ABA Section of Business Law
ABA Section of Business Law
Business Law Today
September/October 1999
Copywrong
Insuring against intellectual property losses
By CAROLINE W. SPANGENBERG and J. STEPHEN BERRY
Spangenberg is a partner and Berry is an associate at Kilpatrick Stockton LLP in Atlanta.
Intellectual property claims can involve staggeringly large sums. They are also becoming more frequent. Consequently, whether an insurance policy will cover all or part of the damages, or even just defense costs, is crucially important to many companies. The question, of course, is just how much insurance are you likely to get (at least without protracted coverage litigation) from your carriers? Like most legal questions, the answer is, "It depends." It depends on a number of things:
First and foremost, the policy language. In response to the increasing frequency and severity of intellectual property claims, the insurance industry has reacted in two ways:
• adopting, in more current policy forms, language designed to restrict the coverage; and
• trying, with varying success, to persuade the courts that the protection actually provided under earlier language is quite narrow.
Second, the jurisdiction. Coverage law, generally speaking, is a state law creature, which can, and does, vary greatly from jurisdiction to jurisdiction. Indeed, the choice of the governing state’s law is not infrequently outcome-determinative.
Third, the nature of the underlying claim. Unfortunately, some courts and policyholders’ counsel have not always been fully conversant with the law governing the underlying intellectual property claim. As a result, some of the coverage opinions reflect an overly simplistic view of the claim for which defense or indemnity is sought. This has also resulted in decisions from one case, perhaps unremarkable under those facts, being rather blindly followed in totally different circumstances.
Specialty-risk policies that provide some real risk shifting are beginning to become widely available. These are certainly worth considering. Also, companies can, and should, negotiate the existence and extent of intellectual property exclusions. For example, some endorsements touted as Y2K exclusions impose far greater restrictions on coverage for computer-related claims than merely those likely to be associated with a Year 2000 problem. This article, however, is limited to a discussion of the protection historically available from nonspecialized policies.
Although sometimes directors’ and officers’ liability, professional liability, or errors and omissions policies can provide protection against intellectual-property-related claims, the most common source of insurance is the commercial general liability (CGL) policy. One can posit an intellectual property claim (for example, a suit by a customer whose goods have been seized as counterfeit) that might be covered under products/completed operations liability coverage, if any, in a CGL policy that defines "property damage" as including "loss of use of tangible property that has not been physically injured or destroyed." More commonly, coverage has been premised on the portion of the policy known as "advertising injury" coverage.
Liability insurance for "advertising injury" differs from coverage for "property damage" and "bodily injury." Advertising injury coverage offers broader protection in some ways, and more limited protection in others. While insurance for property damage and bodily injury typically requires that injury not be "expected or intended" by the insured, "advertising injury" covers intentional torts. Standard advertising injury coverage also contains fewer exclusions. On the other hand, unlike property damage and bodily injury coverage, which typically is triggered by any kind of an occurrence or accident, advertising injury coverage is a "named perils" coverage.
In one current version of standard advertising injury coverage, the insurer promises that:
We will pay those sums that the insured becomes legally obligated to pay as damages because of personal injury or advertising injury to which this coverage applies. We will have the right and duty to defend any suit seeking those damages. . . .
The phrase "advertising injury to which this coverage applies" is later clarified:
This insurance applies to: . . .
"Advertising injury" caused by an offense committed in the course of advertising your goods, products or services. (emphasis added).
Curiously, some of the most important terms in this clause — most important, the word "advertising" — are not defined.
The standard definition of "advertising injury" is "injury arising out of one or more of the following offenses:
• Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;
• Oral or written publication of material that violates a person’s right of privacy;
• Misappropriation of advertising ideas or style of doing business; or
• Infringement of copyright, title or slogan.
Although carriers argue that their policies do not cover certain types of awards involved in intellectual property cases because they may not technically be "damages," these arguments have largely been rejected. Indeed, the U.S. Court of Appeals for the Eleventh Circuit has specifically held that an accounting for profits under the Federal Trademark Act (Lanham Act) constitutes "damages" for the purposes of an insurance policy. Limelight Productions Inc. v. Limelite Studios, 60 F.3d 767, 769 (11th Cir. 1995).
Consequently, the primary analytical questions to be asked are:
• whether there is an "offense;"
• if so, was it "committed in the course of advertising [the insured’s] goods, products or services" [standard post-1986 language] or "in the course of the insured’s advertising activities" [usual pre-1986 language]; and
• does the "offense" have a sufficient nexus with the insured’s advertising activity.
What qualifies as an "offense?" Although trademark and trade dress infringement are not specifically mentioned in the standard list of advertising injury "offenses," virtually all courts, with the notable exception of the U.S. Court of Appeals for the Sixth Circuit, have nevertheless found coverage. A policyholder who rebuilt products of a competitor and then sold them as the original item, another caught for selling imitations of a well-known brand of clothing, and numerous other policyholders accused of trademark or trade dress infringement (including, in some cases, dilution claims) or unfair competition have been protected under the "advertising injury" coverage.
Almost by definition, such cases may involve the "misappropriation of . . . [a] style of doing business" and infringe on a "title, or slogan." (Trade dress consists of distinguishing features of the product or packaging or sales techniques that have become trademark symbols; a trademark is "any word, name, symbol or device or any combination thereof, adopted by a manufacturer to identify his goods and to distinguish them from those manufactured and sold by others." 15 U.S.C. § 1127.)
Moreover, several recent cases have criticized or distinguished the contrary Sixth Circuit authority — one is especially notable. Although technically not binding on the Sixth Circuit because it is a ruling from a lower Michigan court, the decision is especially important because it rejects the analysis of Michigan law in the seminal Sixth Circuit case as "unpersuasive and flawed," and as demonstrating "a lamentable lack of understanding and grasp of the law of trademark/trade dress, and [as] ultimately lead[ing] to an unduly narrow holding and somewhat bizarre and tortured application of Michigan insurance law."
In some policies, the industry has express exclusions for trademark infringement. Policyholders argue that there would be no need for these exclusions if such claims were not otherwise considered to be within the scope of "advertising injury" coverage.
Coverage of trade-secret claims has also been heavily litigated. The most frequently disputed issue regarding coverage of these suits has been whether there is coverage for policyholders sued for using misappropriated information, such as marketing plans or customer lists, to solicit business. Policyholders argue that such offenses fall within the coverage for "misappropriation of advertising ideas or style of doing business."
Most courts agree. At the same time, most courts reject coverage for trade-secret cases involving only manufacturing secrets, both because they do not constitute "misappropriation of advertising ideas or a style of doing business" and because they commonly do not arise "in the course of advertising."
Copyright infringement, libel, slander and product disparagement are expressly listed as "offenses," within the "advertising injury" definition quoted above. The carriers’ efforts to restrict disparagement to the common law tort have been largely unsuccessful. Consequently, decisions involving these types of intellectual property claims have tended to turn on the issues of the scope of the term, "advertising," and whether there is a sufficient nexus between the offense and the insured’s "advertising."
It is hardest to establish coverage for claims of patent infringement. Again with the notable exception of the Sixth Circuit, patent-infringement claims were almost routinely considered to be within an undefined "offense" in the standard 1976 liability policy with broad form endorsement — that of "piracy." In reaction, the industry amended the form in 1986 to eliminate "piracy" as a listed "offense." (However, the industry publicized the revision as merely simplifying the policy language with no change in scope.)
Since then, policyholders have had to argue that patent infringement is included as "misappropriation of the style of doing business" or "infringement of copyright, title or slogan" rather than as "piracy" of inventions. Not surprisingly, the carriers are winning this argument. As one influential opinion said:
[I]t is nonsense to suppose that if the parties had intended the insurance policy in question to cover patent infringement claims, the policy would explicitly cover infringements of "copyright, title or slogan," but then include patent infringement, sub silentio, in a different provision, by reference to "unauthorized taking of . . . [a] style of doing business.
Nevertheless, there are a small but growing number of courts that have found patent-infringement claims covered. Especially where an excess or subsequent policy covering the same "offenses" has an exclusion for patent infringement, some courts have been receptive to the argument that there would be no need for the specific exclusion if patent infringement were unambiguously not covered in the first place. Others have recognized that although not separately enumerated as an "offense," some patent infringement claims could come within the other generic terminology. Recent expansions of patent law to encompass certain business methods as patentable could strengthen this argument in some cases.
Assuming that one can identify at least an arguably covered "offense," the next question is whether that offense occurred in "the course of advertising [the insured’s] goods, products or services" or in the course of "the insured’s advertising activities," as the case may be. Most policies provide no definition for the terms "advertising" or "advertising activity." Insurers say that in order to qualify as advertising, the communication must be addressed to the public at large (for example, newspaper ads or radio or television spots).
However, the insurance contracts contain no express requirement that the insured must direct its advertising activity either toward the general public or actual consumers; nor does Black’s Law Dictionary require more than one recipient. Indeed, several courts have defined the term expansively to include even one-on-one sales pitches to individual consumers. Thus, there is a strong body of authority to the effect that a plain and ordinary reading of "advertising" or "advertising activity" includes any dissemination of information to promote a product or service.
Perhaps the greatest hurdle awaiting the policyholder is the requirement of a nexus between the insured’s advertising and the "offense." Many carriers have argued that the policy language requiring the "offense" to arise "in the course of" the insured’s advertising means there must be a "proximate cause" relationship between the insured’s advertising and the plaintiff’s alleged resulting injury. The policies typically define "advertising injury" as "injury arising out of an offense occurring in the course of the insured’s advertising activities." Courts adopting a pro-carrier approach have collapsed these two separate requirements — that the "advertising injury" arise out of an "offense" and that the "offense" occur in the course of advertising — into one and have required a showing that the insured’s advertising caused the alleged injury for which it is being sued.
This entire issue is a clear instance where some insurance companies and some courts have focused on the name of the coverage at issue — advertising injury — and have not carefully parsed the policy language. It also demonstrates a frequent failure to read closely some of the leading opinions on this point, including the California Supreme Court’s decision in Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1273-74, 10 Cal. Rptr. 2d 538, 553, 833 P.2d 545 (1992). Properly read, Bank of the West supports the proposition that the only nexus that must be shown is between the "offense" and the "advertising."
Courts that have more carefully analyzed the policy language in light of the underlying intellectual property claim being asserted have been more likely to find a sufficient nexus between "advertising activity" and the "offense" for which the policyholder is sued. That is especially so in the cases of trademark and trade dress infringement. As one court sensibly wrote, "[t]rademark or tradename infringement . . . necessarily involves advertising." Others have noted that because proof of consumer confusion or deception is a required element in every trademark and trade dress case, advertising is an essential component of the claim — "[t]o have (or potentially cause) this effect, one must clearly advertise (announce to the intended customers) the mark or dress." Similarly, courts have found that at least some claims of misappropriation of trade secrets "do arise out of the advertising activity because, but for that activity, there would not have been a disclosure . . . an essential element . . . of the trade secret claim."
Courts have been somewhat less receptive to arguments that copyright infringement cases arise out of the insured’s advertising activities. A few have accepted the carriers’ arguments that the ad itself must be the infringing material. Others have been more favorable to policyholders. In one recent case, the Ninth Circuit found coverage for a policyholder accused of copyright infringement for allegedly "causing manufacture, importing, distributing, displaying, selling and placing upon the market apparel items with artwork copied from the [plaintiff’s label]."
Earlier cases ruled that a complaint’s mere mention of the policyholder’s
advertising was sufficient to invoke coverage. Thus, Microsoft obtained a defense because
Apple’s answer to Microsoft’s counterclaim stated that "Microsoft has
infringed Apple’s copyrights by marketing, distributing and licensing Windows
. . ." "[T]he use of the word marketing was enough to indicate that Apple’s
claims could be for infringement that occurred in advertising."
Courts have been most restrictive in requiring a nexus between advertising and injury in cases involving patent infringement. As the Bank of the West court held,
[A] claim of patent infringement does not "occur in the course of . . . advertising activities" within the meaning of the policy even though the insured advertises the infringing product, if the claim of infringement is based on the sale or importation of the product rather than its advertisement.
However, if the claim of infringement is based on something other than the sale or importation of a patented article, there may be coverage. It also remains to be seen whether the recent amendments to the patent statute making an "offer for sale" an act of infringement will change these decisions. Logically, they should. Finally, design patent claims based on the appearance of a product or element could easily arise "in the course of advertising your goods, products or services."
The most-litigated exclusion from "advertising injury" coverage excludes injuries "arising out of oral or written publication of material, if done by or at the direction of the insured, with knowledge of its falsity." Several policyholders have been successful in avoiding this exclusion in cases where the underlying plaintiff did not sue under a theory that required proof of knowledge of falsity as an element. Indeed, intent is not an essential element of any statutory intellectual property cause of action although it may be relevant to both liability and remedies.
Others have avoided it simply because the plaintiff did not allege knowledge of falsity, even in cases where the insurer might have shown the court that such knowledge existed. Furthermore, policyholders may find coverage where some paragraphs of the complaint allege knowledge of falsity and others do not, under the theory that coverage of any claim triggers the insurer’s duty to defend the entire suit.
Another interesting issue relates to the exclusion for trademark infringement. This exclusion is included in many general liability policies despite its removal from some standard policies. Where it remains, this exclusion stands in sharp contrast to the policies’ coverage provision for "infringement of title or slogan" and "misappropriation of style of doing business." One court noted this contrast and ruled that trademark infringement in the context of titles and slogans that were also trademarks (for example, "Big Mac" or "Good to the last drop") were covered by the policy, notwithstanding the exclusion.
Analysis of the potential for insurance coverage for intellectual property claims requires a careful and detailed review of the specific policy language and an understanding of the elements of the claim being asserted. Policyholders should not accept at face value their carriers’ or brokers’ advice that their policies provide no protection because insurance policy assets can be quite valuable to a company facing a major intellectual property liability.
At a minimum, a duty to defend may be triggered and even though the duty to indemnify may be narrower, some liability coverage may be available for many types of intellectual property claims.
