Key Consideration In Litigating Intellectual Property And Antitrust Lawsuits With Awareness Of Potential Insurance Coverage
Edward F. O'Connor
Poms, Smith, Lande & Rose; Irvine, California
Insurance factors have become increasingly important in the field of intellectual property litigation. Until a few years ago little thought was given to the concept that insurance defense had anything to do with litigation between business competitors. Insurance was generally viewed as relating to negligence and property or personal injury. That of course is still the predominant area of insurance coverage and defense.
Today, however, the advertising injury provisions of a number of business policies have language which has opened the door to insurance coverage, or at least a duty to defend, claims involving business torts or business related causes of action. This has been particularly true of certain intellectual property causes of action.
The policy provisions that have opened the door often contain language that relates to such issues as "unfair competition", "false advertising", "trade libel", and "piracy". Sometimes the policies include "trademark", "copyright", "false designation of origin" and "trade secrets". Sometimes the policies specifically exclude such specific causes of action. It is not unusual for a policy to include "unfair competition", but exclude "trademark". The irony of that kind of exclusion/inclusion provision is that in California, "unfair competition" has been held to be common law trademark infringement and statutory "unfair competition" has been held to be not covered by such policy language because there are no damages (only restitution) for statutory unfair competition Bank of the West v. Superior Court, 2 Cal. 4th, 1254, 10 Cal Rptr.2d. 538 (July 1992) Since restitution means the returning of something wrongfully taken, there is no insurance coverage and no duty to defend a wrongdoers attempt to keep what he has no right to keep.
Following this reasoning, the only "unfair competition" which would appear to be covered is common law trademark infringement. How does this square with the "no trademark coverage" language? There is no known answer to this question. It is merely posed to point up the sort of esoteric considerations that are involved in trying to make legal and business judgments in this still somewhat murky area of the law.
In addition to the language found in the various policies, there are different interpretations placed on the duty to defend and the duty of coverage in different states, often interpreting the same language. Thus, forum shopping is a fairly common practice for those seeking to obtain (or avoid) coverage and/or duty to defend.
It should be noted that the duty of coverage and the duty to defend are separate and distinct duties, although they are related. An insurance company may have a duty to defend, but not a duty of coverage. The duty to defend insists where the insurance company may have a duty of coverage. CNA Casualty of California v. Seaboard Surety Co., 176 Cal App 3d 598, 222 Cal Rptr. 276 (1986).
When an insurance company denies that it owes a duty of coverage, but it may be wrong, based either on the allegations of the complaint or what might later be alleged by amendment, (based on the probable facts of the case), then it still has a duty to defend. Because of the inherent conflict of interest between the carrier (claiming no coverage), and the insured, the insured is entitled to its own lawyer to be paid for by the insurance company San Diego Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal App 3d 358 208 Cal.Rptr. 494 (1984). This can be an enormous advantage to a small business which finds itself locked in litigation with a large financially powerful competitor. More than one well heeled plaintiff has been discomforted by discovering that its small adversary suddenly found a litigation treasure chest with which to defend itself. Sometimes this insurance treasure chest can also make the small party an effective counter-claimant as well.
Because of the enormous potential of insurance company defense funds to effect the outcome and even the existence of litigation, it is important that all affected and potentially effected parties consider the ramifications of insurance policy language. The affected parties include not only litigants and potential litigants but insurance companies as well. An unusual side effect of the development of this area of the law is that sometimes the insurance carriers become silent partners with their insureds in financing counterclaims in return for obtaining a share of the counterclaims as reimbursement for their attorney fees.
From the carriers prospective, their first consideration is whether they even want to sell policies that can pull them into litigation which can cost them millions in defense costs and possibly millions more in coverage. Unlike personal and property injury cases where multimillion dollar judgments are relatively rare, commercial litigation which involve gross sales, often involve multimillion dollar judgments. Because of the complexity of these cases multimillion dollar fees and costs are also not rare.
Many insurance companies sold such policies before the courts began holding that they created duties relating to intellectual property causes of action. There is also the question of whether they felt these constituted a built in immunity against coverage for willful torts which would probably relate to false advertising, product disparagement, etc. They may also have felt that the vagueness of these provisions would shield them as well. It was probably these suspicions which were behind the decision of the court in CNA Casualty of California v. Seaboard Surety, supra, wherein the California Court of Appeals held the insurance companies to a rather strict duty to defend.
Since that time a number of changes have been made in various policies and there is really no such thing as standard intellectual property coverage language, although most such language is still found under "advertising injury" provisions. Also, the courts are more reluctant to hold that a duty exists, Bank of the West, supra. Nonetheless, such cases are still in existence, and as more becomes known of this area of the law, we can expect to see more such activity.
The two areas which seem to be hot spots for insurance activity are in the area of trademark law and patent infringement. The irony is that many policies expressly exclude both, and patent infringement has often been held not to arise out of advertising, even if it is piracy. Bank of the West, supra.
The reason patent infringement and trademark infringement give rise to coverage is because they are often associated with other causes of action which do trigger coverage. For example, an accused patent infringer may also be accused of false advertising for making claims about its alleged infringing product being superior to the patent holders product, or by claiming that the patent holder is not the true inventor, or even of violating the antitrust laws by willfully infringing and engaging in other improper activities such as false advertising, misappropriation of trade secrets, attempting to interfere with the patent holders customers, etc.
Such cases, as between competitors, are not all that rare. Often such cases arise out of bad blood between them. Often they have had previous dealings with each other. One case, which I tried, involved a former exclusive distributor of a large company. The parties had a falling out when the distributer invented a product and tried to sell it. The company terminated the distributorship, infringed his patent and then engaged in a series of acts which the jury and the court found to violate the antitrust laws and to be a tortious interference with a prospective business relationship. The result was a judgment of over 20 million dollars for the small company. Automotive Products plc v. Tilton Engineering, Inc., 33 USPQ 1065 (Central Dist. Cal. 1995).
Ironically the case was instituted by the large company which sued to invalidate the patent and later added its own counterclaim of tortious interference. One can well image the duty of defense and coverage issues created by the various counter allegations.
From the insurance company's perspective, their concern is balancing the commercial value of providing a product (policy), which they can market as providing protection for intellectual property claims, against the exposure and costs of defending such actions. What is somewhat puzzling is that most people who buy these policies don't usually even request these provisions. Its not uncommon for insureds to not even know they have such coverage, even after they have become involved in litigation. They don't discover the implications of their own policy language until after someone points it out to them. In other words, insurance companies often provide coverage which was never bargained for and yet which ends up costing them hundreds of thousands and sometimes millions in defense costs, even when it is ultimately decided that there is no duty of coverage.
Of course, an insurance company can always seek a declaratory judgment of no duty of coverage. If successful it excuses the carrier of duty to defend costs. If unsuccessful, however, it means the carrier is on the hook for both defense costs and coverage. It has been my experience that most carriers don't seek a declaratory judgment, but rather pay the defense costs (sometimes on a reduced interim basis) and attempt to settle the issue later. By the same token, most claimants (or their lawyers) are willing to accept interim lower fees and defer the ultimate resolution of coverage and actual defense costs until later. These decisions are often driven by the facts in the underlying case. If the carrier feels the insured's liability is highly likely and the damages great, it may wish to push for a declaratory judgment action as soon as possible. Where liability is weak, the carriers are often ready to pay defense costs for a quick victory on the merits, if possible.
In terms of the initial strategic decisions, the carrier's first strategic decision should be to not sell a policy which subjects it to intellectual property duties of defense and coverage when the customer doesn't request it. Its amazing how many insurance agents don't even know such policy language is in their policies, much less what it means. From an insured's perspective, the first strategic decision should be to obtain the broadest possible coverage under the umbrella of "advertising injury". These policies are available, although more and more insurance companies are either omitting them or attempting to severely restrict their application. Before buying a business insurance policy, corporate counsel should always consult with an expert in this field. Failure to do so could result in the destruction of a company from legal costs alone.
The second strategic consideration from an insured's perspective is to immediately check its policy if, and when, it finds itself a defendant in any business litigation. Failure to tender the defense will result in waiver of all defense costs up till the time of waiver. In addition, if the ultimate position of the defendant is jeopardized or compromised prior to tender, the insurance carrier may assert estoppel and refuse to be responsible for any defense costs or coverage. This, of course, is risky business for the carrier which is always subject to possible bad faith with the possibility of punitive damages for jeopardizing its insured's position. This incidently is one of the main reasons carriers will pay for a defense even when they have good reason to deny coverage. Not only can they be held liable for attorney fees and punitive damages, but derivative damages as well. If a company goes under because of defense costs which the carrier wrongfully refuses to pay, the carrier could be liable for the value of the entire business.
After the insured has received its policy, if there is any possibility of coverage the case should be tendered to the carrier. There is nothing to lose and a great deal to gain.
The possibility that a potential defendant may have such a policy is a strategic factor which should also be considered by a perspective plaintiff as well. In automobile accident and other personal injury and property injury cases, the plaintiff's attorneys initial concern is whether there is a policy of insurance in effect which will make it possible to collect a judgment. If there is no such policy or if the limits are small, the case may not even be filed.
In business litigation, and particularly in intellectual property litigation, these concerns may either be nonexistent or may have just the opposite effect. (Of course, intellectual property plaintiffs like to collect judgments as well, and a defendant's policy may well be an incentive to a plaintiff in these cases.) Often the intellectual property litigant is really only interested in an injunction. Also, since business competitors are the litigants, there is a good chance that a judgment may be collectable from the defendant. A plaintiff may actually desire to drive from his opponent out of business and hopes it doesn't have insurance. In cases such as these, a plaintiff may very well wish to avoid triggering a potential defendant's policy. The triggering or not triggering one's opponent's policy can often depend simply on how a complaint is framed. A complaint for pure patent infringement will usually not trigger a policy (although same stout hearted souls still believe this is a possibility in some jurisdictions). A complaint for pure trademark or pure copyright infringement may also not trigger a policy (depending on the exclusionary language in the policy).
On the other hand, tying patent infringement or trademark infringement to another action may at least trigger a duty to defend. The worst scenario for a plaintiff is for a defendant's carriers to acknowledge its duty to defend and pay for a defendant's lawyer, but reserve its rights on coverage. This buys the defendant a defense but leaves collection of a judgment in limbo. Actually the really worse case scenario is when the defendant is able to use its insurance defense money to build a viable counterclaim against the plaintiff.
Of course this insurance defense money issue cuts both ways. If the plaintiff has a policy which arguably applies to the defendant's counterclaim, the plaintiff may be able to tender its defense of its counterclaims to its carrier. Sometimes the carriers become silent partners in the counterclaims and agree to pay for them in order to get their fees back, or as a backup to obtain coverage from the other side for their potential coverage to their insureds. We thus sometimes see the irony of two (or more) insurance companies stepping into the shoes of their respective insureds and doing battle with each other. One of the few certainties in life is that the salesman who sold those policies never anticipated, in a million years, that this scenario would take place.
Accordingly, another strategic decision must be made by the defendant. It must ask itself if it wants to file a counterclaim which may trigger coverage for the original plaintiff.
In order to determine whether or not coverage or duty to defend may be triggered, one has to consider which types of action are most likely to bring about this result. Before Bank of the West, it was generally considered that "unfair competition" would be most likely to accomplish this result, at least in California, because the statute defines this so broadly that virtually any bad act in business qualifies. Since Bank of the West, however, this has become a weak reed because of the court's ruling that policies do not cover restitution. One cause of action that usually triggers coverage (and has replaced unfair competition as the tort of choice) is trade libel or product disparagement since this is a damage claim arising directly from communication (and therefore qualifies as advertising injury). Accordingly causes of action which can be linked into trade libel can often trigger coverage. In most states (e.g. California) duty to defend part of the case becomes a duty to defend the entire case. In some other jurisdictions courts have apportioned attorney fees between covered and non-covered actions.
A complaint for violation of the antitrust laws; tortious interference with a prospective business advantage; patent infringement; trade libel, and product disparagement, each being a separate count, but each involving identical factual allegations, might very well trigger coverage. They would almost certainly trigger a duty to defend. Obviously a plaintiff or counter-claimant could eliminate one or more of these causes of action (which may be duplicative in their recovery - they also may not be - this is a very tricky area and must be navigated carefully) and thereby effect coverage and its opponent's ability to obtain a defense. Of course this is not dispositive. The possibility of coverage, depending on the facts, may be enough for duty to defend. Seaboard, supra.
The bottom line is that a potential plaintiff and/or a potential counter-claimant should carefully analyze all the possible causes of action available to it, based on the complained of conduct. Next an evaluation should be made as to the desirability of triggering coverage and/or duty to defend from your opponents policy if it has one. Finally, the various causes of action should be drawn to either trigger or not trigger a possible policy. There is some considerable guess work involved, but those familiar with policy language should be able to cover the bases. Once the litigation is underfoot, the other sides policies can be obtained through discovery and a party can decide if it wishes to modify its positions at that point.
CONCLUSION
Insurance has introduced a whole new set of parameters to be considered in business litigation and intellectual property litigation in particular. Insurance has been a lifesaver for some small businesses which often didn't even know they had this kind of protection. Today's corporate business and intellectual property lawyers need to be fully aware of all the ramifications of insurance in business litigation. This means they must also be fully aware of all the causes of action which are related to each other, particularly in the area of intellectual property litigation. Knowledge of these areas can be of great benefit to the client. Lack of such knowledge can be a disaster.
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