                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-9-1995

Granite State v AAMCO
Precedential or Non-Precedential:

Docket 94-2036




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http://digitalcommons.law.villanova.edu/thirdcircuit_1995/161


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            UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT


                      No. 94-2036


            GRANITE STATE INSURANCE COMPANY

                           v.

              AAMCO TRANSMISSIONS, INC.,
                MORGAN INDUSTRIES, INC.

                    Aamco Transmissions, Inc.,

                                    Appellant


   On Appeal from the United States District Court
      for the Eastern District of Pennsylvania
              (D.C. Civil No. 93-05094)


      Submitted under Third Circuit LAR 34.1(a)
                     May 22, 1995

BEFORE:   GREENBERG, ROTH, and ALDISERT, Circuit Judges

                 (Filed:   June 9, 1995)


                            Allan C. Molotsky
                            John W. Potkai
                            Post & Schell
                            1800 JFK Boulevard
                            19th Floor
                            Philadelphia, Pa. 19103

                                 Attorneys for Appellee

                            Karen A. VonDreusche
                            Aamco Transmissions
                            One Presidential Boulevard
                            Bala Cynwyd, Pa. 19004

                                 Attorneys for Appellant


                 OPINION OF THE COURT
GREENBERG, Circuit Judge.


          Aamco Transmissions, Inc., appeals from an order

entered on September 20, 1994, granting the appellee Granite

State Insurance Company judgment on the pleadings on both

Granite's complaint and Aamco's counterclaim in this diversity of

citizenship insurance coverage declaratory judgment action.     The

parties have briefed this case under Pennsylvania law and thus we

will decide this case the way we believe the Supreme Court of

Pennsylvania would decide it.   As might be expected from the

procedural posture of the case, the facts are not in dispute.



                                I.

                 FACTUAL AND PROCEDURAL HISTORY

          This case arose out of a class action commenced in

October 1990 in the Court of Common Pleas of Philadelphia County

by Joseph R. Tracy and Joseph P. Tracy against Aamco.   The Tracys

asserted that Aamco operated a nationwide network of automobile

transmission repair shops at about 800 franchised outlets.      They

claimed to have purchased "Lifetime Rebuilt Transmission

Services" from Aamco franchisees.    According to the Tracys, Aamco

used deceptive advertising which did not describe its services

accurately and which lured purchasers of transmission services

into paying more than they should have paid and induced them to

pay for unnecessary repairs.
           The Tracys brought the action, with exclusions not

material here, on behalf of themselves and all Pennsylvania

residents who had purchased reconditioned, rebuilt or reassembled

automatic transmission services from Pennsylvania Aamco

franchisees during the six years before they started their

action.1   The Tracys asserted that Aamco was liable under the

Pennsylvania Unfair Trade Practices and Consumer Protection Law,

Pa. Stat. Ann. tit. 73, § 201-3 (1993), which provides a remedy

for various unfair methods of competition and trade practices.

           At the time the Tracys brought their action and during

the six previous years, Granite insured Aamco under a

comprehensive general liability insurance policy for "personal

injury or advertising injury . . . arising out of the conduct of"

Aamco's business.   The policy defined "advertising injury" as an

"injury arising . . . in the course of [Aamco's] advertising

activities, if such injury arises out of libel, slander,

defamation, violation of right of privacy, piracy, unfair

competition, or infringement of copyright, title or slogan."

Relying on the policy, Aamco demanded that Granite defend and

indemnify it in the Tracy case, claiming that it had coverage

under the "unfair competition" category of the "advertising

injury" coverage.   Granite, however, declined to cover Aamco, and

1
 . Morgan Industries, Inc., which is or was the parent of Aamco,
was also a defendant in the Tracy action and is a defendant in
this case but as it is not an appellant we make no further
reference to it. We have not described the Tracys' allegations
in detail because for our purposes that case is relevant only for
the fact that it was brought by purchasers of Aamco's services
rather than by a competitor of Aamco.
Aamco then settled the Tracy action itself.   Granite subsequently

brought this action seeking a declaratory judgment that it was

not obligated to provide coverage to Aamco for the claims in the

Tracy action.   Aamco counterclaimed for its expenses in defending

and settling the Tracy case.

           Subsequently Granite made a motion for judgment on the

pleadings which the district court granted in a memorandum

opinion.   At the outset the court set forth familiar general

principles of insurance law.   It explained that under

Pennsylvania law when the facts are not in dispute the court

interprets an insurance policy as a matter of law.    See Pacific

Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985).      It then

indicated that it would review the terms of the Granite policy to

determine the parties' intent and in doing so would read the

policy as a whole and construe it according to its plain meaning.

See Atlantic Mut. Ins. Co. v. Brotech Corp., 857 F. Supp. 423,

427 (E.D. Pa. 1994), aff'd, No. 94-1897,       F.3d        (3d Cir.

May 12, 1995) (table).   The court said that if the policy

language is clear it must be given effect according to its plain

meaning but if the language is ambiguous all doubts as to its

meaning should be resolved in favor of the insured.      See St. Paul
Fire & Marine Ins. Co. v. Lewis, 935 F.2d 1428, 1430 (3d Cir.

1991).

           The court then addressed the particular issue at hand.

It noted that inasmuch as the policy did not define "unfair

competition," it would construe that term "in the context of

insurance coverage according to case law," resolving all
ambiguities in Aamco's favor.   Although Aamco argued that the

policy covered claims for all violations of Pennsylvania's

business fraud statute, the court followed Atlantic Mutual and

held that the term "unfair competition" in the Granite policy

"does not include claims based on state or federal statute."      See

Atlantic Mutual, 857 F. Supp. at 428.    Thus, as the Tracys

predicated their claims solely on the Pennsylvania Unfair Trade

Practices and Consumer Protection Law, the court held that

Granite's policy did not cover the claims.    The court further

held that the term "unfair competition" was not ambiguous and

that Aamco could not have had a reasonable expectation that the

Tracys' claims were covered.    In view of those conclusions the

court did not address Granite's alternative contention that the

policy confines coverage for an advertising injury to claims by

the insured's business competitors and does not cover claims by

its customers.   Aamco then appealed.    We have jurisdiction under

28 U.S.C. § 1291.



                                II.

                            DISCUSSION

          We will affirm, though we do not ground our result on

the district court's reasoning as we do not agree with its

conclusion that the phrase "unfair competition" unambiguously

refers only to the traditional common law tort of that name.2


2
 . We exercise plenary review. See Electric Ins. Co. v. Rubin,
32 F.3d 814, 815 (3d Cir. 1994).
For one thing, the courts are not uniform in describing the tort

of unfair competition.   "The tort developed as an equitable

remedy against the wrongful exploitation of trade names and

common law trademarks that were not otherwise entitled to legal

protection."   Bank of the West v. Superior Court, 833 P.2d 545,

551 (Cal. 1992).   See also AT & T v. Winback and Conserve

Program, Inc., 42 F.3d 1421, 1428 & n.9 (3d Cir. 1994)

(describing cause of action for unfair competition under Lanham

Act), cert. denied, 115 S.Ct. 1838 (1995).   Thus, in Bank of the

West the court indicated that "[t]he common law tort of unfair

competition is generally thought to be synonymous with the act of

'passing off' one's goods as those of another."   Nevertheless the

Supreme Court of Pennsylvania has held that other types of

conduct can constitute unfair competition actionable at common

law.   See Carl A. Colteryahn Dairy, Inc. v. Schneider Dairy, 203

A.2d 469, 473 (Pa. 1964) (finding it illegal to make false or

misleading statements about the circumstances under which an

employee left an employer).   Therefore, it is not so easy to

conclude that there is one narrow and clear category of the

common law tort.

           Furthermore, regardless of the scope of the common law

tort of unfair competition, a person reading the term "unfair

competition" as a category of "advertising injury" within an

insurance policy would not necessarily understand the term to be

limited to a common law definition.   A broader interpretation of

the term than in Bank of the West would be particularly
reasonable in Pennsylvania as that state's legislature has
defined "[u]nfair methods of competition" to include a host of

activities in addition to passing off goods or services as those

of another.   Pa. Stat. Ann. tit. 73, § 201-2(4) (1993).    In

short, we see no valid reason to exclude conduct described in the

statute simply because it might not be regarded as unfair

competition in a common law sense.

          Yet even if the term "unfair competition" within an

insurance policy is construed broadly with respect to the

character of an insured's conduct, that construction does not

determine the class of persons who can present claims against the

insured which will be regarded as being claims for unfair

competition within the policy.   Thus, in order for Aamco to

succeed, it must show that claims by its customers injured by its

own practices reasonably can be described as unfair competition

claims within the context of the insurance coverage.    In this

endeavor it fails for, regardless of the nature of the insured's

conduct, a claim by a consumer of its products or services

arising from that conduct hardly can be characterized as a claim

for unfair competition.   After all, "competition" connotes an

insured's relationship with other persons or entities supplying

similar goods or services.

          In fact, the Pennsylvania legislature itself recognized

this point.   The statute involved in the Tracy action is not

called the "Pennsylvania Unfair Competition Statute."    Rather, it

is the "Pennsylvania Unfair Trade Practices and Consumer
Protection Law." (Emphasis added).   It is a broad business fraud

statute that by its very title demonstrates that it encompasses
more than acts of unfair competition.   Indeed, the statute

distinguishes explicitly between "unfair methods of competition"

and "unfair or deceptive acts or practices," though it lists them

together in one subsection.   Pa. Stat. Ann. tit. 73, § 201-2(4)

(1993).   The fact that the legislature deemed it expedient to

combine the remedies for unfair competition and consumer fraud in

one statute does not magically transform acts of "consumer fraud"

into acts of "unfair competition."   Accordingly, we think that

the Supreme Court of Pennsylvania would hold that a competitor of

the insured, but not its customer, can assert a claim which may

be covered under the "unfair competition" category of the

"advertising injury" coverage.3   While we acknowledge, as did the

district court, that ambiguities in insurance policies should be

resolved in an insured's favor, the Granite policy is not

ambiguous with respect to the relationship required between a

plaintiff in an underlying action and an insured for that

plaintiff's claim to be considered unfair competition within the

Granite policy.

          The result we reach is consistent with the overall

definition of "advertising injury" in the policy.   As we have
3
 . Under the statute, "[a] private cause of action . . . is
available only to consumers who have purchased goods or services
for personal, family, or household purposes." Merv Swing Agency,
Inc. v. Graham Co., 579 F. Supp. 429, 430 (E.D. Pa. 1983) (citing
statute). However, the statute protects business competitors
from unfair competition, as it authorizes the Attorney General
and district attorneys to bring actions in the name of the
Commonwealth of Pennsylvania against people they have reason to
belive are "using or about to use any method, act, or practice
declared by . . . this act to be unlawful." Pa. Stat. Ann. tit.
73, § 201-4 (1993).
indicated, the Granite policy defines "advertising injury" to

include injuries arising from "libel, slander, defamation,

violation of right of privacy, piracy . . . or infringement of

copyright, title or slogan" as well as unfair competition.    While

we do not say that the Supreme Court of Pennsylvania would

conclude that none of these categories could provide coverage for

a claim by a customer against an insured vendor, as we have no

reason to reach that point, none of the categories suggests

claims which a customer is likely to assert against a vendor.

Rather, the categories all define claims which an insured's

competitor might assert against it.   For example, a competitor

might base a libel action on an insured's negative advertising.

Thus, the definition of "advertising injury" lends support to our

conclusion that the word "competition" as used in "unfair

competition" limits coverage to claims by competitors of the

insured.

           We also point out that if "unfair competition" includes

coverage for a claim by a customer against an insured, the

insured "would simply shift the loss to [its] insurer and, in

effect, retain the proceeds of [its] unlawful conduct."   Bank of

the West, 833 F.2d at 553.   In this case a finding of coverage

would mean that Granite would be obliged to reimburse Aamco for

the costs to defend and settle the Tracy case but that Aamco

could retain whatever funds it received by reason of the Tracy
plaintiffs having obtained transmission services from Aamco

franchisees.4   Our outcome avoids this untoward result.

          While the parties have not brought to our attention any

opinion of the Pennsylvania Supreme Court or Superior Court

addressing the issue before us, opinions from other courts are

consistent with our result.   Thus, in Ruder & Finn, Inc. v.

Seaboard Sur. Co., 422 N.E.2d 518, 522 (N.Y. 1981) (internal

quotation marks omitted), the court accepted the insurer's

argument that "the primary concern in unfair competition is the

protection of a business from another's misappropriation of the

business' organization or its expenditure of labor, skill and

money."   In Boggs v. Whitaker, Lipp & Helea, Inc., 784 P.2d 1273,

1275 (Wash. Ct. App.), review denied, 791 P.2d 535 (Wash. 1990),

the court held that the term "unfair competition" in a policy

including coverage for advertising offenses did not apply to a

claim under the Washington Consumer Protection Act as "unfair

competition" referred "only to acts against competitors."      In

Practice Management Assocs. v. Old Dominion Ins. Co., 601 So.2d

587 (Fla. Dist. Ct. App.), review denied, 613 So.2d 8 (Fla.

1992), the appellate court approved a trial court's opinion that

the term "unfair competition" within the definition of

advertising injury "refers unambiguously only to actions

affecting competitors."5

4
 . We recognize that there was no finding of wrongdoing in the
Tracy action.
5
 . Aamco in its brief recites that in O'Brien v. Westinghouse
Elec. Corp., 293 F.2d 1 (3d Cir. 1961), we held that "claims of
unfair competition do not relate exclusively to claims between
          Moreover, we recently held, in interpreting section

43(a) of the Lanham Act, 15 U.S.C. § 1125(a), the federal unfair

competition statute, that "Congress . . . did not contemplate

that federal courts should entertain claims brought by

consumers."     Serbin v. Ziebart Int'l Corp., 11 F.3d 1163, 1179

(3d Cir. 1993).    Rather, the Lanham Act "is primarily intended to

protect commercial interests and . . . section 43(a) of the

statute provides a private remedy to a commercial plaintiff who

meets the burden of proving that its commercial interests have

been harmed by a competitor's false advertising."     Id. at 1177

(citing Sandoz Pharmaceuticals Corp. v. Richardson-Vicks, Inc.,

902 F.2d 222, 230 (3d Cir. 1990) (internal alterations omitted)

(emphasis added)).    We find Serbin's reasoning particularly

persuasive because "the Lanham Act is derived generally and

purposefully from the common law tort of unfair competition, and

its language parallels the protections afforded by state common

law and statutory torts" of that nature.    AT&T v. Winback, 42

F.3d at 1433.

          We have not overlooked Aamco's argument "that the

proper focus regarding issues of coverage under insurance

contracts is the reasonable expectation of the insured," as set

(..continued)
competitors and found that unfair competition could be
successfully claimed between an employee and his employer."
Brief at 22 n.2. But O'Brien is completely different from this
case as it did not involve a claim by a purchaser against a
vendor. Furthermore, we largely predicated our result on our
observation "that all persons are free to enter the trade at any
time and are therefore potential competitors." Id. at 13-14.
Therefore, O'Brien does not support Aamco's claim for coverage.
forth in St. Paul Mercury Ins. Co. v. Corbett, 630 A.2d 28, 30

(Pa. Super. Ct.), dismissed without op., 634 A.2d 221 (Pa. 1993).

Rather, we conclude that Aamco could not have expected to have

insurance coverage for the Tracys' claims under the portion of a

policy protecting it against claims of "unfair competition."     As

we explained above, it would be expected that a claim arising

from "competition" would be forwarded by a competitor of an

insured.   The Tracys and the class they represented were not

competitors of Aamco.



                               III.

                            CONCLUSION

           For the foregoing reasons we will affirm the order of

September 20, 1994.
