Old Insurance Coverage Gets New Life From Recent Federal Legislation

Transcription

1 Old Insurance Coverage Gets New Life From Recent Federal Legislation By Fred A. Simpson Jackson & Walker Houston, Texas The author thanks Jan K. Simpson of the intellectual property firm of Pravel, Hewitt, Kimball & Kreiger, Houston, Texas for editing the examples of patent infringement used in this article. Thanks also to Deborah J. Selden for checking the legal citation Commercial general liability ( CGL ) insurance policies which are generally available for business purposes today include four basic coverages, one of which is entitled advertising injury. Although advertising injury coverage has been widely marketed for twenty years, it has generated fewer claims and less litigation activity than any of the other three basic CGL coverages. 1 That may change as the result of recent amendments to the definition of what constitutes patent infringement. For reasons explained in this article, patent infringement claims in the past generally did not qualify for advertising injury coverage under the CGL policy form. 2 However, recent changes in federal patent infringement laws will undoubtedly stimulate claims and lawsuits falling within the vaguely defined if not ambiguous scope of advertising injury coverage. 3 The new definition of patent infringement encompasses advertising. It is predictable that advertising injury under a CGL policy will henceforth cover a greater number of claims found if the pleaded facts and circumstances suggest a potential for covered damages. This will happen either by accident or by design. An insurer s duty to defend its accused insured then will be triggered because a CGL insurer s duty to defend its insured under Texas law depends not on the outcome of the lawsuit; all that is needed for an insurer to owe its insured a defense is a complaint which alleges facts (taken as true) showing a potential for coverage under the policy. In other words, if the pleaded facts allege a covered claim, the insurer must defend its insured. 4 1 The other basic coverages are: bodily injury, property damage, and personal injury. 2 But see Union Insurance Co. v. Land and Sky Inc., 529 N.W.2d 773 (Neb. 1995); Rymal v. Woodstock, 896 F.Supp. 637 (W.D. La. 1995). 3 The vagueness or ambiguity results from the lack of definition of such things as what constitutes in the course of advertising, misappropriation, advertising ideas or the misappropriation of a style of doing business; and whether slander of a person or organization or disparagement of another s goods, products or services includes slander of a business or of title to patents related thereto. 4 See, e.g., Houston Petroleum Co. v. Highlands Insurance Co., 830 S.W. 2d 152, 155 (Tex. App. Houston [1 st Dist.] 1990, writ denied). However, extrinsic evidence may be considered when doing so does not question the truth or falsity of any facts alleged in the underlying petition filed against the insured. State Farm Fire & Casualty Co. v. Wade, 827 S.W. 2d 448,453 (Tex. App. Corpus Christi 1992, writ denied).

2 Most insureds welcome their CGL insurers into the fray of any tort litigation. This is at least equally true in the case of patent matters where costs tend to be inordinately high due to extensive document production, numerous and lengthy depositions, and the astronomical hourly rates of specialized expert witnesses. Plaintiffs will appreciate the deep pockets of CGL insurers at mediation tables because they know that insurance company managers must as a matter of law exercise prudence in their business decisions. This prudential duty is owed in good faith to the company s insureds. It is also owed as part of a fiduciary duty obligation to the insurance company s shareholders. No matter how distasteful it may be, CGL insurers realize their duties and frequently settle claims for sums of money which include all or part of the alternative cost of providing the defenses they owe their insureds. 5, 6 Why The Federal Infringement Statute Was Changed The definition of patent infringement was changed as of January 1, According to the U.S. Department of Commerce, Patent and Trademark Office, 7 this change was the result of major concessions by the U.S. in the GAAT Uruguay Round designed to conform with practices of other industrialized nations. Changes to the federal statutes were promulgated under H.R. 5110, 103 rd Cong., 2d Sess. (1994), which states on its face that the bill is intended To approve and implement the trade agreements concluded in the Uruguay Round of multilateral trade negotiations. 8 The New Definition of Patent Infringement Adds Offer to Sell Infringement of patent under 35 U.S.C. Section 271, as redefined in the House Bill, effectively adds the advertising of infringing products or methods as a manner in which patent infringement may be committed. Previously it was only wrongful to make, use or sell a patented invention, or its components. The revisions to 35 U.S.C. Section 271(a) state that: whoever without authority makes, uses, offers to sell or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent. 9 5 The Insurance Services Office has estimated that in 1988, insurers spent about 33 cents on legal defense costs for every dollar spent on indemnity. Clifford A. Platt, Note, The Insurer s Duty to Defend: New York Folds the Four Corners of the Complaint Rule in Fitzpatrick v. American Honda, 13 PACE L. REV. 141, 143 (1993). 6 Lamentations about the American legal system and extortions exercised thereunder were recently aired in a John Stossel television special The Trouble With Lawyers (ABC television broadcast, Jan. 2, 1996). A video cassette is available See Ass t Sec. and Comm r of Patents and Trademarks, GAAT URUGUAY ROUND PATENT LAW CHANGES, (u.d.), (citing to P.L , signed by the President on Dec. 8, 1994). 8 H.B was reported by the Ways and Means, Agriculture, Education and Labor, Energy and Commerce, Foreign Affairs, Government Operations, the Judiciary, and Rules Committees. 9 These added words appear in 35 U.S.C. 271(a). Changes to the definition of a contributory infringer occur in 35 U.S.C. 271(c.) Other parts of H.B add the same or similar words to other appropriate sections - 2 -

3 History of Advertising Injury under Texas Law Coverage issues involving patent infringement will be new to Texas and most other U.S. jurisdictions where appellate courts have yet to grapple with the question of what constitutes advertising injury under a CGL insurance policy. The subject of advertising injury under a CGL policy appears in only two reported Texas appellate court decisions, both of which were reached on issues other than whether the alleged wrongdoing was in fact any form of advertising injury. 10 Review of Previous Patent Infringement Claims Under Advertising Injury Much of the reported judicial activity concerning advertising injury involves California law. In 1992, the California Supreme Court examined claims under an older CGL policy form and found that unfair competition was limited to the passing off of one s goods as those of a competitor. 11 At the same time, when considering issues of patent infringement, the supreme court adopted the following stance by quoting from an earlier federal case: 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 advertising. 12 The reason patent infringement matters have not fallen within CGL policy coverage for advertising injury in the past is explained in a 1994 federal district court case: Since the gravamen of patent infringement is the unauthorized production, use or sale of a patented product and not its advertisement, it could not arise out of or occur in the course of advertising activities The same court s opinion contains this further explanation as to the then existing lack of a causal connection between patent infringement and advertising: such as 35 U.S.C. 271(c), and (g), and to other parts of the Code such as 35 U.S.C. 45, lending a consistency of relevant language throughout the United States Code. The definition of a person inducing others to infringe, at 35 U.S.C. 271(b) were unchanged by the new definition of patent infringement. However, if the means employed by a person to actively induce another to infringe is in fact advertising, it would seem that this section of the law has also effectively been given a new meaning. 10 See Feed Store, Inc. v. Reliance Insurance Co., 774 S.W. 2d 73 (Tex. App. Houston [14 th Dist.] 1989, no writ) (seeking only injunctive relief, not money damages); Two Pesos, Inc. v. Gulf Insurance Co., 901 S.W. 2d 495 (Tex. App. Houston (14 th Dist.] 1995, no writ) (alleged offense occurred before the insurance policy was in effect). However, there are indications that a lawsuit involving patent infringement and the question of CGL advertising injury coverage is headed for the Corpus Christi Court of Appeals. See Texas Judge Won t Reconsider Ruling In Favor Of Advertising Injury Coverage. MEALEY S EMERGING INSURANCE DISPUTES, 5 (Preview ed. 1995). The subject case is Cigna Lloyds Insurance Co. v. Bradleys Electric, Inc., No C, Nueces County District Court Bank of the West v. Superior Court, 2 Cal. 4 th 1254, 10 Cal. Rptr. 2d 538, 833 P.2d 545 (1992). National Union Fire Insurance Co. v. Siliconix, 729 F. Supp. 77, 80 (N.D. Cal. 1989). Atlantic Mutual Insurance Co. v. Brotech Corp., 857 F. Supp 423, 429 (E.D.Pa. 1994)

4 The mere advertising of a patented product would not support a claim of patent infringement and the advertising of a patented product is not an element of a patent infringement claim. Another 1994 case in the Ninth Circuit held there was no coverage under a liability policy which provided coverage for piracy arising out of or committed in advertising. 14 The California Supreme Court was quoted in that decision for the proposition that: [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. 15 The federal court in Iolab went on to explain that unless claims alleged the patent infringement of a product during the course of advertising in a manner independent of its sale, the loss was not a form of piracy arising out of or committed in advertising, adding these words: [P]atent infringement cannot constitute an advertising injury because, under 35 U.S.C. 271, a patent is infringed by making, using or selling a patented invention, not by advertising it. 16 The Iolab court concluded that in order for the insured in the case before the court to show the causal nexus between advertising and the claimed loss, the insured would have to show its advertising caused the patent infringement, not the liability. 17 The new federal statute establishes that an offer to sell a patented product is part of the definition of patent infringement. Therefore, all the judicial reasoning explained above is obsolete. The revised statute clearly creates the potential for a causal connection between advertising and patent infringement. A carefully pleaded complaint will trigger the insurer s duty to defend. The duty to indemnity possibly will be triggered as well. Brief History of Advertising Injury Coverage 18 Advertising injury coverage under a CGL policy became generally available in 1976 when an ancillary policy form or amendment to the CGL policy known as the Broad Form 14 Iolab Corp. v. Seaboard Surety Co., 15 F.3d 1500,1505 (9 th Cir. 1994). 15 Id., quoting from Bank of the West v. Superior Court, 2 Cal. 4 th 1254, 10 Cal. Rptr. 2d 538, 833 P.2d 545 (1992), which in turn cited to National Union Fire Insurance Co. v. Siliconix, Inc., 729 F. Supp. 77, 80 (N.D.Cal. 1989). 16 Citing to Siliconix, and quoting from Aetna Casualty & Surety Co. v. Superior Court, 19 Cal. App. 5 th 320, 23, Cal. Rptr. 2d 442, 446 (1993) (which, while interpreting Bank of the West stated the patentee is not injured because a product incorporating its invention is advertised, but because the infringer, without consent, used or sold a product utilizing a patented invention. ) 17 See Iolab Corp. v. Seaboard, 15 F.3d at For a more comprehensive discussion of how advertising injury coverage developed, see, Terri D. Keville, Advertising Injury Coverage: An Overview, 65 S. CAL. L. REV. 919, (1992)

5 Endorsement was introduced by the insurance industry. The definition of advertising injury in that early form was as follows: Advertising Injury means injury arising out of an offense committed during the policy period occurring in the course of the named insured s advertising activities, if such injury arises out of libel, slander, defamation, violation of rights of privacy, piracy, unfair competition, or infringement of copyright, title or slogan. The 1976 Broad Form Endorsement was modified in However, there were no changes in the language of the advertising injury part of the CGL coverage until a complete revision of the CGL policy form was approved for use in Texas in July The new language deleted all reference to piracy and unfair competition. Much mischief arose because that early definition of advertising injury included the phrases piracy, and unfair competition. There is a substantial body of case law and commentary on the subject of unfair competition and the potential it raised for CGL coverage. 19 None of the reported cases are from Texas courts, however. The language of the Broad Form Endorsement has not entirely disappeared. There is a diminishing potential for claims of unfair competition and piracy under policies containing the now superseded language as to unfair competition. However, some courts suggest that coverage for both piracy and unfair competition persists in the newer policy form under the banner of misappropriation. 20 However, the general rule is that patent infringement is neither piracy nor infringement of a copyright, title, or slogan, and that patent infringement does not qualify as a civil cause of action under the common law tort of unfair competition. 21 A new and perplexing question arises as a result of the recent federal legislation: is patent infringement also a covered misappropriation under the CGL policy language? The modern CGL policy language which was introduced in 1987 restated the definition of advertising injury coverage by introducing the concept of offenses, not all of which are easily recognizable as common law torts or statutory violations: Advertising injury means injury arising out of one or more of the following offenses: a. 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; 19 See, e.g., Eugene R. Anderson and Karen L. Bush, Solid Case Law Demonstrates That There Is Insurance Coverage for Antitrust and Other Unfair Trade Practices Claims, and the Body of that Case Law is Growing, INSURANCE LITIGATION, Apr. 1991, at 151; Cinda L. Berry, The Advertising Liability Clause: Coverage for Unfair Business Practices?, F OR THE DEFENSE, Jan. 1992, at See Sentex Systems, Inc. v. Hartford Accident and Indemnity Co., 822 F.Supp 930, 941 (C.D.Cal.1995). 21 See 2 A LLAN D. WINDT, INSURANCE CLAIMS & DISPUTES, 11.29, at (3 rd ed. 1995)

6 b. Oral or written publication of material that violates a person s right of privacy; c. Misappropriation of advertising ideas or style of doing business; or d. Infringement of copyright, title or slogan. The modern CGL policy definition of advertising injury tracks the intent of the earlier Broad Form Endorsement in a number of respects. For example, there is no coverage for insureds engaged in the business of advertising, broadcasting or telecasting. This is consistent with the nature of CGL insurance coverage which generally tends to avoid insuring basic business risks particular to and inherent in the business of the insured enterprise, absent the addition to the policy of special coverage language and the collection of special premiums. 22 The 1987 CGL policy form promulgated by the Insurance Services, Office was accepted by Texas insurance regulators in modified form in There were no changes to the language of advertising injury coverage, however. The qualifications and exclusions of advertising injury in the current CGL policy, are paraphrased as follows: l. Offenses must be committed in the defined coverage territory and within the policy period. 2. Offenses must be committed in the course of advertising the insured s goods, products or services. 3. No coverage exists for publication of material if the insured knows the material is false. 4. No coverage exists for publication first taking place before the policy was issued. 5. Pure breach of contract is not covered, except for misappropriation of advertising ideas under an implied contract. 6. No coverage exists for nonconforming goods, products or services, nor for pricing mistakes. 7. Insureds in the advertising business have no advertising injury coverage. The Potential for Future Patent Infringement Coverage: 22 However, the usual way to insure against these basic business risks is to purchase errors and omissions insurance coverage. 23 There was another change to the industry s format for CGL coverage in 1993, but that form promulgated by the Insurance Services Office has not yet been approved for use in Texas. There are no proposed changes in the advertising injury coverage in the 1993 version, however

7 A United States patent may be infringed in three different ways: 1. Direct infringement - 35 U.S.C. Section 271 (a) 2. Inducement of others to infringe - 35 U.S.C. Section 271 (b). 3. Contributory infringement - 35 U.S.C. Section 271(c). A claim for direct patent infringement appears to require proof of only a few statutory elements to quality for coverage as an advertising injury under a CGL policy. If plaintiff alleges that the defendant/insured advertised an offer to sell the insured s goods or services and if plaintiff sets forth facts describing an infringement on the patent rights of plaintiff by way of an offering to sell an invention, which forms either the basis of plaintiff s advertising ideas or plaintiff s style of doing business, a violation may adequately be described under Section 271(a). The acts may at the same time constitute a misappropriation for CGL purposes. A claim against a person who actively induces infringement of a patent is a little more complicated. Plaintiff must plead a clear explanation of the causal connection between the wrongdoer s advertising and the induced infringement by another person of plaintiffs ideas or style of doing business in order to establish CGL coverage under an alleged violation of Section 271(b). To establish the defendant as a contributory infringer who offers to sell and thereby misappropriates the plaintiff s ideas or style of doing business, there must be a showing that the advertising in question constitutes an offer to sell something belonging to plaintiff within the following statutory provision: a component of a patented machine, manufacture, combination or composition, or material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use. 24 Following are three examples to show how each of the three types of patent infringement may become grievances forming the requisite basis of a complaint sufficient to trigger coverage for advertising injury. A CGL insurer may owe a duty to defend its insured, and perhaps even a duty to indemnify, for a misappropriation of advertising ideas or style of doing business under the advertising injury coverage of the CGL policy if the language of the complaint contains allegations demonstrated in any of the three examples See 35 U.S.C. 271(c). 25 Some jurisdictions may foreclose CGL coverage for inducing patent infringement through advertising, such as in California where the insurance code bars coverage for any loss caused by a willful act of the insured. See - 7 -

8 All three examples are based on the premise that Andy developed and holds patents on a waterless clothes-washing machine, including all components thereof, as well as methods for the successful use of his invention. Andy s intellectual property rights also include a style of doing business wherein he utilizes specific advertising ideas concerning his invention and the training of purchasers in the use thereof as the fundamental basis of his business. Andy unquestionably has achieved certain unique patented property rights evident by or manifest in his style of advertising and doing business. Andy s patent rights are clearly at risk in the marketplace to appropriation by others. 26 Direct infringement: Let us say that Zeb later enters the marketplace by advertising a device or method for which Andy believes he holds exclusive rights by virtue of his patent. Andy may assert claims against Zeb which likely will fall within the CGL definition of advertising injury. If Zeb has CGL coverage, his insurer faces a claim for which there is a potential for indemnity under the CGL policy. The CGL insurer must defend Zeb. Inducing infringement: Alternatively, if Zeb advertises a training course or self-study program in which Zeb instructs third parties in the art of using the methods under patent to Andy, Zeb thereby induces other persons to violate Andy s patented methods. Zeb has probably misappropriated Andy s style of doing business (if not also Andy s advertising ideas). Zeb s CGL insurer probably owes Zeb the same defense as if Zeb directly infringed Andy s patents. Contributory infringement: Assume that Zeb develops a line of replacement parts designed to prolong the life of Andy s waterless clothes-washing machine. If Zeb advertises those replacement parts for sale to third parties, his actions threaten to deny Andy the sale of either one or more of his own patented washing machines or the components thereof. Zeb thereby meets the definition of a contributory infringer and, if Zeb is sued by Andy for contributory infringement, Zeb s CGL insurer may also owe Zeb a defense. The three simplified examples shown above deal only with the duty of a CGL insurer to defend and do not address any of the complex indemnity issues under the CGL policy. The new statutory definition of patent infringement appears to allow an aggrieved party to bring an action earlier during patent violation than was possible before. However, it is entirely Aetna Casualty & Surety Co. v. Superior Court, 19 Cal. App. 4 th 320, 23 Cal. Rptr. 2d 442 (1933). Advertising injury may factually be a willful act of the wrongdoer, but the complaint may not contain words to suggest that. 26 There are three elements to the common law tort of misappropriation: (1) the plaintiff has created a thing through the substantial investment of money, time, and effort such that the thing can be characterized as property ; (2) the defendant has misappropriated this property without compensating the plaintiff for his investment; and (3) the plaintiff has been injured as a result. Sentex Systems, Inc. v. Hartford Accident and Indemnity Co., 882 F.Supp 930, 942 (C.D. Cal. 1995)

9 possible that a plaintiff will be unable to prove money damages from the mere advertising of plaintiffs patented invention and that only equitable relief, if anything, will be granted to the plaintiff. There may be no CGL coverage because there are no monetary damages as a result of the infringement. It is important to point out that if only injunctive relief results from a patent infringement lawsuit, no money damages will be ordered for which any indemnity is owed under the CGL policy. However, if the complaint alleges money damages independently of or in connection with a request for equitable relief, the insurers duty to defend its insured still exists. This is because when the pleadings include any allegations of money damages, the absolute rule in Texas for determining the duty to defend requires the CGL insurer to defend according to the totality of the factual allegations 27 of the pleadings, which are assumed to be true. 28 It is worth considering the nature of money damages for patent infringement. They must be based on either: 1. A reasonable royalty to be paid by the infringer to the patent holder, or 2. The lost profits of the patent holder resulting from the infringement. A defense against a plaintiff s proving up either one of these remedies can be an extensive and expensive litigation proposition. For that reason CGL insurers may prudently elect to pay out their estimates of litigation costs as part of settlement packages. Examples of Insurer s Reservations of Rights. Insureds routinely tender claims and lawsuits to their CGL insurers. Advertising injury claims are relatively few at this time. In the future, CGL insureds who file parent infringement claims with their insurers can look forward to receiving the same statement of reasons why their insurers believe there is no coverage for the claims as they have in the past. These statements will happen when the insurers either: (a) offer to defend their insureds subject to reservation of rights letters, or (b) deny coverage outright (in which case the ball will be in the court of the insureds). The laundry list of reasons for noncoverage of advertising injury claims is predictable: 1. Alleged injury did not arise out of an offense committed during the CGL policy period. 27 Legal theories and, conclusions and causes of action do not qualify as factual allegations. For example, A struck Z, is an alleged fact, but A was negligent when he did so is not an allegation of fact. Nor is A infringed the patent of Z. See Adamo v. State Farm Lloyds, 853 S.W.2d 673, 676 (Tex. App. Houston [14 th Dist.] 1993, writ denied). 28 See Heyden Newport Chemical Corporation v. Southern General Insurance Company, 387 S.W.2d 22, 24 (Tex. 1965)

10 2. Publication of offensive material, if any, first took place before the inception of the CGL policy. 3. Injury, if any, did not occur in the course of the named insured s advertising of its goods, products or services. 4. Any injury arose from breach of contract (if other than misappropriation of advertising ideas under an implied contract.) 5. Alleged injury is not from misappropriation of advertising ideas. 6. Alleged injury is not misappropriation of a style of doing business Any publication of materials was done at the direction of the insured with knowledge of its falsity. 8. Any injury arises out of the willful violation of a penal statute or ordinance committed by or with the insured s consent. 9. A professional liability exclusion in the CGL policy, if any, precludes coverage because injury arose out of the rendering or failure to render a professional service. 10. Claims are only for equitable relief and not money damages (in which case the insurer has no defense obligation), or may become amended or stricken to claim only equitable relief (in which case the insurer may stop defending.) Conclusion. Although not all offers to sell necessarily constitute the advertising of one s goods, products, or services, it is difficult to imagine a situation where the opposite is true. 30 If one advertises the goods, products or services to which another person claims patent rights there may be an infringement which may be a misappropriation of either or both an advertising idea or a style of doing business, or even a disparagement of the title to intellectual property. Insufficient time has passed for intellectual property law commentators to come forth with their assessment of the impact of the new federal legislation, let alone the place of the new law under advertising injury coverage extended by a CGL insurance policy. However, it is predictable that the changes in the federal statute will stimulate claims activity under a basic CGL coverage which has been relatively dormant up to this point. The change could even lead to a substantial revision in 29 See St. Paul Fire & Marine Insurance Co. v. Advanced lnterventional Systems, Inc., 824 F. Sup. 583, 585 (E.D.Va. 1993), aff d 2l F.3d 424 (4 th Cir. 1994). 30 See, e.g., Sentex Systems, Inc. v. Hartford Accident & Indemnity Co., 882 F.Supp. 930, (C.D. Cal. 1995), for discussion on the breadth of advertising activity, including one-on-one solicitat ion

11 coverage provided by the standard CGL policy form on grounds that patent infringement was never intended to be covered