(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.

The First Circuit's opinion set forth the general principles found in Massachusetts law that an insurer must defend its insured where the underlying complaint's allegations could be reasonably construed as "roughly sketching" a covered claim, provided that no policy exclusion applies. Rather than focusing on the specific causes of action, the court would focus on the types of losses that might be proved within the range of the complaint's allegations, and determine whether such losses fit the reasonable expectations of coverage of the policy.

In this case, the court ruled that Valley Forge had a duty to defend Lionbridge against TPG's bad faith allegations. The court held that the underlying complaint's allegations of bad faith related to the publication of material that disparaged TPG's goods, products, or services. The court also found that the policy's exclusions for knowing conduct and misuse of trade secrets did not apply to the bad faith allegations in the underlying complaint.

The Lionbridge Technologies LLC v. Valley Forge Insurance Co. ruling is significant for policyholders in trade secrets cases involving bad faith allegations. It highlights the potential scope of the duty to defend in such cases and serves as a reminder that insurers may be obligated to defend policyholders even in cases where certain policy exclusions apply. Policyholders should be aware of their rights and the potential for coverage in cases involving bad faith allegations.

It's important to note that the outcome of this case may not be the same in all jurisdictions, and legal advice should be sought in order to understand the rights and obligations of both insurer and policyholder in any specific case. This article was written by Samuel Lopez, investigative paralegal and journalist for the USA Herald, who has been following the case closely.