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In a case involving industrial lubricants, a federal judge in Arkansas found that a chemical company’s comprehensive general liability policy did not covers claims arising from allegations that the company had stolen a former client’s proprietary formula.

Background

Pinnacle is a Pine Bluff, Arkansas corporation that makes bulk lubricants, both for sale to the general public and for third parties to resell under their own brands.

Gibraltar Lubricating Services, Inc. is another Arkansas corporation that develops and sells specialty lubricating oils.

Pinnacle and Gibraltar entered into an agreement for Pinnacle to make products for Gibraltar.  Gibraltar provided Pinnacle with its confidential and proprietary formula so that Pinnacle could prepare test batches of its product.  Pinnacle made one test batch that was sold to a Gibraltar customer.

According to Gibraltar, Pinnacle demanded the right to be Gibraltar’s exclusive blender of lubricants.  Gibraltar refused the demand and terminated its relationship with Pinnacle.

Gibraltar alleged that Pinnacle then began soliciting Gibraltar customers, selling a lubricant using the Gibraltar formula at a price lower than Gibraltar’s.

Gibraltar sued Pinnacle, claiming trade secret misappropriation and breach of contract.

During the period when the companies were doing business, Pinnacle had a commercial general liability policy with Chartis Specialty Insurance.  Pinnacle tendered its defense to Chartis but Chartis refused to defend Pinnacle, saying that Gibraltar’s claims were not covered by Pinnacle’s insurance policy.

Pinnacle then sought summary judgment on Chartis’ duty to defend.

The Insurance Policy

The court held that the insurance policy’s property damage clause did not apply because Gibraltar did not actually suffer property damage.  The complaint only charged that Gibraltar lost profits due to Pinnacle’s sales of the allegedly stolen formula, not that it lost the use of the formula.

In addition, there was no covered “occurrence” under the policy because “occurrence” means an “accident” — and Pinnacle’s acquisition and use of the Gibraltar formula was alleged to have been intentional.

The case is Pinnacle Resources, Inc. v. Chartis Specialty Insurance Co.

Are you covered?

Most insurance policies do not provide protection against claims made for intentional acts, such as trade secret theft.  Obviously, this imposes a risk for companies that face unfounded charges of trade secret misappropriation.

If you want to know whether your company’s insurance policy provides coverage for either loss of trade secrets or charges of trade secret theft, of if you anticipate being involved in trade secret litigation, contact our office to arrange a free initial consultation.


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Photo attribution: “Oil Change oil pan 2005 gmc suv” by Myke Waddy. Licensed under Public domain via Wikimedia Commons.

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