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(USA Herald) - The duty of a liability insurer to defend a policyholder from litigation is typically described as broad and expansive, extending beyond the insurer's duty to indemnify. The duty to defend generally obliges an insurer to defend a policyholder against lawsuits raising even the mere possibility of coverage. But what happens when the duty to defend is called into question in a trade secrets case involving bad faith and exclusions related to knowing conduct and misuse of trade secrets?

A recent decision by the U.S. Court of Appeals for the First Circuit, Lionbridge Technologies LLC v. Valley Forge Insurance Co., provides valuable insights on the potential scope of the duty to defend in such cases.

The insurance coverage case in Lionbridge arose out of an underlying trade secrets case between competing language translation companies. Lionbridge Technologies LLC, the policyholder, faced a lawsuit from TransPerfect Global (TPG) for allegedly engaging in a scheme to obtain access to TPG's sales models, pricing information, and customer lists by faking interest in a potential acquisition.

TPG alleged that Lionbridge personnel "falsely told TPG's customers that Lionbridge was purchasing TPG and that they should contract with Lionbridge directly before the sale." Furthermore, the complaint alleged that Lionbridge acted in bad faith by contacting TPG's existing and prospective clients to misrepresent separate litigation related to the company's co-founders and to "introduce doubt" about TPG's stability. As a result, the complaint alleged that some TPG clients reduced their business with TPG.

Valley Forge Insurance Co. had issued a commercial general liability policy to Lionbridge. The policy covered personal and advertising injury, including the oral or written publication of material that slanders or libels an organization or disparages the organization's goods, products, or services. Valley Forge initially defended Lionbridge from the TPG lawsuit under a reservation of rights. However, the insurer and insured engaged in numerous disagreements over what eventually grew to multimillion-dollar attorney fees.

Lionbridge eventually filed suit in the U.S. District Court for the District of Massachusetts for its defense costs. Valley Forge counterclaimed for a declaration that it was not obligated to pay more than certain reduced rates of one defense firm and a portion of joint defense costs shared with Lionbridge's corporate owner. The parties filed cross motions for summary judgment on the issue of whether Valley Forge owed Lionbridge a duty of defense. The district court ruled in favor of Valley Forge and held that the duty did not apply. Lionbridge appealed.