marks under the Lanham Act, and that SSO’s continued use of the

marks after termination of the Tradename License Agreement violated the Lanham Act, 15

U.S.C. § 1125(a)(1). In Count III, BGS alleges that SSO breached the Tradename License

Agreement, under which it had permission to use the “Bud’s Gun Shop” name, and variations

thereof, by continuing to use the name after its over-the-counter sales of firearms fell below a

certain threshold.       SSO argues that the allegations fall within the Policies’ coverage for

advertising injury and for property damage and that no exclusions apply.

                                                 A.

       SSO contends that the allegations in BGS’s Counts II and III fall within the Policies’

coverage for advertising injury that arises out of “[o]ral or written publication, in any manner, of

material that slanders or libels a person or organization or disparages a person’s or

organization’s goods, products, or services.” R. 29-2, Policy No. L200805866 at 19 (emphasis


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added). Specifically, SSO argues that BGS’s contention that SSO’s use of the name caused harm

to BGS’s “identity, reputation, and good will,” is an allegation that SSO’s use of its name

“disparaged” BGS’s goods, products, or services. Liberty concedes the point, stating that “a

rational argument might exist that [SSO’s] alleged breach of the license agreement and use of the

name ‘Buds’ disparaged [BGS’s] reputation,” and focuses on arguing that certain exclusions

preclude coverage. See Liberty Br. 37. Thus, we assume arguendo that Counts II and III fall

within the Policies’ coverage for advertising injury arising from publication of material that

“disparages a person’s or organization’s goods, products, or services,” and consider whether

exclusions apply.

           Liberty argues that the Policies’ trademark-infringement and breach-of-contract

exclusions preclude coverage for the allegations in Counts II and III.            The trademark-

infringement exclusion exempts from coverage personal and advertising injury “arising out of

the infringement of copyright, patent, trademark, trade secret or other intellectual property

rights.” The breach-of-contract exclusion applies to advertising injury “arising out of a breach of

contract.” We agree that these exemptions preclude coverage for BGS’s allegations in Counts II

and III.

                                                1.

           Count II is a trademark-infringement claim. See Tumblebus Inc. v. Cranmer, 399 F.3d

754, 760–61 (6th Cir. 2005) (“Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), provides a

federal cause of action for infringement of marks and trade dress that have not obtained federal

registration.”). BGS contends that its name and variations of the name are protected “marks”

under the Lanham Act, and that SSO’s continued use of the marks after its sales fell below the

threshold in § 2(a) of the Tradename License Agreement violated the Lanham Act, 15 U.S.C. §


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1125(a)(1). The allegations thus fall squarely within the exclusion for advertising injury “arising

out of the infringement of . . . trademark . . . rights.”

        SSO argues that the trademark-infringement exclusion is ambiguous because it

contradicts the definition of what the Policies cover. Specifically, the Policies define “personal

and advertising injury,” in part, as injury arising from “[i]nfringing upon another’s copyright,

trade dress or slogan in your ‘advertisement.’” But the Policies then exclude coverage for injury

“arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual

property rights.” The exclusion of coverage for injury arising out of infringement of “copyright .

. . and other intellectual property rights,” SSO argues, renders the provision ambiguous and

requires us to construe the exclusion in SSO’s favor. However, the asserted ambiguity in the

exclusion is not at issue here. The Policies do not define “advertising injury” as including

trademark infringement, and they unambiguously exclude coverage for such injury arising from

trademark infringement. Any ambiguity created by the conflict between the language extending

coverage to advertising injury arising out of “infringing upon another’s copyright, trade dress, or

slogan” and the language excluding coverage for injury arising out of “the infringement of

copyright, patent, trademark, trade secret or other intellectual property rights” has no impact on

the portion of the exclusion that does not conflict with the grant of coverage. See Lewis by Lewis

v. W. Am. Ins. Co., 927 S.W.2d 829, 836 (Ky. 1996) (“It is a very well established principle that

where a contract contains valid and invalid clauses or conditions, and the good may be separated

from the bad without affecting the integrity of the contract as a whole, the unlawful part of the

contract may be eliminated and the balance of it upheld.”) (citing Gen. Acc., F. & L. Assurance

Corp. v. Louisville H.T. Co., 193 S.W. 1031 (Ky. 1917)). Because there is no ambiguity




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regarding the exclusion of coverage for trademark infringement, the allegations in Count II do

not trigger coverage.

                                               2.

       In Count III, BGS alleges breach of contract. In contrast to Count II, Count III does not

use the term “marks.” Rather, it alleges that SSO breached the Tradename License Agreement

by continuing to use BGS’s name, (as defined in the Agreement). The Agreement refers to the

names as “tradenames” and not “marks.” SSO argues that the trademark-infringement exclusion

does not apply to BGS’s allegations to the extent they refer to rights in a trade name and not a

trademark. This distinction is immaterial, however, because the breach-of-contract exclusion

plainly applies. Any liability resulting from use of the trade names described in Count III

necessarily arises from SSO’s breach of its license to use those names. That is enough to

preclude coverage, without regard to whether the trademark-infringement exclusion also applies.

See Kemper Nat’l. Ins. Cos v. Heaven Hill Distilleries, Inc., 82 S.W.3d 869, 874 (Ky. 2002)

(Under Kentucky law, each exclusion in an insurance policy “is to be read ‘independently of

every other exclusion’” and “any applicable exclusion is sufficient to remove coverage”)

(quoting Harrison Plumbing & Heating, Inc. v. New Hampshire Ins. Grp., 82 S.W.3d 869, 880

(Wash. App. 1984)).

       This court’s decision in Assurance Company of America v. J.P. Structures, Inc., Nos. 95-

2384, 96-1010, 96-1027, 1997 WL 764498 (6th Cir. Dec. 3, 1997), construing an insurance

policy under Michigan law, is not to the contrary. In Assurance, the underlying action included

claims for breach of a franchise agreement as well as several trademark-infringement claims. Id.

at *1. The district court concluded that the trademark-infringement claims “arose out of” the

breach of the franchise agreement, and were therefore excluded from coverage by the breach-of-


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contract exclusion, because the franchise agreement was the source of the insured’s right to use

the marks. Id. at *3 (noting the district court’s conclusion “that the claims arose out of the

breach because ‘[t]he breach of the franchise agreement is the basis upon which all other claims

are causative. Once the breach of contract has occurred and the contract was terminated, all the

other causes of action became possible . . . .’”). This court reversed, finding the connection

between the alleged breach of contract (failure to pay royalties) and the trademark infringement

too remote to support application of the exclusion. Id. at *5 (“Defendants’ breach of the contract

caused its termination.     Defendants’ intentional unauthorized use of the mark caused the

trademark infringement. The contract merely withdrew the authorization to use it.             The

advertising injury did not arise from the breach of contract which was the failure to pay

royalties.”). We cannot say the same regarding BGS’s allegations in Count III. BGS alleged

that SSO breached the Tradename License Agreement by failing to cease use of the names after

its sales fell below the threshold amount. The allegations track the wording of § 2(a) of the

Tradename License Agreement. Following the reasoning in Assurance, the advertising injury—

disparagement from SSO’s use of the names—“arose out of” the breach of contract because use

of the names was the breach alleged. Further, in Assurance, the court determined that, rather

than arising from the breach of the franchise contract, the advertising injury arose from the

trademark infringement. The opinion in Assurance specifically noted that the policy at issue did

not mention trademark infringement.       Id. at *2.   Here, however, coverage for trademark

infringement is excluded.

                                               B.

       Finally, SSO contends that the allegations in Count II fall within the Policies’ coverage

for “property damage.” The Policies define “property damage” as “physical injury to tangible


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property, including all resulting loss of use of that property,” or “[l]oss of use of tangible

property that is not physically injured.” Under Count II, BGS alleged that as a result of SSO’s

use of its marks it “suffered damage by, inter alia, harm to its identity, reputation, and goodwill

and by confusion among buyers and sellers in the firearms market and more generally among the

consuming public.” SSO argues that these statements represent a claim for “loss of use of

tangible property” because they suggest that BGS lost the ability to sell its products.

       To support its argument, SSO relies on Lucker Manufacturing v. Home Insurance

Company, 23 F.3d 808 (3d Cir. 1994), in which the Third Circuit held that a change in customer

demand for a product could constitute a “loss of use” of property. See Lucker, 23 F.3d at 815–16

(“[T]he loss of a non-physical use of a product, such as offering it for sale, should be considered

a ‘loss of use’; and . . . the decreased value of a product because of loss of customer acceptance

of the product is a ‘loss of use’ within the meaning of the standard CGL policy.”). In Lucker

Manufacturing, the underlying plaintiff, Lucker Manufacturing, contracted with Shell Oil

Company to design and manufacture a lateral mooring system (LMS) for use in offshore drilling.

Id. at 811–12. Lucker Manufacturing purchased a “casting,” a component part of the LMS, from

Grede. Id. at 812. During a demonstration of the LMS for Shell, one of the castings supplied by

Grede failed.    Id.     Shell required Lucker Manufacturing to increase the number of safety

precautions in its manufacturing process, at a cost of $600,000. Id. Lucker Manufacturing sued

Grede for the cost of compliance with Shell’s requests. In a post-trial settlement, Grede assigned

its rights under its insurance policy to Lucker Manufacturing and Lucker Manufacturing sued for

coverage, arguing that the underlying complaint alleged a “loss of use” of tangible property, and

therefore fell within Grede’s coverage for “property damage liability.” Id. In determining

coverage, the Third Circuit characterized Lucker Manufacturing’s “complaint, reduced to its


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relevant essentials, [as] aver[ring] that the failure of the Grede castings prevented Lucker

[Manufacturing] from being able to sell the LMS design to Shell.” Id. at 814. The court found

that loss of the ability to sell an object can constitute the “loss of use” of the object. But the

court nonetheless found the property damage coverage inapplicable to Lucker Manufacturing’s

suit because the property at issue was merely the design for the LMS system; it was not tangible

property. Id. at 818. Relying on Lucker Manufacturing, SSO argues, “Count II of the [Second

Amended Complaint] claims that SSO’s allegedly unauthorized use of the Trade Names created

confusion and mistake among BGS’s customers, who presumably would have otherwise

purchased firearms and accessories (tangible property) from BGS, resulting in damage to BGS.

This is a covered property damage.” SSO Br. 36 (citation to the record omitted).

       Liberty makes several arguments why coverage is not appropriate. First, Liberty notes

that BGS’s Count II is a trademark-infringement claim.          Trademark infringement, Liberty

argues, cannot be “property damage” under the Policies because a trademark is not “tangible”

property, and in any event, BGS did not allege that it lost the use of its marks. Second, Liberty

argues, BGS’s allegations that it suffered damage to its “goodwill, identity, and reputation” are

also not allegations of damage to tangible property. Rather, “goodwill, identity, and reputation”

are all intangible.      Finally, with respect to SSO’s arguments under Lucker Manufacturing,

Liberty argues in a matter of a few sentences that this case is distinguishable from Lucker

Manufacturing because (1) the loss of customer acceptance present in Lucker Manufacturing is

not present here, (2) this case involves no lack of demand in the marketplace for firearms, and

(3) BGS did not claim any injury to or loss of use regarding its firearms.

       We agree with Liberty that BGS’s allegations under Count II do not fall within the

Policies’ coverage for “property damage liability.” The Policies provide that Liberty will pay


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“damages the insured becomes legally obligated to pay because of . . . ‘property damage.’” R.

29-2, Policy No. L200805866, at 1. In Count II, BGS claims that SSO’s trademark infringement

caused “confusion among buyers and sellers in the firearms market,” and harmed its “identity,

reputation, and goodwill.” These are not allegations of “property damage” as defined in the

Policies, i.e., loss of use of tangible property. Count II contains no allegations that BGS suffered

a loss of sales as a result of the trademark infringement, customer confusion, or harm to its

identity, reputation, and goodwill.

                                         CONCLUSION

       For the foregoing reasons, we AFFIRM the district court’s determination that Liberty had

no duty to defend or indemnify SSO. In light of that conclusion, we do not address the parties’

arguments regarding whether Denninghoff was a covered insured.




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