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Eyeblaster, Inc. v. Federal Ins. Co.: US District Court : INSURANCE | COMPUTER - no Commercial General Liability or Errors and Omissions insurance coverage for claims of malware installation; but policy not illusory, either

Eyeblaster, Inc,
vs. Civil No. 07-4379 ADM/JJK
Federal Insurance Company,
Robert P. Thavis, Esq., Leonard, Street and Deinard, Minneapolis, MN, appeared for and on
behalf of the Plaintiff.
Dale M. Wagner, Esq. and Jessica S. Williams, Esq., Bassford Remele, Minneapolis, MN,
appeared for and on behalf of the Defendant.
On August 25, 2008, the undersigned United States District Court Judge heard oral
argument on the Motion for Partial Summary Judgment of Plaintiff Eyeblaster, Inc.
(Eyeblaster) and the Cross Motion for Summary Judgment of Defendant Federal Insurance
Company (Federal). [Docket Nos. 19 & 25]. Eyeblaster seeks a declaration that Federal was
obligated to defend Eyeblaster in a lawsuit brought by Plaintiff David Sefton in the United States
District Court for the Southern District of Texas (the Sefton Action). Federal requests
summary judgment on all claims asserted by Eyeblaster. For the reasons set forth below, this
Court denies Eyeblasters Motion for Partial Summary Judgment and grants Federals Motion
for Summary Judgment.
A. The Parties and the Insurance Policies
Eyeblaster is a worldwide company in the business of interactive advertising content
delivery and management technology, and whose primary product assists in the creation,
delivery, and management of online advertising. Arnstein Aff. [Docket No. 22] 2. Eyeblaster
is a Delaware corporation with its principal place of business in New York. Notice of Removal
[Docket No. 1] 4. Federal, an insurance company, is an Indiana corporation with its principal
place of business in New Jersey. Id. 3. Eyeblaster alleges that Federal owed it a duty to
defend and a duty to indemnify from the Sefton Action, which alleged damages in excess of
,000 exclusive of fees and costs. Id. 5.
Eyeblaster purchased general liability (GL) and information and network technology
errors and omissions (E&O) insurance policies from Federal for the period of December 5,
2006, to December 5, 2007. Arnstein Aff. 3. Generally, the GL policy insured Eyeblaster for
claims alleging damage to tangible property. Thavis Aff. [Docket No. 23] Ex. A, at 20, 49. The
E&O policy covered Eyeblaster against claims of financial loss caused by a wrongful act that
resulted in damage to intangible property including data, software, and other information in
electronic form. Id. at 53, 75-76. Subject to the terms of the policies, Federal had a duty to
defend Eyeblaster against suit even if the suit was false, fraudulent, or groundless. Id. at 21, 54.
B. The Sefton Complaint
On November 16, 2006, David Sefton filed his First Amended Complaint against
Eyeblaster in federal court in Houston, Texas. Arnstein Aff. Ex. 1. Eyeblaster tendered that
complaint to Federal on or about January 2, 2007. Id. at 6 and Ex. 3 (Federal Letter to
Eyeblaster Denying Coverage). On March 12, 2007, Federal informed Eyeblaster by letter that it
denied all coverage with respect to Seftons First Amended Complaint under both the GL and
E&O policies. Id. at Ex. 3. It reasoned that under the GL coverage Sefton did not allege
property damage due to an accident or occurrence, and under the E&O policy Seftons
allegations did not include a wrongful act covered under that policy. Id. The letter also
identified exclusions under both policies as further reasons for the denial and reserved the right
to cite additional policy provisions as appropriate. Id. Sefton filed a Second Amended
Complaint on July 24, 2007. Id. Ex. 2. The Second Amended Complaint included the
allegations in the First Amended Complaint as well as additional allegations.
In the Second Amended Complaint, Sefton alleged that Eyeblaster, on or about July 21,
2006, enticed him to visit a website by fraudulently misrepresenting the website had a
connection to America Online, Inc., and that by visiting the website Eyeblaster was able to
download its spyware onto his computer. Id. Ex. 2 6-9, 62. Sefton alleged Eyeblaster
installed tracking cookies, executable code, java script, and GIFs on his computer. Id. 14-20.
He also alleged that this act changed his security settings, installed pop-up advertising on his
computer, renamed files, and redirected his computer and web-browsing. Id. 30-37. He
alleged the introduction of this spyware caused his computer to freeze up resulting in lost data
for a tax return on which he was working, and that he paid a computer technician to
unsuccessfully repair the damage caused by the spyware. Id. 71. Sefton alleged he
experienced sustained and significant internet transmission before he activated any internet
software, that his computer was taken over, and that he could not operate his computer until
this transmission was finished. Id. 101.
He further alleged the software allowed commercial surveillance that could result in
cyber-stalking, identification of confidential web visitations, breach confidential identity
information, and invasion of privacy and solitude. Id. 104. The spyware consumed massive
amounts of memory and caused Seftons computer to stop running or run so slowly it was
essentially inoperable. Id. 112. Finally, he experienced numerous pop-ups, a hijacked
browser, unanticipated toolbars, unanticipated icons, random, haphazard error messages, and
slowed computer performance that occasionally resulted in crashes. Id. 113.
Sefton alleged violations of the Computer Fraud and Abuse Act, 18 U.S.C. 1030, the
Texas Business and Commercial Code 48.052 & 48.101, a deceptive trade practice under
Texas law, prima facie tort under Texas law, trespass, conversion, fraud, nuisance, invasion of
privacy, intrusion upon seclusion, and conspiracy. Id. 123-75. For the purposes of this
litigation, the Court notes Sefton alleged that Eyeblaster intentionally accessed a protected
computer without authorization, that the deceptive trade practice violations were committed
knowingly, that Eyeblaster intended to deceive Sefton, intended that he would rely on its
misrepresentations, and that the unwanted installation of spyware onto the users computer can
certainly be said to be an intentional act by the distributor of the spyware to use or intermeddle
[sic] with the consumers computer and processing power. Id. 127, 139, 141, 157. After
receiving the Second Amended Complaint, Eyeblaster tendered it to Federal. Arnstein Aff. 7.
In a letter dated September 18, 2007, Federal reaffirmed its position that no coverage existed
under the policies, and it therefore had no duty to defend or indemnify. Arnstein Aff. Ex. 4.
Eyeblaster filed this action against Federal in the district court for Hennepin County,
State of Minnesota on October 1, 2007. Complaint [Docket No. 1]. Federal removed to this
Court on October 25, 2007, pursuant to 28 U.S.C. 1441. Notice of Removal.
A. Standard for Summary Judgment
Federal Rule of Civil Procedure 56(c) provides that summary judgment shall issue if the
pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); see Matsushita Elec.
Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 252 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). On a motion
for summary judgment, the Court views the evidence in the light most favorable to the
nonmoving party. Ludwig v. Anderson, 54 F.3d 465, 470 (8th Cir. 1995). The nonmoving party
may not rest on mere allegations or denials, but must demonstrate on the record the existence of
specific facts which create a genuine issue for trial. Krenik v. County of Le Sueur, 47 F.3d 953,
957 (8th Cir. 1995).
B. Duty to Defend
The insurer has a duty to defend all claims against the insured if any one of the asserted
causes of action is arguably within the scope of policy coverage. Metro. Prop. & Cas. Ins. Co. &
Affiliates v. Miller, 589 N.W.2d 297, 299 (Minn. 1999). The duty to defend is broader than the
duty to indemnify. Id. To avoid this obligation, the insurer must establish that all claims clearly
fall outside the policy. Id. The duty to defend is determined by comparing the allegations in the
complaint against the insured to the language in the insurance contract and assessing if the
claims state a cause of action within the coverage afforded by the policy. Meadowbrook, Inc.
v. Tower Ins. Co., 559 N.W.2d 411, 419 (Minn. 1997); Garvis v. Employers Mut. Cas. Co., 497
N.W.2d 254, 256 (Minn. 1993).
Eyeblaster asserts the Sefton Complaint arguably contains allegations giving rise to
coverage under both the GL and E&O policies. It also maintains that none of the policy
exclusions apply. Federal argues that the Sefton Action is not covered under either the GL or
E&O policies, but even if it were, various policy exclusions apply that would deny coverage
under both policies.
1. The GL Policy
The coverage clause of the GL policy states:
Subject to all of the terms and conditions of this insurance, we will pay damages that
the insured becomes legally obligated to pay by reason of liability;
imposed by law; . . .
for bodily injury or property damage caused by an occurrence to which this coverage
applies. . . .
Thavis Aff. Ex. A at 20. Property damage is defined as:
physical injury to tangible property, including resulting loss of use of that
property. All such loss of use shall be deemed to occur at the time of the
physical injury that caused it; or
loss of use of tangible property that is not physically injured. All such loss
of use shall be deemed to occur at the time of the occurrence that cause it.
Tangible property does not include any software, data, or other information that is
in electronic form.
Id. at 49. Finally, occurrence is defined as an accident, including continuous or repeated
exposure to substantially the same general harmful conditions. Id. at 47. Eyeblaster argues the
GL policy should cover the Sefton Action because Sefton alleged damage to tangible property.
Specifically, Eyeblaster cites the allegations in the Second Amended Complaint which state
Sefton's computer immediately froze up, stopped running or ran so slowly as to be essentially
inoperable, and that his computer was taken over and [could not] operate until this sustained
and significant and unauthorized transmission takes place. Arnstein Aff. Ex. 2 71, 101, 112.
Coverage under the GL policy turns on whether these allegations in the Sefton Complaint allege
damage to tangible property which give rise to a duty to defend, or whether instead the
allegations claim damage to software, which is specifically excluded from coverage.
While this issue has not been raised in Minnesota courts, the Fourth Circuit answered a
substantially similar question in America Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89
(4th Cir. 2003). In that case, America Online, Inc. (AOL) brought an action against its insurer,
St. Paul Mercury (St. Paul), to require St. Paul under its GL policy to defend against claims
that AOLs software package caused damage to computers, computer data, and software
systems. St. Paul denied coverage claiming the GL policy only covered loss to tangible
property, and the allegations in the complaint asserted damage only to intangible property:
The Fourth Circuit characterized the allegations in that case, which are similar to those in
the Sefton Action, as altering the plaintiffs existing software, disrupt[ing] their network
connections, caus[ing] the loss of stored data, and caus[ing] their operating systems to crash.
Id. at 91-92. The outcome turned on whether the plaintiffs alleged damage to tangible property.
The Fourth Circuit began its analysis by defining tangible as capable of being touched. Id. at
94. It proceeded to find that the AOL software may have created a conflict with the
programming of data on the computers hard drive, but not the hard drive itself. Id. at 95. The
result of this reordering of data was to cause problems with the computer, but regardless of
whether the software is rendered unusable, the hardware remains available for instructions and
recording. Id. at 96. The Fourth Circuit analogized to the situation of a combination to a
combination lock being forgotten; the lock becomes useless, but the lock is not physically
damaged. Id. As a result, the Fourth Circuit ruled that the complaint did not allege physical
damage to tangible property and therefore St. Paul had no duty to defend in that action. Id. at 97.
The allegations in the Sefton Complaint, like those in AOL, all relate to damage to
software. The policy language clearly states tangible property does not include software.
Thavis Aff. Ex. A at 44. While Sefton may allege that his computer froze or processed so slowly
as to be essentially inoperable, these allegations all relate to the effect Eyeblasters spyware had
on his computers software. He did not allege any actual damage to his hard drive. While the
Complaint referenced damages to the less exact term computer, which necessarily contains
both software and hardware components, the allegations in the Complaint demonstrate the
damage was solely the effect of Eyeblasters product on the software on Seftons computer, not
the hardware. Because only the software was damaged, there was no damage to tangible
property and the allegations in the Complaint are not covered under the GL policy.
2. The E&O Policy
The operative language for the E&O policy states:
Subject to all of the terms and conditions of this insurance, we will pay loss by
reason of liability:
imposed by law; . . .
for financial injury, caused by a wrongful act:
That results in the failure of your product to perform the function or to serve
the purpose intended; . . .
to which this coverage applies.
Thavis Aff. Ex. A at 53. Financial injury is defined as:
Economic injury sustained by a person or organization because their property,
including software, data and other information that is in electronic form:
cannot be used; or
is less useful.
Id. at 73. Finally, a wrongful act:
means an error, unintentional omission or negligent act.
includes all related wrongful acts and all series of continuous, repeated or
related wrongful acts.
Id. at 75. Unlike the GL policy, the E&O policy specifically covers intangible property such as
software, data, and other electronic information. Additionally, Federal does not contest that the
Sefton Complaint alleges a financial injury that would be covered under the E&O policy.
Memo. in Supp. of Def.s Mot. for Summ. J. [Docket No.27] at 24, n.5. Federal does contest,
however, whether Eyeblaster committed a wrongful act within the meaning of the policy. The
thrust of Federals argument is that because Seftons Complaint alleged that Eyeblaster intended
to place its software on his computer, there was no wrongful act for purposes of coverage.
Eyeblaster counters arguing that the Complaint alleges negligence in addition to intentional
conduct on Eyeblasters part, and that Federals definition of wrongful act is too broad and
would render the coverage illusory.
Courts must look at the allegations in the complaint to determine whether the claims state
a cause of action within the meaning of the policy. See Meadowbrook, 559 N.W.2d at 419. In
looking at the entirety of the Sefton Complaint, it is apparent that he alleged Eyeblaster acted
intentionally in placing its software on his computer. While there are fleeting references to
misrepresentation, trespass, and invasion of privacy in the nearly one hundred and ninety
paragraph Complaint, the substance of the allegations is clearly that Eyeblaster intentionally
placed its product on Seftons computer. See Franklin v. Western Nat. Mut. Ins. Co., 574
N.W.2d 405, 407 (Minn. 1998) (construing the pleadings as a whole to determine basis of partys
claim and finding no duty to defend under the policy). Having established that Sefton alleged
intentional conduct, the next determination is whether that conduct is covered under the E&O
The policy defines a wrongful act as an error, unintentional omission or negligent
act. Thavis Aff. Ex. A at 75. Eyeblaster argues that nothing in this definition supports a
reading that these errors, omissions or negligent acts apply to inadvertent or unintended acts. As
such, Eyeblaster is entitled to coverage even for an intended act that results in an unintended
injury. This interpretation runs counter to the plain language of the definition. The policy
language focuses on the act, and the Court must determine whether the Sefton Complaint
alleges that Eyeblasters intentional act of placing its spyware on Seftons computer is covered
under that policy definition. It is not. Eyeblaster designed its software to install itself on
Seftons computer, and that act caused the damage addressed in the Complaint. Had Eyeblaster
intended to give its customers one type or software but instead mistakenly provided them with a
different version that caused a problem, this error would be covered under the language of the
E&O policy. According to the language of the Complaint, however, Eyeblaster specifically
intended that this software would install itself on Seftons computer and regardless of whether
Eyeblaster intended the resulting injury, this act is not covered under the E&O policy language.
Finally, Eyeblaster argues that this interpretation of the policy language renders the
coverage illusory because the nature of its business requires it to place cookies, Flash
technology, and JavaScript on users computers and by intending those acts, this interpretation
would deny it coverage. As discussed above, the E&O policy still applies to Eyeblaster in some
1 Because the Court has found Federal owed Eyeblaster no duty to defend under either
the GL or E&O policies, it is unnecessary to reach the issues involving the various policy
situations such as the installation of incorrect software, even if it does not cover this situation.
The E&O policy covers a bundle of risks and while this act by Eyeblaster may possibly be
uninsurable, the policy is not illusory because there is no coverage. For these reasons, Federal
did not owe Eyeblaster a duty to defend in the Sefton action1.
Based upon the foregoing, and all of the files, records and proceedings herein, IT IS
HEREBY ORDERED that Defendants Motion for Summary Judgment [Docket No. 25] is
GRANTED and Plaintiffs Motion for Partial Summary Judgment [Docket No. 19] is DENIED.
s/Ann D. Montgomery
Dated: October 7, 2008.


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Bystanders Witnessed This.
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