## Facts

- Phoenix Control Systems, Inc. (PCS) competed with Johnson Controls, Inc. (Johnson) in industrial automated control systems for water and wastewater treatment plants.
- Johnson owned a registered copyright in its “JC-5000 Process Control System” software; modules bore proprietary notices restricting use without consent.
- PCS was insured under an Office Building Package Policy issued by Insurance Company of North America (INA) for July 19, 1984 to July 19, 1985.
- The policy included “personal injury and advertising injury” coverage defining advertising injury to include “any infringement of copyright ... in your advertising,” and contained an intentional-acts exclusion for injury “expected or intended from the standpoint of the insured.”
- Johnson sued PCS in federal court alleging PCS used Johnson’s copyrighted software and related materials in competing for projects and soliciting customers.
- PCS tendered defense to INA, asserting the allegations created potential “advertising injury” coverage; INA denied any duty to defend.
- PCS sued INA for breach of the duty to defend; the trial court granted summary judgment to INA and the court of appeals affirmed.
- PCS asserted that although it intentionally used Johnson’s material, it believed in good faith it had a legal right to do so, disputing any intent to cause wrongful injury.

## Issues

1. Whether the policy’s “advertising injury” coverage for “any infringement of copyright ... in your advertising” is limited to advertising-related infringement or extends to any copyright infringement.
2. Whether the allegations and known facts conclusively established PCS intended or expected injury so that the intentional-acts exclusion eliminated INA’s duty to defend.

## Decision

- The Arizona Supreme Court reversed the summary judgment for INA and remanded.
- The Court interpreted “in your advertising” to limit copyright-infringement coverage to advertising-related infringement.
- The Court held the underlying allegations could reasonably be read to claim infringement in PCS’s solicitation and proposal activities, creating a potential for coverage.
- The Court held the intentional-acts exclusion did not apply as a matter of law because the record did not conclusively show PCS subjectively intended or expected the injury; intent to act was not enough.
- Because the complaint and reasonably ascertainable facts showed a potential for covered liability, INA owed a duty to defend.

## Legal Principles

- An insurer’s duty to defend is broader than its duty to indemnify and arises when allegations and known or reasonably ascertainable facts show any potential for coverage.
- Policy language covering copyright infringement “in your advertising” limits coverage to advertising-related infringement, but ambiguous application to the alleged conduct is resolved in favor of a defense obligation.
- An intentional-acts exclusion requires proof the insured subjectively intended or expected the injury, not merely that the insured intentionally performed the acts alleged.
- At the duty-to-defend stage, intent-based exclusions are construed narrowly; unresolved factual disputes about subjective intent preclude denial of defense on summary judgment.

## Conclusion

The court required INA to defend PCS because the underlying suit plausibly alleged advertising-related copyright infringement and the intentional-acts exclusion could not defeat the defense duty without conclusive proof PCS subjectively intended or expected the resulting injury.


Phoenix Control Sys., Inc. v. Ins. Co. of N. Am., 165 Ariz. 31, 796 P.2d 463 (Ariz. 1990)