Costco purchased shampoo bearing the trademark “TIGI” from its supplier, K&M Industries. Tigi USA notified Costco that the products were likely counterfeit. In response, Costco pulled the shampoo from its shelves and demanded that K&M provide evidence of its authenticity. K&M failed to do so. Because the Lanham Act prohibits trafficking in counterfeit goods, Costco destroyed the products and sued K&M. In an uncontested arbitration, Costco was awarded $2.4 million, including attorneys’ fees.
Presumably unable to collect its award, Costco then filed a complaint against Hartford Casualty Insurance Company, K&M’s insurer. On cross-motions for summary judgment, King County Superior Court Judge Michael Fox ruled that Hartford’s policy covered K&M for Costco’s loss.
The Washington State Court of Appeals reversed. It found that Costco’s loss was excluded under the policy’s exclusion for damage to “your product.” The exclusion provided that “This insurance does not apply to … ‘Property damage’ to ‘your product’ arising out of it or any part of it.” The policy defined “Your product” as “Any goods … distributed” by you. The Court of Appeals found that “The shampoo distributed by K&M falls unambiguously within that definition.”
The Court concluded that “Costco’s property damage — its loss of use of the shampoo — arose out of the shampoo. Because the shampoo was counterfeit, Costco was unable to sell it or make any other use of it. When an insured becomes liable for damage to its own tangible product that occurs either by physical injury or loss of use, and such damage arises out of the product, the insured is not covered.” Therefore, the Court found that Hartford was not responsible for covering K&M’s liability to Costo.
The published decision, National Clothing v. Hartford Casualty, 145 P.3d 394 (Wn. App. October 23, 2006), is available here.
Michael Atkins
Ron Coleman takes this case a step further in his blog, Likelihood of Confusion. He suggests that attorneys consider insurance coverage when their clients receive a cease and desist letter. That’s a good idea. Depending on the subject matter, we should think about insurance when sending those letters, too. Thanks much, Ron, for your good wishes!