HNRK Coverage Corner

On May 15, 2024, the Eighth Circuit issued a decision in Dexon Computer, Inc. v. Travelers Property Casualty Company of America, Case No. 23–1328, interpreting what the district court aptly described as a “nebulous concept”—the “related acts” provision in a claims made liability policy.

As we have explained in a previous post on this topic, claims made policies generally cover claims made against the insured during the policy period, even though the underlying conduct may have occurred during an earlier period.  But sometimes, a lawsuit filed during the policy period may be deemed to have occurred before the inception of coverage.  This is because the related claims provision (a standard policy term) groups together claims arising from the same underlying conduct and deems all such claims to have been made at the time of the earliest such related claim.  Sometimes, the effect of such a provision benefits the insured (if, for example, an earlier policy has a higher limit or more favorable coverage terms), and other times, it may benefit the insurer (if, as was the case in Dexon Computer, the policy limits coverage to wrongful acts committed on or after a “retroactive date”).

Dexon, a reseller of computer networking products, was sued by Cisco in the Northern District of California for federal trademark infringement and counterfeiting. “The complaint alleged trademark infringements between 2006 and 2010 that were the basis of a previous lawsuit dismissed with prejudice in 2011, and then alleged some thirty-five acts of infringement between 2015 and 2020.”  Dexon tendered the defense of the Cisco lawsuit to its liability insurer (Travelers) under a claims made policy covering the period May 18, 2020 to May 18, 2021. 

It was undisputed that some of the alleged infringing acts recited in Cisco’s complaint took place during the policy period.  Further, because the policy provided a duty to defend, “if any part of a cause of action is arguably within the scope of coverage, the insurer must defend.”  Prahm v. Rupp Const. Co., 277 N.W.2d 389, 390 (Minn. 1979).  The Policy limited coverage to wrongful acts committed on or after a “retroactive date” (May 18, 2019) and before the end of the policy period.  Further, each wrongful act in a series of “related” acts is deemed to have been committed on the date of the first act in the series.  The policy broadly defined “related” to mean “connected, tied or linked by any fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events transactions or causes.”

Travelers denied coverage, contending that Cisco had alleged a “unified, continuous trafficking scheme spanning more than 15 years,” and therefore, “Cisco’s allegations confirm that Dexon’s infringing acts before and after the Policy’s May 18, 2019 retroactive date are ‘connected, tied or linked’ by . . . a series of facts and transactions [that] . . . are deemed to have occurred prior to the retroactive date, foreclosing coverage.” 

The district court rejected this argument and the Eighth Circuit affirmed, observing that “the alleged acts of infringement occurred at different times, involved different customers who were sold different products sourced from different suppliers, and that Dexon had received no prior claims involving products sourced from any of these suppliers.”  Therefore, the court concluded, “we cannot say, as a matter of law, that every act of infringement committed after the Retroactive Date is related to a pre-Retroactive Date act of infringement.”  Although Cisco had alleged a unified “scheme” (in a bid for “significantly enhanced Lanham Act remedies” available against a “serial trademark infringer”), this did not change the result:  “[I]f Cisco could not prove that theory, is there any doubt that it would then seek to recover damages an injunctive relief for each transaction that it proved was a sale of a ‘counterfeit Cisco product?”     

The concept of “related acts” is indeed “nebulous.”  The confusion stems from the seemingly broad sweep of the definition of “related.”  The definition at issue in Dexton Computer—“connected, tied or linked by any fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events, transactions or causes”—can’t quite mean what it appears to say, or else every claim would qualify as “related.”  Indeed, the parties apparently agreed that the definition “‘cannot be applied literally’ because ‘every claim that any litigant has ever made against Dexon is ‘linked’ by the ‘fact’ that the claims were made against Dexon.’”  Other courts have similarly acknowledged that a literal application of a broad “related claims” provision is unworkable.  See, e.g., American Medical Sec., Inc. v. Executive Risk Specialty Ins. Co., 393 F. Supp. 2d 693, 703 (E.D. Wis. 2005) (rejecting a “literal reading” of related claims exclusion because it would have the absurd effect of eliminating “coverage for any and all claims if [the insured] was involved in any judicial, administrative or regulatory proceeding prior to the inception date of the policy since any such proceeding would at least ‘involve’ the ‘fact’ that [the insured] sold insurance”); Southridge Capital Mgmt. v. Twin City Fire Ins. Co., 2006 WL 2730312, at *9 (Conn. Super. Ct. Sept. 8, 2006) (“The courts recognize that some degree of relatedness is going to exist among almost any claims brought against an insured . . . and clearly there clearly have to be boundaries of some sort.”); Hrobuchak v. Fed. Ins. Co., 2010 WL 4237435, at *4 (M.D. Pa. Oct. 21, 2010) (rejecting broad interpretation of “relatedness” that would have rendered the policy of nullity because “any suit brought against [the insured] would almost by definition involve their core business model”). 

The Delaware Courts have responded to this conundrum by requiring “meaningful linkage” that goes beyond common “background facts.”  Immunomedics, Inc. v. Hudson Ins. Co., 2024 WL 1235407, at *13 (Del. Super. Ct. Mar. 18, 2024) (claims not related despite “the running theme of Immunomedics’ general mismanagement of the commercialization of [its product].”).  Other courts have rejected attempts to link separate claims based on allegations of a common scheme.  See, e.g., Alvarez v. XL Specialty Ins. Co., 202 A.D.3d 566, 567 (1st Dep’t 2022) (“The allegations in the underlying complaint, that all three transactions were part of a larger scheme to strip Sears of its valuable assets, was insufficient to enmesh otherwise distinct claims.”); Argent Fin. Group v. Fidelity & Deposit Co. of Md., 2005 WL 2304515, at *8 (W.D. La. Sept. 21, 2005) (allegation of “a common scheme to defraud or harm” was irrelevant and did not demonstrate that multiple claims were “related”); Home Ins. Co. of Ill. (N.H.) v. Spectrum Information Techs., 930 F. Supp. 825, 851 (E.D.N.Y. 1996) (“bald allegations” of a common “conspiracy are insufficient to enmesh otherwise distinct claims”).