Appeal from the Court of Common Pleas, Bucks County, Civil Division, No. 90-07496-05-1, Garb, J.
Stuart M. Wilder, Doylestown, for appellants.
Brian P. Sullivan, Plymouth Meeting, for appellee.
Before CAVANAUGH, KELLY and BROSKY, JJ.
In this appeal we must determine whether the trial court properly granted summary judgment in favor of appellee insurance company, Aetna [Casualty and Surety Company], pursuant to its declaratory judgment action against appellant-insureds, identified as "Jane Roe and John Roe". Specifically, we must decide whether Aetna had a duty to defend the appellants in civil actions brought by third parties asserting claims of sexual, physical, and mental abuse, plus requests for compensatory and punitive damages under appellants' comprehensive homeowner's insurance policy, in view of that policy's provision excluding coverage for bodily injury or property damage which is expected or intended by the insured. For the following reasons, we hold that the trial court properly granted summary judgment in favor of Aetna. Accordingly, we affirm.
The identity of the parties involved in the underlying actions is masked to protect the identity of the minor children and the appellants.
The relevant facts and procedural history are as follows. The underlying actions against appellants, instituted by parents on behalf of themselves and their three minor children, alleged sexual, physical, and mental abuse by appellants, a teacher at Breezy Point Day School, and her husband, as well as another individual identified as "Pamela Poe," also a teacherer at Breezy Point Day School. The owners and operators of Breezy Point Day School are identified in this action as "James Doe and Jane Doe".
In response to complaints of child sexual abuse received from the parents of the three children, the Bucks County Children and Youth Services began an investigation into Breezy Point Day School on April 28, 1989. The Bucks County District Attorney's Office assumed the investigation on October 25, 1989. In his report dated March, 1990, the district attorney concluded that there was no basis whatsoever to file criminal charges. The district attorney reported that the evidence produced over an eleven-month period indicated that the allegations of abuse are unfounded, without merit; and no credible evidence existed to support the allegations. Bucks County District Attorney's Office Report — Investigation into Breezy Point Day School, March, 1990 at 3-4.
As the result of defendants' conduct, as set forth above, minor-plaintiff[s] [have] suffered severe mental and physical injury.
As a result of the defendants' conduct, as set forth above, plaintiffs have been obliged to expend various and divers sums of money for treatment of the injuries sustained by minor-plaintiff[s], and will be obliged to continue to expend such sums for an indefinite time.
The conduct of the defendants as set forth above was outrageous and in wanton and reckless disregard of the rights of minor-plaintiff[s] for which plaintiffs claim an additional sum for punitive damages.
(2) which is caused by a violation of a penal law or ordinance committed by or with the knowledge or consent of any insured.
On August 14, 1990, Aetna filed a declaratory judgment action seeking a determination of the extent of Aetna's duty to defend or indemnify appellants in the three underlying actions pending in the Bucks County Court of Common Pleas. Pursuant to the Declaratory Judgments Act, 42 Pa.C.S.A. § 7540, Aetna joined all of the parties to the underlying actions as parties-defendant to its declaratory judgment action.
On April 19, 1991, Aetna filed a motion for summary judgment which the trial court denied by order entered on May 30, 1991. All three underlying actions eventually terminated in Bucks County. One party dropped the case against appellants and paid appellants an undisclosed sum of money to settle appellants' counterclaims. Appellants were awarded summary judgment on the other two cases. Aetna renewed its motion for summary judgment on December 17, 1993. The Honorable Isaac S. Garb granted Aetna's motion for summary judgment and entered the declaratory judgment on March 11, 1994. This timely appeal followed.
The summary judgments in appellants' favor were affirmed by this Court. ( See Nos. 2931 and 2963 Philadelphia 1993, filed 6/8/94).
IS AN INSURER OBLIGATED TO DEFEND INSUREDS SUED FOR COMMITTING TORTIOUS ACTS IN THEIR HOME WHERE THE COMPLAINTS UNDERLYING THE LAWSUITS REQUEST PUNITIVE DAMAGES BUT DO NOT EXCLUDE LIABILITY OF THE INSUREDS BEING PREMISED UPON CONDUCT THAT IS NOT CRIMINAL NOR UPON INJURIES WHICH THE INSUREDS DID NOT INTEND?
The well-settled scope of appellate review for a grant of summary judgment states that summary judgment is properly granted where the pleadings, depositions, answers to interrogatories, and admissions, together with affidavits demonstrate that no genuine, triable issue of fact exists and that the moving party is entitled to judgment as a matter of law. Pa.R.Civ.P. 1035(b); Stidham v. Millvale Sportsmen's Club, 421 Pa. Super. 548, 558, 618 A.2d 945, 950 (1992), appeal denied, 536 Pa. 630, 637 A.2d 290 (1993); Harford Mutual Insurance Co. v. Moorhead, 396 Pa. Super. 234, 237, 578 A.2d 492, 494 (1990), appeal denied, 527 Pa. 617, 590 A.2d 757 (1991). The trial court must examine the record in the light most favorable to the non-moving party and resolve all doubts against the moving party. Stidham v. Millvale Sportsmen's Club, supra. The moving party's evidence must clearly exclude any genuine issue of material fact. Id. We will reverse the trial court's grant of summary judgment only if there has been an error of law or a clear abuse of discretion. Britamco Underwriters, Inc. v. Weiner, 431 Pa. Super. 276, 279, 636 A.2d 649, 651 (1994); McCain v. Pennbank, 379 Pa. Super. 313, 318, 549 A.2d 1311, 1313 (1988) (citations omitted).
The issue in this case involves the proper construction of an insurance policy which is resolved as a matter of law in a declaratory judgment action. 42 Pa.C.S.A. § 7533; Fisher v. Harleysville Insurance Co., 423 Pa. Super. 362, 621 A.2d 158 (1993), appeal denied, 536 Pa. 624, 637 A.2d 285 (1993); Heffernan Co. v. Hartford Insurance Co., 418 Pa. Super. 326, 614 A.2d 295 (1992); Harleysville Mutual Insurance Co. v. Madison, 415 Pa. Super. 361, 609 A.2d 564 (1992); Germantown Insurance Co. v. Martin, 407 Pa. Super. 326, 595 A.2d 1172 (1991), appeal denied, 531 Pa. 646, 612 A.2d 985 (1992); Harford Mutual Insurance Co. v. Moorhead, supra. Applying these standards, we turn to appellants' assertions.
Appellants maintain that the trial court erred in granting summary judgment in favor of Aetna because Aetna had a duty to defend appellants against those portions of the complaints which might be covered by appellants' homeowner's insurance policy. The trial court erred, appellants assert, in finding that the exclusionary provision of the policy excluded "intentional conduct" rather than "intentional injury." In addition, appellants contend, the allegations in the underlying complaints did not claim criminal conduct as the sole basis for appellants' liability and prayers for punitive damages did not necessarily relieve Aetna of its obligation to defend against claims for compensatory damages.
Relying on Stidham v. Millvale Sportsmen's Club, supra, appellants propose that Aetna assumed the role of spectator throughout the resolution of the pleadings and ensuing pretrial proceedings which resulted in favor of appellants. Aetna was bound, appellants submit, to remain in the action until any ambiguity which arose from the use of the proviso " inter alia" in the complaints was resolved. Moreover, appellants reason, Aetna's duty to defend arose, as well, from the failure of the underlying complaints to specify what, if any, injury appellants actually caused. Appellants conclude that Aetna had a continued duty to defend because the underlying actions were decided in appellants' favor. Aetna's continued duty to provide for their defense, appellants urge, exposes Aetna to all defense costs which appellants incurred as a result of appellants having to seek private counsel. We disagree.
An insurer's duty to defend is a distinct obligation, different from and broader than its duty to indemnify. Britamco Underwriters v. Weiner, supra, 431 Pa. Super. at 280, 636 A.2d at 651 (citations omitted); D'Auria v. Zurich Insurance Co., 352 Pa. Super. 231, 233, 507 A.2d 857, 859 (1986) (citations omitted). An insured has purchased not only the insurer's duty to indemnify successful claims which fall within the policy's coverage, but also protection against those groundless, false, or fraudulent claims regardless of the insurer's ultimate liability to pay. D'Auria v. Zurich Insurance Co., supra at 234, 507 A.2d at 859 (citing Zeitz v. Zurich General Accident Liability Insurance Co., 165 Pa. Super. 295, 67 A.2d 742 (1949)). Not all claims asserted against an insured, however, activate the insurer's duty to defend. Id.
The insurer's obligation to defend is fixed solely by the allegations in the underlying complaints. Stidham v. Millvale Sportsmen's Club, supra, 421 Pa. Super. at 564, 618 A.2d at 953; Germantown Insurance Co. v. Martin, supra, 407 Pa. Super. at 331, 595 A.2d at 1174; Harford Mutual Insurance Co. v. Moorhead, supra, 396 Pa. Super. at 238-39, 578 A.2d at 494-95; United Services Auto Assoc. v. Elitzky, 358 Pa. Super. 362, 368, 517 A.2d 982, 985 (1986), appeal denied, 515 Pa. 600, 528 A.2d 957 (1987). "It is not the actual details of the injury, but the nature of the claim which determines whether the insurer is required to defend." D'Auria v. Zurich Insurance Co., supra, 352 Pa. Super. at 234, 507 A.2d at 859 (quoting Springfield Township, et al. v. Indemnity Insurance Co. of North America, 361 Pa. 461, 64 A.2d 761 (1949)). The duty to defend is limited to only those claims covered by the policy. Id. at 235, 507 A.2d at 859 (citations omitted). The insurer is obligated to defend if the factual allegations of the complaint on its face comprehend an injury which is actually or potentially within the scope of the policy. American States Insurance Co. v. Maryland Casualty Co., 427 Pa. Super. 170, 183, 628 A.2d 880, 887 (1993) (citing, inter alia, Cadwallader v. New Amsterdam Casualty Co., 396 Pa. 582, 152 A.2d 484 (1959); Wilson v. Maryland Casualty Co., 377 Pa. 588, 105 A.2d 304 (1954)); Stidham v. Millvale Sportsmen's Club, supra, 421 Pa. Super. at 564, 618 A.2d at 953.
In D'Auria v. Zurich Insurance Co., supra, this Court stated, "The major difference between indemnity and duty to defend cases is that in the latter, the complaint is the sole guide to the facts." Id. at 236, 507 A.2d at 860.
Thus, the insurer owes a duty to defend if the complaint against the insured alleges facts which would bring the claim within the policy's coverage if they were true. It does not matter if in reality the facts are completely groundless, false, or fraudulent. It is the face of the complaint and not the truth of the facts alleged therein which determines whether there is a duty to defend.
D'Auria v. Zurich Insurance Co., supra, 352 Pa. Super. at 235, 507 A.2d at 859.
Where a claim is potentially within the scope of an insurance policy, the insurer who refuses to defend at the outset does so at its own peril. Stidham v. Millvale Sportsmen's Club, supra (citing Cadwallader v. New Amsterdam Casualty Co., supra.). In Stidham, we stated that [a] declaratory judgment action, though not specifically required by law, might resolve at the outset the question of an insurer's duty to defend. Id. at 565, 618 A.2d at 954. The purpose of a declaratory judgment procedure is to furnish an expeditious remedy for the settlement of claims which indicate imminent and inevitable litigation and to provide practical help in settling controversies which could be determined more advantageously if settled promptly rather than at some future time when they would require adjudication. Eureka Casualty Co. v. Henderson, 371 Pa. 587, 592, 92 A.2d 551, 553 (1952) (citing the predecessor to 42 Pa.C.S.A. § 7531-7541) . See also Geisinger Clinic v. Di Cuccio, 414 Pa. Super. 85, 104, 606 A.2d 509, 519 (1992), appeal denied, 536 Pa. 625, 637 A.2d 285 (1993) (purpose of awarding declaratory relief is to settle finally and make certain the legal status or rights of the parties); Doe v. Johns-Manville Corp., 324 Pa. Super. 469, 473, 471 A.2d 1252, 1254 (1984) (declaratory judgments are judicial searchlights switched on at the behest of a litigant to illuminate an existing legal right, status or other relation). In addition, a declaratory judgment action provides a forum for all persons asserting claims on the issue of coverage between the insured and the insurer. Stidham v. Millvale Sportsmen's Club, supra; 42 Pa.C.S.A. § 7540.
Appellants' proposition, that Aetna's duty to defend them in the underlying proceedings was established by the favorable outcome of those proceedings, is without merit for the following reasons. First, in an action for declaratory judgment, Aetna's duty to defend is determined solely by the nature of the claim on the face of the underlying complaints. Therefore, the course and outcome of the underlying litigation is irrelevant in this context. Second, contrary to appellants' assertion, Aetna did not choose the role of spectator in the instant case. Rather, Aetna sought a judicial determination of its duty to defend. Third, in Stidham v. Millvale Sportsmen's Club, supra, upon which appellants rely for this proposition, the insurer refused to defend and later argued intentional injury based upon the insured's guilty plea to third degree murder. Plus, in Stidham, supra, the insurer did not pursue a declaratory judgment action; it simply refused to defend. Accordingly, appellants' proposition fails.
In Stidham, we stated that the insurer's cavalier approach to the legal proceedings, based on its independent decision not to participate, was risky because the insurer had the opportunity to litigate the issue of the insured's intent [in a declaratory judgment action]. Stidham v. Millvale Sportsmen's Club, supra, 421 Pa. Super. at 567-68, 618 A.2d at 955.
Moreover, in Stidham, supra, we stated that a guilty plea in criminal proceedings cannot substitute for a declaratory judgment action because all indispensable parties were not involved in that proceeding. Id. at 565, 618 A.2d at 954 (citations omitted). Instantly, Aetna properly joined all of the parties to the underlying actions as parties-defendant to its action for declaratory judgment.
In order to determine whether Aetna had a duty to defend appellants, therefore, we must compare the terms of the homeowner's policy with the nature of the allegations of the underlying complaints against appellants. We must then determine whether, if the allegations were true, Aetna might be obligated to provide coverage. See Britamco Underwriters, Inc. v. Weiner, supra, 431 Pa. Super. at 280, 636 A.2d at 651.
Appellants purchased Aetna's general liability homeowner's policy which provides limited payment for damages due to bodily injury or property damage covered under the policy, as well as a defense at Aetna's expense. This broad declaration of coverage is limited, however, by an exclusionary provision which states, in relevant part, that the policy does not apply to personal liability and medical payments to others for bodily injury or property damage "which is expected or intended by the insured." This Court has construed insurance policy provisions excluding coverage for "expected or intended injuries" in other disputes and, after a thorough exegesis of the "expected or intended harm" clause, this Court has held that these clauses are ambiguous as a matter of law and must be construed against the insurer. Stidham v. Millvale Sportsmen's Club, supra, 421 Pa. Super. at 563, 618 A.2d at 953 (citing United Services Auto Assoc. v. Elitzky, supra, 358 Pa. Super. at 375, 517 A.2d at 989). See also Germantown Insurance Co. v. Martin, supra, 407 Pa. Super. at 332, 595 A.2d at 1172; Donegal Mutual Insurance Co. v. Ferrara, 380 Pa. Super. 588 EQD, 552 A.2d 699, 702 (1989). In addition, this Court has held that the words "expected" and "intended" are synonymous when interpreting insurance exclusionary clauses. Stidham v. Millvale Sportsmen's Club, supra. "[A]n insured intends as injury if [he/she] desired to cause the consequences of [his/her] act or if [he/she] acted knowing that such consequences were substantially certain to result." Id.
Appellants proffer that Aetna had a duty to defend against the portions of the underlying complaints which fell within the policy. Appellants point to a paragraph in each complaint that purportedly alleges negligence and reckless conduct. After careful review of the record, we note that the paragraph in the underlying complaints alleging outrageous conduct in wanton and reckless disregard of minor-plaintiffs' rights seeks punitive damages. As punitive damage allegations, these too are excluded from coverage as a matter of law. In Creed v. Allstate Insurance Co., 365 Pa. Super. 136, 529 A.2d 10 (1987), appeal denied, 517 Pa. 616, 538 A.2d 499 (1988), this Court explained, "an insurer owes no duty to indemnify an insured on an award of punitive damages. There is no functional distinction or difference between punitive damages which arise from intentional conduct or reckless conduct. It is the conduct that is being punished, not the victim that is being compensated." Id. at 141-42, 529 A.2d at 12 (citations omitted). See also Pennbank v. St. Paul Fire and Marine Insurance Co., 669 F. Supp. 122, 125 (W.D.Pa. 1987) ("public policy does not permit a tortfeasor who is personally guilty of wanton misconduct to shift the burden of punitive damages to his insurer" (quoting Esmond v. Liscio, 209 Pa. Super. 200, 224 A.2d 793 (1966)). Because Aetna owes a duty to defend against only those allegations that it would have to cover under the policy, and punitive damages are not recoverable under the policy as a matter of law, Aetna has no duty to defend against punitive damage allegations.
The prayers for punitive damages, appellants then assert, did not relieve Aetna of its obligation to provide a defense against the portions of the complaint requesting compensatory damages. We refuse to follow appellants' rationale. Instead, we look first at the injuries, then the damages. The request for compensatory damages in the underlying complaints is based on such bodily injuries that are excluded from coverage as expected or intended by the insured.
Appellants also maintain that insurers are obligated to defend insureds even when the underlying complaints allege solely intentional conduct. We cannot agree. In support of this contention, appellants present three Pennsylvania cases (in order of their appearance in their brief): United Services Auto Assoc. v. Elitzky, supra; Britamco Underwriters, Inc. v. Weiner, supra; and Bracciale v. Nationwide Mutual First Insurance Co. (E.D.Pa. No. 92-7190, 1993 WL 323594 Unpublished Memorandum, August 20, 1993). After careful study, we conclude that these cases are readily distinguishable from the instant case.
First, appellants insist, United Services Auto Assoc. v. Elitzky, supra, is controlling on the issue of whether Aetna has a duty to provide a defense. Appellants proffer that "in Elitzky the insurer was obligated to provide a defense to the insureds, even though the complaints charged them with defamation, because the emotional distress alleged by the complaint may not have been intended by the volitionally made statements. 358 Pa. Super. at 377, 517 A.2d at 992." Appellants' Brief at 13. While this contention is true, it is only part of the inquiry. The underlying complaint in Elitzky clearly alleged that the Elitzkys' failure to determine the accuracy of their letters was in utter and reckless disregard of its truth or falsity. Id. at 366, 517 A.2d at 984. The Elitzky Court reasoned, therefore, that the underlying plaintiff could have recovered on a defamation claim even if the Elitzkys thought their statements were true, if that belief was in reckless disregard to the truth. Id. at 375, 517 A.2d at 989. Thus, the Court concluded, the insurer had a duty to defend because the underlying plaintiff's complaint stated a cause of action which may have been covered by the Elitzkys' insurance policy.
The Elitzky Court also distinguished intent from recklessness. This Court stated in pertinent part, "It is possible that the Elitzkys recklessly disregarded the truth and libeled [underlying plaintiff] yet did so with pure hearts." Id. 358 Pa. Super. at 375, 517 A.2d at 989. "They could have made this decision because of a belief that their actions would aid society. Resolving one's doubts in favor of helping society is not the equivalent of intentionally harming someone." Id. at 377, 517 A.2d at 990. This argument is untenable in a case involving the sexual, physical and mental abuse of a child.
Similarly, the underlying complaint in Britamco Underwriters, Inc. v. Weiner, supra, contained specific allegations of negligence in addition to allegations of intentional harm. Id. at 278, 636 A.2d at 650. In the instant case, the underlying plaintiffs made no allegations of negligent or reckless behavior on the part of appellants. Therefore, these cases do not support appellants' claim because the instant underlying complaints sound solely in the intentional torts of assault and battery.
In Britamco Underwriters, Inc. v. Weiner, supra, the underlying plaintiff filed a suit against the owners of a bar alleging that one of the co-owners as well as an employee of the bar struck the plaintiff in the neck. Plaintiff's "[c]omplaint asserted alternative theories of liability sounding in assault and battery, intentional, reckless and/or negligent infliction of emotional distress, and claims of negligence, generally." Id. 431 Pa. Super. at 278, 636 A.2d at 650.
[i]n that case this Court held that the insurance company was justified in not defending an action brought against the insured taproom owner by a patron for personal injuries because . . . the patron had unequivocally alleged assault and battery . . . in the original complaint, an offense clearly excluded under the terms of the policy. The majority held that the complaint . . . revealed that the cause of action was based upon facts which did not come within the scope of the policy. We said that under no theory of law could the insured prevail against the insurance company because it would not be possible for the injured patron to recover on a claim of negligence when the suit was founded on the theory of intentional tort. Just as the pleading in that case fixed the insurer's right, since neither amendment nor variance in proof could possibly establish a cause of action which would be cognizable under the insurance contract, so does [underlying plaintiff's] pleading fix the insured's right in this case. In the Wilson case, supra, the complaint of the injured party alleged only an injury which clearly was not within the coverage of the insurance policy.
Cadwallader v. New Amsterdam Casualty Co., supra, 396 Pa. at 590-91, 152 A.2d at 488-89. Thus, Aetna is not obligated to defend appellants because the underlying complaints alleged the intentional harms of assault and battery.
Recently, the Third Circuit Court of Appeals stated that in certain cases a court can infer an actor's intent as a matter of law from the nature and character of his or her acts. Wiley v. State Farm Fire and Casualty Co., 995 F.2d 457 (3rd Cir. 1993). In its thorough review of current Pennsylvania law on the question of intent as well as a survey of the analyses applied in other jurisdictions in child abuse cases, the Court in Wiley noted that the inferred intent to harm is an irrebuttable presumption. Id. at 460 (citation omitted). The criminalization of child abuse additionally serves to place the insured on notice of the societal understanding that the harm from such conduct is inseparable from its performance. Id. at 464 (quotation omitted). The court concluded that "harm to children in sexual molestation cases is inherent in the very act of sexual assault committed on a child, regardless of the motivation for or nature of such assault, and that the resulting injuries are, as a matter of law, intentional. . . ." Id. We agree. Thus, we adopt the inferred intent rule, as utilized by the Third Circuit Court in Wiley v. State Farm Fire and Casualty Co., supra, for liability insurance cases involving the sexual abuse of a child by an insured adult.
In Wiley v. State Farm Fire and Casualty Co., supra, the appellants, parents of the minor child, filed suit against Floyd Wiley, Jr. on behalf of their child following the entry of a guilty plea by Floyd to indecent assault and corrupting the morals of same minor child. The appellants sought to recover money damages for bodily harm resulting from their daughter's molestation. The complaint also alleged negligent infliction of personal injury. Floyd sought defense of the civil action by State Farm under his homeowner's policy. State Farm agreed to defend subject to a reservation of rights to contest coverage on the ground that the insured's conduct fell within the standard homeowner's policy coverage exclusion for bodily injury "intended or expected" by the insured. The parties stipulated to: Floyd's culpability, the value of the appellants' claim in the event that they should prevail, and the filing of a declaratory judgment action against State Farm to decide the applicability of the homeowner's policy to the appellant's claim.
Both State Farm and the appellants filed motions for summary judgment. The district court entered judgment in favor of State Farm. The appellants timely appealed.
On review, the Third Circuit Court of Appeals concluded that the district court had properly entered summary judgment in favor of State Farm, reasoning that State Farm had established the existence of the intended harm exclusion in Floyd's homeowner's policy and his intent to harm the minor child as a matter of law through application of the inferred intent rule. Thus, the Court of Appeals affirmed the judgment of the district court.
But see Aetna Life and Casualty Co. v. Barthelemy, 33 F.3d 189 (M.D.Pa. 1994) (declining to extend the inferred intent rule beyond the exceptional case of sexual child abuse by an insured adult).
Appellants complain that nothing from the records of these cases allows the conclusion that the underlying plaintiffs had no intention of going beyond the generically described acts to exclude negligent or reckless conduct. Aetna should have chosen to defend, appellants posit, reserving the right to withdraw its representation and refuse indemnification once it became clear that coverage was not required. Citing Connor v. Allegheny General Hospital, 501 Pa. 306, 311 n. 3, 461 A.2d 600, 602 n. 3 (1983), appellants argue that Aetna then could have filed preliminary objections to the more open-ended allegations in an attempt to force the plaintiffs to comprehensively detail the allegations of wrongdoing and to catalogue the plaintiffs' injuries. If, however, as appellants contend, the underlying complaints were open-ended, they too could have filed a preliminary objection in the nature of a request for a more specific pleading or they could have moved to strike any ambiguous portions of the underlying plaintiffs' complaint. See Connor v. Allegheny General Hospital, supra. A careful review of the record reveals that appellants consented to the amendment of two of the complaints in the underlying actions. Appellants' need for a "facially all-inclusive catalogue" that "purports to be a comprehensive list of the tortious acts alleged" and "injuries set forth comprehensively and in particularity" is misguided in this context. In an action for declaratory judgment, the court's role is to look at which is included in the underlying complaint, not at what is excluded.
Furthermore, while it is true that amendments to pleadings are liberally allowed in Pennsylvania, an amendment may not introduce a new cause of action after the statute of limitations has run because to do so would unfairly prejudice the opposing party. Connor v. Allegheny General Hospital, supra, 501 Pa. at 310, 461 A.2d at 602 (citations omitted); Heffernan Co. v. Hartford Insurance Co., 418 Pa. Super. 326, 332, 614 A.2d 295, 298 (1992); Frey v. Pennsylvania Electric Co., 414 Pa. Super. 535, 538, 607 A.2d 796, 797 (1992) (citations omitted); Pa.R.Civ.P. 1033, 42 Pa.C.S.A.
In determining whether a wholly different cause of action is introduced by the amendment, technical considerations or ancient formulae are not controlling; nothing more is meant than that the defendant shall not be required to answer a wholly different legal liability or obligation from that original stated . . . The test is whether an attempt is made to state facts which give rise to a wholly distinct and different legal obligation against the defendant.
Frey v. Pennsylvania Electric Co., supra at 538-39, 607 A.2d at 797-98 (quoting Hodgen v. Summers, 382 Pa. Super. 348, 350-51, 555 A.2d 214, 215 (1989)).
We have held that tests for determining when an amended complaint presents a different cause of action, which is therefore barred, are: whether a judgment would foreclose any action on either; whether the same measure of damages supports both; whether the same defenses are available in each; and whether the same measure of proof is required.
Id. at 540, 607 A.2d at 798 (citing Hodgen v. Summers, supra). A new cause of action arises if, for example, the amendment proposes a different theory or a different kind of negligence than the one previously raised or if the operative facts supporting the claim are changed. Willett v. Evergreen Homes, Inc., 407 Pa. Super. 141, 150, 595 A.2d 164, 169 (1991) (quoting Daley v. John Wanamaker, 317 Pa. Super. 348, [359,] 464 A.2d 355, 361 (1983)); Junk v. East End Fire Dept., 262 Pa. Super. 473 EQD, 396 A.2d 1269, 1277 (1978).
By the time the trial court entered summary judgment in favor of Aetna, in the present case, on March 11, 1994, any amendment to the underlying complaints seeking to add a claim of negligent or reckless conduct would introduce a new cause of action for which the operative statute of limitations had expired. Thus, any amendments to the underlying complaints alleging negligent acts or injuries would be time-barred. Moreover, after a thorough search of Pennsylvania case law, we conclude that no precedent exists for recovery in negligence for injuries suffered as a result of the commission by a tortfeasor of the intentional torts of assault and battery. To characterize as negligence the children's physical and mental injuries alleged as a result of sexual, physical, and mental abuse would be to create a legal oxymoron as an extension of tort law we are not inclined to create. Thus, appellants' argument merits no relief.
Citing Vale Chemical Co. v. Hartford Accident and Indemnity Co., 340 Pa. Super. 510, 518, 490 A.2d 896, 900 (1985), appellants correctly contend that while an insurer's obligation to defend is fixed solely by the allegations in the underlying action, so long as the underlying action comprehends a single injury which may be within the scope of the policy, the insurer must defend the insured until the insurer is able to confine the claim to a recovery that the policy does not cover. Instantly, the underlying complaints allege sexual, physical, and mental abuse of three four-year-old females. We conclude that on their face, these complaints state no factual allegations to which appellants' insurance policy actually or potentially applies. Therefore, Aetna had no duty to defend appellants in the underlying actions, and the trial court appropriately entered summary judgment in Aetna's favor.
For the foregoing reasons, we hold that the trial court properly granted summary judgment in favor of Aetna in its action for declaratory judgment. Accordingly, we affirm.


§ 1. The notice shall apply for offshore structures as defined in section 2 of the offshoresikkerhedslovens.
(2). § 2, § 3, paragraph 1, no. 2 and 3, and paragraphs 2 and 3, section 4, paragraph 3, nr. 1 and 2, section 5, paragraph 1, no. 3 and 7 and §§ 9-11 also applies to pipelines covered by offshoresikkerhedslovens § 3, paragraph 2.
(3). The notice also applies to accommodation facilities on ships and facilities covered by the offshoresikkerhedslovens section 3, paragraph 3, and where people who work on an offshore facility, be accommodated, to the extent that it affects the health and safety of the persons accommodated.
(4). The notice also applies to the activities carried out by ships and facilities covered by the offshoresikkerhedslovens section 3 (5) (special craft), as well as on the equipment used, to the extent that the activities or equipment has an impact on safety and health conditions at the affiliated offshore structures.
1) Accident: a sudden, unexpected and harmful event that happens during work or stay in any offshore installation, and resulting in death or personal injury.
2) work-related illness: an illness that occurred after prolonged exposure at work or stay in any offshore installation.
3) ' near miss ' event: an event that could have led to an accident or an injury to the offshore installation of safety or health significance.
4) Disabled: The casualty is unable to fully carry out his usual work.
5) occupational injuries: A common term for work-related ailments and injuries caused by accidents.
6) Security liable employer: the employer has a duty to take out accident insurance for workers ' compensation insurance law.
1) Accident and any deaths, incidentally, occurred on the offshore installation.
2) ' near miss ' event, including any spills of hydrocarbons.
3) Not negligible damage to the offshoreanlæggets construction or equipment of safety or health significance.
(2). Registration must be done electronically or on paper in a way that is accessible to the Danish Energy Agency.
(3). The registration must contain sufficient information to enable the operating company responsible for the product can apply these to face the recurrence of events in accordance with paragraph 1.
(4). Offshoreanlæggets security organization must have access to the information contained in the registration in so far as they have an impact on safety and health conditions.
2) that the injured is incapacitated for 1 day or more in addition to the injury of the day.
(2). The Security responsible for providing the employer shall, at the request of the Danish Energy Agency submit supplemental information about how long the injured was disabled.
1) almost Any incident that could have led to death or accident with serious injury or danger to offshoreanlæggets integrity.
(b)) has the potential to cause a major accident, see. the definition in the Ordinance on the management of health and safety on offshore structures, etc.
3) any incident where a person has been or is likely to have been exposed to ionizing radiation for more than the permitted extent according to the rules of the dose limits for ionizing radiation, which is provided by the health protection agency, see. Ordinance on medical supervision with work with ionizing radiation on offshore installations.
4) any event which might have led to the escape of a biological agent and which could cause severe infection or illness in humans.
5) Any significant damage to the offshoreanlæggets construction or equipment of safety or health significance.
(4). Notification under paragraphs 1 and 3 shall take place as soon as possible to the DEA and in 9 days after the onset of the basic regulation. However, section 5, paragraphs 1 and 4.
(5). The operating company responsible for the product must provide offshoreanlæggets security organization access to the notification. Any injured people must also have a copy of the notification.
1) any accident under section 4 (1) (8). 1, resulting in deaths.
2) any accident under section 4 (1) (8). 2, resulting in serious personal injury.
3) Any event pursuant to section 4, paragraph 3, nr. 1, which could have led to death or serious risk to the integrity of the offshoreanlæggets.
4) Any spills of substances and materials pursuant to section 4, paragraph 3, nr. 1, which means that one or more persons iland brought for observation for poisoning.
5) Any spill of hydrocarbons under section 4, paragraph 3, nr. 2.
6) Any event pursuant to section 4, paragraph 3, nr. 3 or 4.
7) Any injury pursuant to section 4, paragraph 3, nr. 5, which means that the offshore installation or essential parts thereof are not functional.
(2). The operating company responsible for the product must, in the cases referred to in paragraph 1, the leave event rather untouched and blocked off, unless police decide otherwise, or the need to stave off an imminent or immediate danger necessitating the second.
(3). The operating company responsible for the product must, as soon as possible after the event is found, inform offshoreanlæggets security organization about the incident.
(4). The subsequent notification pursuant to section 4, paragraph 4, of the events referred to in paragraph 1 shall be accompanied by a statement of the operator company or other employers follow up on the incident, including a description of events and information about the measures as a result of the incident have been or will be taken in order to avoid repetition.
§ 6. Doctors, who through their profession finds or suspects that a person has sustained an injury or disorder or have been exposed to harmful influences in connection with work or stay on offshore structures, must report this to the Danish Energy Agency, including all diseases or deaths that can be attributed to occupational exposure to biological agents.
(2). The obligation incumbent on any doctor, review whether practicing or employed at the hospital, clinic or other institution. At hospitals and clinics, etc. is the responsibility of the notifier to the obligation, however, only the Chief Medical Officer of each Department.
(3). Notification should occur as soon as the doctor was aware of the injury, illness or impact and the putative link with work or stay in any offshore installation.
§ 7. Review obligation pursuant to section 6, paragraph 1, shall lapse when the doctor is satisfied that the person suffering the damage, impact, etc. have already been reported to the DEA.
§ 8. Review under section 6, paragraph 1, requires express consent.
§ 9. Notification pursuant to section 4, paragraph 4, and article 6, paragraph 1, must be done electronically or in paper form in a way that is accessible to the Danish Energy Agency according to its detailed instructions.
(2). The Danish Energy Agency can approve that notification occurs in electronic or paper-based form prepared by the reviewer.
§ 10. The operating company responsible for the product and other employers must provide information for the purpose of statistical calculations in connection with the liquidation of accidents or near accidents at the Danish Energy Agency upon request, including statement of number of spills of hydrocarbons, which are not covered by the review obligation pursuant to section 4, paragraph 3, nr. 2.
§ 11. Unless a higher penalty is inflicted for offshoresikkerhedsloven or other legislation, is punishable by a fine anyone who violates sections 3-5, article 6, paragraphs 1 and 3, § 8, § 9, paragraph 1, or article 10.
(2). For violation of the provisions of paragraph 1, within the framework of offshoresikkerhedslovens § 71 imposed on an employer responsibility, even though the infringement fines not attributable to the employer as the intentional or negligent. It is a condition of fine responsibility that the infringement attributable to one or more persons related to the company or the company as such. For such fine liability determined no alternative custodial penalty.
§ 12. The notice shall enter into force on the 1. July 2008 and has the effect of injuries and other incidents occurring on the commencement date or later.
Ministry of climate and energy, the 25. June 2008 Connie Hedegaard/Ib L Official notes 1) Ordinance contains provisions that implement elements of Council Directive 89/391/EEC of 12. June 1989 on the introduction of measures to encourage improvements in the safety and health of workers at work (Official Journal 1989 nr. L 183, page 1), as last amended by European Parliament and Council Directive 2007/30/EC of 20. June 2007, the official journal of the European Union 2007 (nr. L 165, page 21), parts of Council Directive 92/91/EEC of 3. November 1992 concerning the minimum requirements for improving the safety and health of workers in the mineral-extracting industries (eleventh individual Directive within the meaning of article 16 (1) of Directive 89/391/EEC) (Official Journal 1992 nr. L 348, p. 9), as amended by European Parliament and Council Directive 2007/30/EC of 20. June 2007, the official journal of the European Union 2007 (nr. L 165, p. 21), and parts of the European Parliament and of the Council Directive 2000/54/EC of 18. September 2000 on the protection of workers from the risks related to exposure to biological agents at work (seventh individual Directive within the meaning of article 16 (1) of Directive 89/391/EEC) (Official Journal of the European communities 2000 nr. L 262, p. 21).


Petitioner is a Liberian corporation which is wholly owned by Italian nationals. It operates two Liberian-registered ships which make regularly scheduled cruises between New York City and various Caribbean ports for seven months each year and annual cruises to Italy, where they undergo repairs and the crews take their leaves. The crews are nonresident aliens, mostly Italians, and they are recruited and hired in Italy, where they sign Liberian articles. Respondent union is an American labor organization formed for the primary purpose of organizing foreign seamen on foreign flag ships, and it began picketing petitioner's ships while one was docked in New York and the other anchored offshore. Petitioner sued in a New York State Court for injunctive relief, which was granted.
Held: the National Labor Relations Act is inapplicable to the maritime operations of foreign flag ships employing alien seamen, McCulloch v. Sociedad Nacional, ante, p. 372 U. S. 10, and it did not deprive the State Court of jurisdiction to grant such relief. Pp. 372 U. S. 24-28.
10 N.Y.2d 218, 176 N.E.2d 719, judgment vacated and cause remanded.
The basic issue in this case, the application of the National Labor Relations Act, as amended, 61 Stat. 136, 73 Stat. 541, 29 U.S.C. § 151 et seq., is decided this day in McCulloch v. Sociedad Nacional, ante, p. 372 U. S. 10. In view of factual differences and procedural dissimilarity from that case, however, we find it appropriate to write briefly.
The petitioner, Incres Steamship Company, Ltd., is a Liberian corporation which is wholly owned by Italian nationals. It operates two Liberian registered passenger ships, the Nassau and the Victoria, which make regularly scheduled cruises between New York City and various Caribbean ports for seven months each year. In addition, annual cruises are made to Italy, where the vessels undergo repairs and the crews take their leaves. The crews of both vessels are nonresident aliens, most of whom are Italians, and they are recruited and hired in Italy, where they sign Liberian articles.
foreign seamen on foreign flag ships. In February of 1960, it began a campaign to organize the seamen on Incres' vessels. On May 13, 1960, as part of this campaign, IMWU began picketing at the pier where the Nassau was docked. Two days later, the Victoria, while anchored offshore, was picketed by IMWU representatives in a launch. The IMWU representatives persuaded some crew members of the Nassau not to perform their duties, and longshoremen and tugboat crews were temporarily persuaded to refrain from servicing both vessels. As a result of this activity, several cruises were canceled.
On May 16, 1960, Incres brought this action for damages and injunctive relief against IMWU. On the same day, IMWU filed unfair labor practice charges against Incres, on which the National Labor Relations Board has conducted an investigation but has not rendered a decision. The Supreme Court of New York County granted a temporary and, after trial, a permanent injunction enjoining the union from picketing Incres' vessels or from encouraging crew members to refrain from working on those vessels. The Appellate Division affirmed. 11 A.D.2d 177, 202 N.Y.S.2d 692. The New York Court of Appeals, by a divided court, reversed. 10 N.Y.2d 218, 219 N.Y.S.2d 21, 176 N.E.2d 719. Applying our decision in San Diego Building Trades Council v. Garmon, 359 U. S. 236 (1959), it held that the state courts had no jurisdiction until the Board refused to act in the dispute, since it was "surely arguable" that the Board would exercise jurisdiction under the contacts theory as applied in West India Fruit & Steamship Co., 130 N.L.R.B. 343 (1961), and other Board decisions. We granted certiorari, 368 U.S. 924, and the case was argued with McCulloch v. Sociedad Nacional, supra, and its companion cases.
We held today in Sociedad Nacional that the Act does not apply to foreign registered ships employing alien seamen.
The holding and reasoning in that case are equally applicable to the maritime operations here, leading to the conclusion that the Act does not apply. It is true that our decision in Garmon, supra, as applied in Marine Engineers Beneficial Assn. v. Interlake S.S. Co., 370 U. S. 173 (1962), results in preemption of state court jurisdiction if a dispute is arguably within the jurisdiction of the Board. But, although it was arguable that the Board's jurisdiction extended to this dispute at the time of the New York Court of Appeals' decision, our decision in Sociedad Nacional clearly negates such jurisdiction now. In that case, we were immediately concerned with the Board's jurisdiction to direct an election, holding that the Act had no application to the operations of foreign flagships employing alien crews. Therefore, no different result as to Board jurisdiction follows from the fact that our immediate concern here is the picketing of a foreign flag ship by an American union. See Benz v. Compania Naviera Hidalgo, 353 U. S. 138 (1957). The Board's jurisdiction to prevent unfair labor practices, like its jurisdiction to direct elections, is based upon circumstances "affecting commerce," and we have concluded that maritime operations of foreign flag ships employing alien seamen are not in "commerce" within the meaning of § 2(6), 29 U.S.C. § 152(6).
railroad for "piggy-back" carriage, we held that state court jurisdiction was preempted by the Act. Here, of course, the IMWU's activities are directly related to Incres' employer-employee relationships, since the very purpose of those activities was the organization of alien seamen on Incres' vessels.
For the reasons stated, the judgment of the Court of Appeals is vacated, and the cause is remanded for further proceedings consistent with this opinion and that in Sociedad Nacional.


United States v. R. L. C., 503 U.S. 291 (1992).
United States v. R. L. C. (90-1577), 503 U.S. 291 (1992).
Because certain conduct of respondent R. L. C. at age 16 would have constituted the crime of involuntary manslaughter under 18 U.S.C. §§ 1112(a) and 1153 if committed by an adult, the District Court held that he had committed an act of juvenile delinquency within the meaning of the Juvenile Delinquency Act. In light of a provision of that Act requiring the length of official detention in certain circumstances to be limited to "the maximum term of imprisonment that would be authorized if the juvenile had been tried and convicted as an adult," § 5037(c)(1)(B), the court committed R. L. C. to detention for three years, the maximum sentence for involuntary manslaughter under § 1112(b). Reading § 5037(c)(1)(B) to bar a juvenile term longer than the sentence a court could impose on a similarly situated adult after applying the United States Sentencing Guidelines, and finding that the Guidelines would yield a maximum sentence of 21 months for an adult in R. L. C.'s circumstances, the Court of Appeals vacated his sentence and remanded for resentencing.
915 F. 2d 320, affirmed.
1. Plain meaning analysis does not compel adoption of the Government's construction that the word "authorized" in § 5037(c)(1)(B) must refer to the maximum term of imprisonment provided for by the statute defining the offense. At least equally consistent, and arguably more natural, is the construction that "authorized" refers to the result of applying all statutes with a required bearing on the sentencing decision, including not only those that empower the court to sentence but those that limit the legitimacy of its exercise of thatpower, including § 3553(b) which requires application of the Guidelines and caps an adult sentence at the top of the relevant Guideline range, absent circumstances warranting departure. Thus, the most that can be said from examining the text in its present form is that the Government may claim its preferred construction to be one possible resolution of statutory ambiguity. Pp. 3-5.
2. The § 5037(c)(1)(B) limitation refers to the maximum sentence that could be imposed if the juvenile were being sentenced after application of the Guidelines. Although determining the maximum permissible sentence under § 5037(c)(1)(B) will require sentencing and reviewing courts to determine an appropriate Guideline range in juvenile delinquency proceedings, it does not require plenary application of the Guidelines to juvenile delinquents. Where the statutory provision applies, a sentencing court's concern with the Guidelines goes solely to the upper limit of the proper Guideline range as setting the maximum term for which a juvenile may be committed to official detention, absent circumstances that would warrant departure under § 3553(b). Pp. 13-14.
1. The textual evolution of § 5037(c)(1)(B) and the relevant legislative history reinforce the conclusion that the section is better understood to refer to the maximum sentence permitted under § 3553(b). Whereas the predecessor of § 5037(c) spoke in terms of the "maximum term which could have been imposed on an adult" (emphasis added), the current version's reference to "the juvenile," on its face suggests a change in reference from abstract considerations to a focused inquiry into the circumstances of the particular juvenile. Although an intervening version referred to the maximum sentence "that would be authorized by section 3581(b) if the juvenile had been tried and convicted as an adult" (emphasis added), the emphasized language was quickly deleted, resulting in the present statutory text. The legislative history demonstrates that Congress intended the deletion to conform juvenile and adult maximum sentences, in that § 3581(b), which catalogs such sentences for federal offenses by reference to their relative seriousness, could in some circumstances have appeared to authorize a longer sentence for a juvenile than an adult would have received. Absent promulgation of the Guidelines, the deletion might have left the question of the "authorized" maximum to be determined by reference to the penalty provided by the statute creating the offense. However, Congress' purpose today can be achieved only by reading "authorized" to refer to the maximum sentence that may be imposed consistently with § 3553(b), which willgenerally provide a ceiling more favorable to the juvenile than that contained in the offense defining statute. It hardly seems likely that Congress adopted the current § 5037(c) without intending the recently enacted Guidelines scheme to be considered for the purpose of conforming juvenile and adult sentences. Pp. 5-12.
2. No ambiguity about the statute's intended scope survives the foregoing analysis, but, if any did, the construction yielding the shorter sentence would be chosen under the rule of lenity. That rule's application is unnecessary in this case, however, since this Court has "always reserved lenity for those situations in which a reasonable doubt persists about a statute's intended scope even after resort to `the language and structure, legislative history, and motivating policies' of the statute." Moskal v. United States, 498 U. S. ___, ___ (citation omitted). Pp. 12-13.
Justice Scalia, joined by Justice Kennedy and Justice Thomas, concluded that it is not consistent with the rule of lenity to construe a textually ambiguous penal statute against a criminal defendant on the basis of legislative history. Once it is determined that the statutory text is ambiguous, the rule requires that the more lenient interpretation prevail. In approving reliance on a statute's "motivating policies," Moskal v. United States, 498 U. S. ___, ___, seems contrary to Hughey v. United States, 495 U.S. 411, 422. And insofar as Moskal requires consideration of legislative history at all, it compromises the purposes of the lenity rule: to assure that criminal statutes provide fair warning of what conduct is rendered illegal, see, e. g., McBoyle v. United States, 283 U.S. 25, 27, and to assure that society, through its representatives, has genuinely called for the punishment to be meted out, see e. g., United States v. Bass, 404 U.S. 336, 348. While the Court has considered legislative history in construing criminal statutes before, it appears that only one case, Dixson v. United States, 465 U.S. 482, has relied on legislative history to "clarify" an ambiguous statute against a criminal defendant's interest. Dixson does not discuss the implications of its decision, and both of the cases it cites in supposed support of its holding found the statute at hand not to be facially ambiguous. Pp. 1-4.
Justice Thomas agreed with Justice Scalia that the use of legislative history to construe an otherwise ambiguous penal statute against a criminal defendant is difficult to reconcile with the rule of lenity. The rule operates, however, only if ambiguity remains even after a court has applied established principles of construction to the statutory text. See, e. g., Chapman v. United States, 500 U. S. ___, ___. Although knowledge of these principles is imputed to the citizenry, there appears scant justification for also requiring knowledge of extra legal materials such as legislative history. Pp. 1-2.
Souter, J., announced the judgment of the Court and delivered the opinion of the Court with respect to Parts I, II-A, and III, in which Rehnquist, C. J., and White, Stevens, Scalia, Kennedy, and Thomas, JJ., joined, and an opinion with respect to Parts II-B and II-C, in which Rehnquist, C. J., and White and Stevens, JJ., joined. Scalia, J., filed an opinion concurring in part and concurring in the judgment, in which Kennedy and Thomas, JJ., joined. Thomas, J., filed an opinion concurring in part and concurring in the judgment. O'Connor, J., filed a dissenting opinion, in which Blackmun, J., joined.


Many courts read Texas Civil Practice & Remedies Code § 41.003 as permitting an award of exemplary damages for "fraudulent fraud." In other words, when the jury finds that the defendant committed fraud, a second finding of the same fraud, this time by clear and convincing evidence, authorizes recovery of exemplary damages. But when the defendant's wrongful act that caused the plaintiff's damages is fraud, can that same fraud properly be considered as an aggravating circumstance justifying exemplary damages?
The answer, of course, is "no." Section 41.003's limitation on exemplary damages requires a finding that the defendant's wrongful conduct was accompanied by aggravating circumstances. Section 41.003(a) embodies this common law rule, stated in numerous cases decided before Chapter 41 was enacted: "Exemplary damages are recoverable if the injury complained of results from a wrong accompanied by aggravating circumstances of malice, fraud, or gross negligence." The presence of a wrong accompanied by "aggravating circumstances" has been the basis for punitive damages in Texas since at least 1888.
"Aggravating circumstances" generally means that, in addition to engaging in wrongful behavior, the defendant also had an illicit motive, desiring to harm or revenge himself upon the plaintiff. Thus, in 1990, the Fourteenth Court of Appeals explained that a defendant's "profit-motivated business interests," though "self-serving," will not amount to "ill-will, spite, evil malice" or other "aggravating circumstances."
To establish an aggravating circumstance, the plaintiff must prove something more—that the defendant committed the fraud with malice. The Texas Supreme Court said as much back in the 1966 case of Dennis v. Dial Finance & Thrift Co., explaining that exemplary damages are available for fraud "intentionally committed for the purpose of injuring [the plaintiff]." That is the precise definition of malice in Chapter 41. According to §41.007(7), "'Malice' means a specific intent by the defendant to cause substantial injury or harm to the claimant."
The Texas Supreme Court reinforced this requirement in 2012 in Safeshred. v. Martinez, reiterating that an aggravating circumstance must be something separate from, and in addition to, the underlying wrongful act: "when a tort requires willful harm as a necessary element of liability, that willfulness alone cannot justify a punitive damages award." In Safeshred, the court was addressing a Sabine Pilot claim. The court explained that in Sabine Pilot claims, punitive damages could not be based on the employer's intent to fire the employee because that intent was a necessary element of liability. To justify punitive damages, a Sabine Pilot plaintiff must prove something more such as "interference with the employee's future employment, harassment, or terminating his employment knowing the reason for doing so is unlawful."
So, obviously, when the wrongful conduct is fraud, the same fraud cannot be an aggravating circumstance. Fraud can be an aggravating factor for other wrongful conduct, such as conversion or breach of fiduciary duties. But if the underlying wrongful act is itself fraud, then fraud cannot be an aggravating circumstance. The plaintiff must prove the fraud was committed with malice. Requiring malice is consistent with the common law that §41.003 embodies, and absent a clear intent to change it, the statute must be construed in harmony with the common law.
Numerous other jurisdictions agree that "fraudulent fraud" will not support an award of exemplary damages. In Pennsylvania, for example, "when fraud is the basis of compensatory damages, the same fraudulent conduct is not sufficient to base an award of punitive damages without more." In Iowa, punitive damages may be awarded in a fraud case "when, in conjunction with the fraud, the defendant acts with legal malice or engages in other aggravating conduct amounting to actual malice." And in Ohio, if the underlying tort is fraud, to recover punitive damages the plaintiff must prove the fraud was committed maliciously. Courts in the District of Columbia, Illinois, Indiana, Kentucky, Michigan, Mississippi, New York, Oklahoma, Oregon, and Rhode Island have all reached the same conclusion.
Permitting recovery of exemplary damages for "fraudulent fraud" does not foster §41.003's purpose. When a jury has found fraud under the preponderance-of-the-evidence standard, another question asking whether the defendant committed the same fraud—this time by clear-and-convincing evidence—does not impose a meaningful threshold for imposing punitive damages. It is akin to asking, "Did you really mean to find fraud?" Of course the jury will say "yes." The jury always says yes. It is time for the courts to start setting a meaningful threshold for imposing punitive damages in fraud cases by requiring the jury to find malice.
Reprinted with permission from the May 25, 2015 edition of Texas Lawyer. © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.


In a rare reversal by the Trademark Trial and Appeal Board (the “Board” or the “TTAB”), it was determined that there was no confusion among the marks NABOSO (English translation barefoot) and BAREFOOT for overlapping goods. See In re Naboso Technology, LLC, Serial No. 87236262 (February 27, 2019) [not precedential], where the applicant filed a trademark application for the foreign term NABOSO, a Czech word that translates to barefoot in English. The applicant’s goods included orthotics, yoga mats, and rubber flooring while the Registrant owned four marks, two for BAREFOOT in standard characters, and two for BAREFOOT Composite marks for orthotics, for rubber floor mats, and yoga accessories including yoga exercise mats. This case although not a precedent of the TTAB is a good case to cite if the applicant is faced with the Doctrine of Foreign Equivalents in a 2(d) refusal. Based on In re Naboso Technology, LLC, the applicant should argue that the Examining Attorney or Board must weigh all the relevant du Pont factors in a confusion analysis, in particular all the elements of mark similarity, including appearance, sound and commercial impression against the similarity of meaning before rendering a decision.
The Board reminds us that the most important inquiry in a likelihood of confusion analysis is the cumulative effect of the similarities or the differences in the marks and the goods. Federated Foods, Inc. v. Fort Howard Paper Co., 544 F.2d 1098, 192 USPQ 24 (CCPA 1976).The applicant in this matter does not dispute that the goods are related. In fact, with the exception of applicant’s flooring the goods were identical to the registrant’s products. Therefore, the Board presumed that the channels of trademark and relevant consumers were the same. Both of these du Pont factors favored finding a likelihood of confusion.
Next the Board examined the similarities of the marks. The strength of a trademark is determined by both its inherent distinctiveness (conceptual strength) and its marketplace strength. To ascertain the conceptual strength, one must determine where the mark lies on the continuum, frequently referred to as the spectrum of distinctiveness. To learn more about determining the strength of a trademark, see the firm web page entitled, The Importance Of Selecting A Distinctive And Inventive Trademark. Both marketplace strength and inherent distinctiveness are reviewed under the du Pont factor known as the number and nature of similar marks in use on similar goods. It is important to keep in mind that the relevance of third party marks depends on whether or not the marks are in use in commerce. Palm Bay Imps., Inc. v. Veuve Clicquot Ponsardin Maison Fondee en 1772, 396 F.3d 1369, 73 UsPQ2d 1689 (Fed. Cir. 2005).
As a trademark practitioner, I hope this decision issued by the Trademark Trial and Appeal Board (the “Board” or “TTAB”) is an indication that the Board will be tougher on inconsistent examination by Examining Attorneys at the USPTO. See In re The Random Acts of Kindness Foundation, Serial Nos. 87245967, 87245971, 87245973, and 87245975 (February 15, 2018) [not precedential], where the Board reversed four refusals for various goods and services which encouraged the performance of certain acts of kindness for others. The Applicant filed four applications based on use in commerce for the mark RANDOM ACTS OF KINDNESS. Each application was refused for failing to function as a trademark or service mark under the Trademark Act because the wording “RANDOM ACTS OF KINDNESS” is informational and a widely used phrase. The Examining Attorney determined that the slogan is incapable of indicating one source of goods or services.
Terms and expressions that merely convey information will not be allowed to register as trademarks. There has been a long line of cases that refuse common slogans even when the slogan is applied in a source-identifying manner. For example, the following slogans were refused on this basis, DRIVE SAFELY, ONCE A MARINE ALWAYS A MARINE, and THINK GREEN. The key question is how will the public or relevant consumer base perceive the proposed mark. A mark has to indicate a single source for goods or services. The Examining Attorney introduces numerous articles, titles of books, and excerpts from websites demonstrating the common use of the phrase, “RANDOM ACTS OF KINDNESS”. Even though there was some minimal stylization in the mark, there was not enough according to the Examining Attorney to produce an independent commercial impression separate from the literal wording itself.
The underlying basis for refusal asserted by the Examining Attorney, failing to function as a trademark is a frequently asserted ground for refusal. To review other common grounds for application refusal, see our web page entitled, Common Grounds For Refusal Of A Trademark. The applicant argued that it had multiple other trademarks for the term “RANDOM ACTS OF KINDNESS” and variations thereof registered on the Principal Register for various goods and services. In rebuttable the Examining Attorney relied on In re Nett Designs, Inc., 236 F.3d 1339, 57 USPQ2d 1564 (Fed. Cir. 2001), for the principle that each case must be decided on its own facts, and the Board is not bound by prior decisions that contain different records. The Examining Attorney also cited In re Cordua Rests., Inc., 118 USPQ2d at 1635, for the proposition that the Trademark Office must review each application to determine if it is in compliance with all the rules, even if the USPTO mistakenly registered a similar or identical mark that possessed the same deficiency.
Applicant was seeking to register the mark HONEYHOLE SANDWICHES in standard characters with a disclaimer on “sandwiches” for “restaurant with bar specializing in serving proprietary unique sandwiches, local beers, and alcohol in a vibrant eclectic environment”. The Examining Attorney refused the application due to a likelihood of confusion with the registered mark HONEYHOLE for alcoholic beverages except beer. The applicant appealed the refusal, the Board affirmed and required a “something more” showing to prove relatedness between restaurant services and alcoholic beverages. See In re Honeyhole Sandwiches Inc., Serial No. 87138294 (May 22, 2018) [not precedential].
When considering the similarities of the marks, the Board found them very similar in sight, sound, connotation, and commercial impression. This factor weighs in favor of confusion. There was no evidence of record to show the mark was commercially weak, therefore the sixth du Pont factor (the number and nature of similar marks on similar goods) also weighs in favor of confusion. Next the Board considered if the goods and services were commercially related. This evaluation must be based on the identifications in the application and registration. The Board noted that the “something more standard” cited by the Federal Circuit court had to be kept in mind. For more information on the “something more” rule imposed by the Federal Circuit, see our blog posts entitled, The Origin of the Something More Standard In Trademark Law, and The Federal Circuit Expands The Application Of Its Something More Standard. It has long been held that when analyzing one party’s services for providing food, i.e. a restaurant, and another party’s food and/or drink products, the fact that a restaurant may offer particular food or beverages doesn’t mean the parties’ goods and services are related.
Evidence must be produced that demonstrates something in addition to either similar or identical marks used for restaurant services and another’s food or beverage product. See In re Coors Beers Brewing Company, 343 F.3d 1340, 68 USPQ2d 1059 Fed. Cir. (2003), where there was no showing of “something more” sufficient to justify a relatedness between beer and restaurant services. Often, “something more” will be found if the restaurant specializes in the other party’s food or beverages. Moreover, if the Board finds that the mark is strong and of an arbitrary nature, this will be a factor weighing in favor of finding “something more”. In the case at bar, the mark HONEYHOLE was found to be commercially strong for alcoholic beverages. Moreover, the applicant’ identification states it serves alcohol and its menu demonstrates use of the mark HONEYHOLE for cocktails.
Can A Design Feature Be The Dominant Aspect Of A Mark?
In a recent case, The Trademark Trial and Appeal Board (the “Board” or “TTAB”) reversed a 2(d) refusal finding the applicant’s mark which contained words plus a design not to be similar enough to the registrant’s mark to cause a likelihood of confusion. See In re Primeway International LLC, Serial No. 87059786 (January 9, 2019) [not precedential], where the applicant was seeking to register the mark INCOGNITO for footwear. The Examining Attorney determined that it caused a likelihood of confusion with the registrant’s mark STS INCOGNITO & Wolf Design for hats, hooded sweatshirts, jackets, shirts and t-shirts. In reversing the Examining Attorney, the Board pointed to several cases where a word mark and a word plus design mark were held not confusable because the design feature was the most visually prominent aspect of the mark. For more on design marks, see our web page entitled, Design Trademarks And How They Are Treated By Examining Attorneys.
The general rule is that when considering a mark that includes both words plus a design, the words are generally given greater weight because the words are more likely to be remembered by the consumer, and used to request or reference the goods or services. See In re Viterra, 671 F3d 1358, 101 USPQ2d 1905, 1911 (Fed. Cir. 2012). However, there is an exception to this rule and, in appropriate cases you should give greater weight to a prominent design feature. See Jack Wolfskin Ausrustung Fur Draussen GmbH & Co. KDAA v. Millennium Sports, S.L.U., 797 F.3d 1363, 116 USPQ2d 1129, 1135 (Fed. Cir. 2015). In other words, you can accord more weight to a more distinctive element in a mark. In the case at bar, applicant’s mark features a wolf in sheep’s clothing with an arm extended out against large letters “STS”. Underneath the large wolf design in small letters is the word “incognito”. The Board held that the most prominent feature of the mark was the wolf design and the letters STS and not the shared term “incognito”.
The Board relied on several cases where the design aspect of the mark was viewed as the dominant feature of the mark. See a precedential case decided in 2014, In re Covalinski, 113 USPQ2d 1166 (TTAB 2014) [precedential], where the Board held that the goods for both marks were legally identical. The applicant applied to register the mark REDNECK RACEGIRL & Design, for athletic apparel, and the mark was initially refused by the Examining Attorney for causing a likelihood of confusion with the mark RACEGIRL for various clothing items. The refusal by the Examiner was grounded on the general rule mentioned above, but in that case, the exception to the rule should have applied. The Board reversed the refusal, finding that the first du Pont factor was determinative as the design of the mark was visually dominant, and rendered the term “Racegirl” difficult to read, while emphasizing the RR letters.
In this matter, petitioner is seeking to cancel respondent’s trademark registration, FIREBRAND for a newsletter featuring brand and product development pursuant to Section 14(3) of the Trademark Act. See Lewis Silkin LLP v. Firebrand LLC, 129 USPQ2d 1015 (TTAB 2018) [precedential]. Petitioner alleges that respondent abandoned the mark. Respondent filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). To withstand a motion to dismiss, the petitioner must allege facts, which if proven would establish that petitioner is entitled to the relief sought. Here, the petitioner needed to show standing to bring the proceeding, and a valid statutory ground to cancel the registration.
The Federal Rules of Civil Procedure apply to Trademark Trial and Appeal Board (“TTAB”) proceedings. The rules require a short and plain statement of the claim showing that the pleader is entitled to relief. The Board follows the Iqbal/Twomblystandard, stating a claim for relief that is plausible on its face. There is no requirement that the Petitioner prove its case at the pleading stage. The Board has applied this standard in three cases, and in all three cases has concluded that no more is required other than pleading nonuse of the trademark, in conjunction with an intent not to resume use.
To further understand this issue one must understand use in commerce as a prerequisite to acquiring trademark registration. There must be commercial use of the type common to a particular industry. This would include test markets, infrequent sales of expensive goods or shipments of a new drug to a clinical investigator while waiting FDA approval. Under trademark law, abandonment is when use is discontinued with intent not to resume use. Intent not to resume may be inferred from circumstances. See also, our blog post entitled, How Do You Prove Abandonment Of A Trademark, for more information on this topic. The burden will initially rest with the petitioner to prove a prima facie showing of abandonment. Then the burden shifts to the trademark owner to show the mark was used in commerce or that the owner intended to resume use in the foreseeable future.
The US Court of Appeals for the Federal Circuit (the “CAFC”) affirmed the Trademark Trial and Appeal Board’s (the “Board”) decision refusing to register the marks CORN THINS and RICE THINS for snack foods, and vacated the Board’s decision dismissing a claim that these same marks were generic. See Real Foods Pty Ltd. v. Frito-Lay North Am., Inc., Case Nos. 17-1959-2009 (Fed. Cir. Oct. 4, 2018). The Board not only held that the marks CORN THINS and RICE THINS were merely descriptive, but that the marks also failed to acquire distinctiveness. See also the matter finding PRETZEL CRISPS to be generic for pretzel crackers. It is time for the snack industry to pay attention to the past, and consider adopting inherently distinctive marks.
The evidence showed the sales figures were not high, and a relatively small amount of funds were spent on advertising and marketing. Frito-Lay opposed the marks CORN THINS and RICE THINS, arguing that the marks should either be held generic or merely descriptive without a finding of secondary meaning (acquired distinctiveness). As part of the evidence submitted into the record, Frito-Lay produced a survey showing only ten percent of consumers associated the marks with a particular source. The CAFC determined that CORN THINS and RICE THINS were not only merely descriptive of snack foods, but in fact the marks were highly descriptive. In certain cases, five years of substantial and continuous use can allow a mark to acquire distinctiveness when the mark is not inherently distinctive, but this is not the case where the mark is found to be highly descriptive of the goods. The Court stated that an applicant’s burden increases when the mark is highly descriptive. In other words, a more descriptive mark requires more evidence of secondary meaning.
Real Foods argued that the marks were suggestive. Suggestive marks are inherently distinctive trademarks requiring imagination, thought and perception to determine the nature of the goods. Real Foods was hoping for a reversal of the descriptiveness finding, as was made in In re Panasonic Avionics Corp., Serial No. 86499954 (January 5, 2017) [not precedential]. The snack company attempted to convince the CAFC that there was a double entendre associated with the marks. Real Foods argued that the marks CORN THINS and RICE THINS not only conveyed that the snack food was of a physically thin nature, but it was a diet friendly and low calorie snack. The evidence below explains why this argument failed.
In a recent case decided by the Trademark Trial and Appeal Board (the “Board” or the “TTAB”), the applicant argued that its proposed mark, ATHLETE INTELLIGENCE was suggestive of the goods requiring the consumer to use a multistep reasoning process. See In re i1 Sensortech, Inc., Serial No. 87249539 (November 9, 2018), where the Board determined that the mark ATHLETE INTELLIGENCE in standard characters for a monitoring device worn by a person to measure the effects of physical impacts, biometric data, physiological data etc., was merely descriptive of the identified goods, and not suggestive. The refusal to register was thus affirmed on appeal. Descriptiveness is a ground often cited for refusal by Examining Attorneys, to view other common grounds asserted by the USPTO for refusing registration see the firm’s web page entitled, Common Grounds For Refusal Of A Trademark.
There were a couple of interesting evidentiary issues to address in this appeal. In its reply brief, the applicant requested that the Board take judicial notice of its registration that was issued by the European Union Intellectual Property Office for the same mark and the identical goods. The Board pointed out that it has a practice of not taking judicial notice of third party registrations. This is done to encourage applicants to raise these matters during prosecution where it can be more readily resolved, and to avoid unnecessary appeals. The Board referred to the Trademark Trial and Appeal Board Manual of Procedure §1208.04, and denied the request for judicial notice.
The Examining Attorney also objected to the applicant submitting hyperlinks to news articles in its reply brief. The Examiner stated that this evidence should have been submitted in the prosecution’s record, and applicant could not at this late date bolster and expand the record with hyperlinks to additional evidence. The Board agreed, and did not consider the news articles. Also, merely providing hyperlinks is not an acceptable method for making the information or “linked material” part of the record.
Can A Trademark Applicant Assign An Intent-To-Use Application?
[N]o application to register a mark under section 1051(b) of this title shall be assignable prior to the filing of an amendment under section 1051(c) of this title to bring the application into conformity with section 1051(a) of this title or the filing of the verified statement of use under section 1051(d) of this title, except for an assignment to a successor to the business of the applicant, or portion thereof, to which the mark pertains, if that business is ongoing and existing.
The policy behind the statute is to ban assignments of intent-to-use applications (prior to the filing of an Allegation of Use or Statement of Use), unless the application is assigned with the business associated with the mark. Assuming there is an ongoing and existing business, the assignee of the intent-to-use trademark application, must purchase the whole business (assets, business location if one exists, employees etc.) affiliated with the mark. If the assignment is held to be invalid, it will void the underlying application or registration under §10 of the Trademark Act. See Clorox Co. v. Chem. Bank, 40 USPQ2d 1098 (TTAB 1996).
The following factors will be considered when determining if the assignee is a successor to the business of the applicant, was there a transfer of the business and the good will of the trademark, is there continuity of management, is the assignee producing products or rendering services similar to the applicant, has there been a transfer of assets, and are there documents supporting these facts. The fact finder will look to determine if the assignment was part of a larger transaction between the applicant and the assignee. In the matter of Central Garden & Pet Company v. Doskocil Manufacturing Company, Inc., 108 USPQ2d 1134 (TTAB 2013) [precedential], this was part of the problem. An assignment was recorded with the Assignment Division of the United States Patent & Trademark Office (“USPTO”), but the assignment constituted the entire agreement between the parties, and was not part of a more significant transaction. In this case, the assignee was not the successor to the business of the applicant. In fact, the Assignor continued in the same business after the transfer, including producing and selling the same products branded with the mark that was the subject of the assignment.
In a recently issued Trademark Trial and Appeal Board (“TTAB” or the “Board”) decision, we are reminded that using a geographically descriptive term in a trademark may risk a refusal by the Examining Attorney and the Board could affirm the refusal. See In re National Association of Veterinary Technicians in America, Inc., Serial No. 87228944 (September 14, 2018) [not precedential], where the applicant in an effort to reverse the Examining Attorney’s refusal put forth several losing arguments to the Board. A mark is merely descriptive under Section 2(e)(2) of the Trademark Act, 15 U.S.C. §1052(e)(2) when it immediately conveys information concerning a feature, purpose, function, characteristic, quality or ingredient of the goods or services. In re Engineering Systems Corp., 2 USPQ2d 1075 (TTAB 1986). The test is once a consumer knows what the product or service is, will the trademark convey information about the goods or services. A mark will also be considered merely descriptive if it describes the types of consumers or the uses of the goods or services.
(3) the public would make an association between the goods or services and the place named in the mark by believing that the goods or services originate in that place.
A public association will be presumed if there is no dispute about the geographic significance being the primary significance and the goods or services originate from the geographic place named in the mark, and if the geographic location is neither obscure nor remote. To learn more about descriptive marks, see our web page entitled, Trademark Application Refusal Based On Descriptiveness or Deceptiveness. The test for geographically misdescriptive marks is similar to the test above. The primary significance of the mark must be a known geographic location, the goods or services do not originate from the place named in the mark, but purchasers are likely to believe they would, and this fact is a material consideration when deciding to buy the goods or services. See the Trademark Manual of Examining Procedure Section 1210.01(b).
The applicant in this matter, American Cruise Lines, Inc. is seeking registration of the mark, AMERICAN CONSTELLATION (standard characters) for cruise ship services, transportation of passengers by ship and conducting cruises for others. The Examining Attorney refused the application based on a likelihood of confusion with the registrant’s marks, CONSTELLATION and CELEBRITY CONSTELLATION, both in standard characters for the same cruise ship services. The Examining Attorney requested that the word “American” be disclaimed, but applicant submitted evidence that it had acquired distinctiveness. The claim of distinctiveness was based on use in commerce with four U.S. registrations using the term “American” for cruise ship services. The Examiner accepted the evidence. The applicant voluntarily disclaimed the right to use the term “Constellation”. After refusing the application, the Examining Attorney denied applicant’s request for reconsideration, and the applicant appealed to the Trademark Trial and Appeal Board (the “Board” or the “TTAB”). See In re American Cruise LInes, Inc., 128 USPQ2d 1157 (TTAB 2018) [precedential].
The Examining Attorney as part of its review considered two consent agreements (agreeing to use and registration of the mark AMERICAN CONSTELLATION) submitted by the applicant. Consent agreements are relevant under the du Pont factors. It bears on the market interface between an applicant and a registrant. See our webpage entitled, Resolving Trademark Disputes Without Litigation, for general information on consent agreements, and other means used to resolve these types of disputes.
Typically, the Board addresses the other relevant du Pont factors first, then determines the importance of the consent agreement. Regarding services, those are identical in this matter so there is a presumption that trade channels and classes of consumers are the same, weighing in favor of confusion. Regarding conditions of purchase, applicant submitted affidavit evidence that purchasers of its services exercised a heightened degree of care when purchasing cruise ship services. Affidavit evidence is to be considered probative in nature in an ex parte proceeding, if the affidavit refers to matters known or observed by the affiant.
Regarding similarities between the marks, the marks share the common term, Constellation. This is an arbitrary word used in conjunction with cruise ship services, and will be given broad protection. There is no per se rule that calls for a finding of confusion when a junior user’s mark incorporates the entire mark of the senior user, but certainly this increases the likelihood of confusion. The Board determined the marks were very similar in sound, connotation, appearance and commercial impression.


Copyright law can have a direct impact on the availability and pricing of the products we purchase. This is true in many ways, one of which was recently addressed by the United States Supreme Court in Costco v. Omega, a case involving Costco’s sale of gray-market watches.
In Costco, the court had the opportunity to address a persistent conundrum involving the “first sale doctrine” and answer the question: May a distributor — without the authorization, and even against the will of the copyright owner — resell copyrighted products in the U.S. that were made abroad, intended only for sale abroad, and purchased abroad? The justices’ 4-4 tie left the question unanswered, to the disappointment of the many people watching the Court and hoping for a definitive resolution.
It is well established that the purchaser of a copyrighted work made within the U.S. may resell or otherwise transfer it to another party without violating the copyright owner’s rights. The first sale doctrine, codified in the Copyright Act at 17 U.S.C. § 109, explicitly permits this further distribution after an authorized first sale of a “lawfully made” work, and “exhausts” the copyright owner’s exclusive right of distribution.
Only the distribution right may be exhausted, not the other exclusive rights of the copyright owner (e.g., the right to copy, the right to make derivative works). Thus, if you buy a copyrighted book, you may resell the book or give it as a gift to someone else, but you may not make additional copies of it to distribute.
For many years, and especially since the Supreme Court’s 1998 decision in Quality King Distributors, Inc. v. L’Anza Research International, Inc., copyright scholars have debated the legality of importing into the U.S. for distribution copyrighted goods which were made abroad and intended only to be sold abroad (so called “gray market goods”). The question turns largely on what constitutes a “lawfully made” item in this context.
In Costco v. Omega, Omega sued over Costco’s sale in the U.S. of authentic Omega watches which were unauthorized gray market goods. Costco had obtained the watches from a third party which had purchased them from authorized Omega distributors overseas. On the back of the watches was a symbol that Omega had registered with the U.S. Copyright Office, enabling Omega to assert a claim under the Copyright Act.
According to Omega, Costco had threatened to sell “indirect merchandise” if Omega did not agree to Costco’s terms for carrying Omega watches in its stores. After failing to reach agreement, Costco proceeded to acquire the watches from sources outside the U.S. even though it knew that Omega did not authorize the imports.
The trial court initially barred Costco from selling the watches. Later, the judge withdrew the injunction, accepting Costco’s argument that the first sale doctrine prevented Omega’s copyright infringement claim.
Because the goods involved in Costco v. Omega were made overseas, the Ninth Circuit held that the first sale doctrine did not apply to bar Omega’s infringement claims, and remanded the case to the district court.
In Quality King, the Supreme Court had determined that products made in the United States and sold abroad but subsequently re-imported into the United States without the copyright owner’s consent would be covered by the “first sale doctrine” and thus would preclude a copyright claim. In Quality King, the Supreme Court did not address whether the first sale bar would also apply to works made abroad. However, Justice Ginsburg’s concurrence hints that the first sale bar would apply only to goods made within the U.S.
The Ninth Circuit expressed concern that applying the first sale doctrine “to foreign-made copies would violate the presumption against the extraterritorial application of U.S. law.” That is, U.S. law is presumed to apply only to conduct occurring within or having effect within the United States unless explicitly provided otherwise by statute.
Copyright scholars had hoped that Costco v. Omega would answer the question long left open by Quality King. Unfortunately, the newest justice, Elena Kagan, could not participate in the decision because of her earlier involvement in the case as U.S. Solicitor General. Without a ninth justice to break the tie, the Supreme Court was deadlocked.
As a result, the Ninth Circuit’s decision–that the first sale doctrine does not bar an infringement claim for foreign-bought items resold in the U.S.–stands intact, but the ruling has no precedential effect outside the Ninth Circuit. Thus, courts in other circuits may reach differing conclusions, and in those circuits, the question remains an open one. Should a similar case reach the Supreme Court in its current composition, Justice Kagan’s vote will likely be the tiebreaking vote.
In the meantime, companies concerned about the sale of gray market goods in the U.S. will want to find ways to affix copyrighted works onto their goods as a way to stop the importation of products that were made abroad for foreign sale only, in the hopes that the Ninth’s Circuit’s rule will be adopted elsewhere and ultimately affirmed by a majority of the Supreme Court.
Because under U.S. trademark law, where the goods are authorized for sale abroad and legitimately bear the company’s trademarks, companies are generally unable to pursue claims for trademark infringement. Accordingly, seeking protection under the copyright laws has now become a favored alternative for such companies.
Critics of the Ninth Circuit’s decision fear that it encourages international price discrimination whereby brand owners can charge different prices for the same goods in different markets without competition from third party importers. Retailers believe that they should be allowed to import as they see fit any legitimate, non-pirated items that had already been sold once at a price of the copyright owner’s choosing.
Now, however, if the Ninth Circuit decision gains wide acceptance, the implications could extend beyond the importation of large quantities of gray market goods. In fact, individual resellers and libraries might face the burden of having to research the origins of every copyrighted article that they own before selling it or lending it out.
Critics also argue that from an economic perspective, the court’s opinion may create perverse incentives for companies to move their manufacturing facilities abroad in order to avoid application of the first sale doctrine and retain control over the downstream distribution of all sold items.
Such opponents may seek to promote these policy questions before Congress rather than leave the issue to the courts.