Coverage for Intellectual Property Claims Under CGL Insurance Policies

Transcription

1 Coverage for Intellectual Property Coverage for Intellectual Property Claims Under CGL Insurance Policies Sidney J. Hardy Eugene T. Rhee I. Introduction Most of us have business clients who advertise their goods or services. Suppose one day next week one of your clients calls and advises you that her business has been sued by a competitor who claims to have been tortiously injured as a result of your client s trademark infringement, misappropriation of marketing ideas, and copyright infringement. Your client wants to know whether her business has insurance coverage for these claims. Over the past twenty-five years, countless lawsuits have been filed by policyholders against their insurers seeking coverage for intellectual property claims under the Advertising Injury provisions of their Commercial General Liability ( CGL ) policies. In fact, one federal district court judge observed that the number of lawsuits brought in this area constituted a litigation explosion. 1 Media liability policies are specifically designed to provide tailored coverage to companies in the business of publishing, broadcasting, and advertising. Those specialized policies are beyond the scope of this article; rather, the focus here will be on coverage for intellectual property claims under the Advertising Injury provision of the standard CGL policy. Submitted by the authors on behalf of the FDCC Intellectual Property Section. 1 Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F. Supp (N.D.Ill. 1998). 337

2 FDCC Quarterly/Spring 2008 Sidney J. Hardy is a director in the law firm of McCranie, Sistrunk, Anzelmo, Hardy, Maxwell & McDaniel, P.C., which has offices in Metairie and Covington, Louisiana. He received his bachelor s degree from the University of Alabama Law School in Mr. Hardy has represented clients in matters involving professional liability, transportation and trucking, construction, products liability, retail employment matters, commercial disputes, environmental claims, and class actions. During his career, he has tried jury cases in almost all of these practice areas. He has extensive experience in representing both primary and excess insurance carriers in all stages of litigation. Mr. Hardy is currently serving as managing partner of the firm. II. Evolution of the Policy Language Coverage for advertising injury first appeared in CGL policies in 1973 by way of endorsement. In 1986, the Insurance Services Office, Inc. ( ISO ), an entity which compiles and publishes forms used by insurers, amended the CGL policy by moving this coverage into the policy itself. It provided coverage for Advertising Injury which was caused by an offense committed in the course of advertising your goods, products, or services. Advertising Injury was defined as follows: 1. 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; 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. 2 2 ISO Form CG

3 Coverage for Intellectual Property Eugene T. Rhee is an associate with the law firm of McCranie, Sistrunk, Anzelmo, Hardy, Maxwell & McDaniel, P.C. He received his bachelor s degree in 1998 from Louisiana State University and his J.D. in 2002 from Paul M. Herbert Law Center at Louisiana State University. His practice focuses on general civil litigation, insurance defense and commercial litigation. He is admitted to practice in all Louisiana State courts, and all United Sates District Courts of Louisiana and the United States Court of Appeals for the Fifth Circuit. He is a member of the Louisiana State Bar Association as well as the Federal and American Bar Associations. The 1986 form amended the prior endorsement with a change in the definition of Advertising Injury, by deleting piracy and unfair competition as covered offenses and by also eliminating the exclusion for trademark infringement. In 1998, the CGL form underwent another revision. In this edition, the phrase misappropriation of advertising ideas or style of doing business was deleted and replaced by the use of another s advertising idea in your advertisement. Paragraph (d) of the covered offenses was also changed. Instead of providing coverage for infringement of copyright, title, or slogan, the 1998 version provided coverage for infringing upon another s copyright, trade dress or slogan in your advertisement. The 1998 revision also defined advertisement as:...a notice that is broadcast or published in the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters. 3 The 2001 revisions are characterized primarily by new and broad exclusions. The 2001 revision excludes personal and advertising injury arising out of copyright, patent, trademark, trade secret, or other intellectual property rights. 4 It does not, however, apply to infringement, in your advertisement, of copyright, trade, or slogan. The new revision also excludes advertising injury coverage for website 3 ISO Form CG ISO Form CG

4 FDCC Quarterly/Spring 2008 designers, and internet search, access, content, or service providers. Also excluded is unauthorized use of another s name or product in the policyholder s address, domain name or metatag... The fourth exclusion covers personal and advertising injury arising out of an electronic bulletin board or chat room that the policyholder hosts, owns, or over which he exercises control. The 2001 revisions formally acknowledged certain internet activities constituting advertising as follows: Material placed on the internet or on similar electronic means of communication; and Regarding websites, only that part of a website that is about your goods, products or services for the purposes of attracting customers or supporters. 5 III. The Coverage Test In adjudicating coverage disputes under the Advertising Injury provisions of CGL polices, courts have adopted a three prong test: 1. the suit must have alleged a cognizable advertising injury; 2. the infringing party must have engaged in advertising activity; 3. there must have been some causal connection between the advertising injury and the advertising activity. 6 The insured s claim must satisfy all three prongs of the test in order for the court to hold that the insurer has a duty to defend and/or indemnify its insured. The first prong requires a determination of whether the infringing party was engaged in advertising activity. Prior to the 1998 CGL revisions, the term advertising was not defined in the policies, and courts were free to offer their own definitions of advertising, no matter how expansive or restrictive. To what extent does solicitation constitute advertising? In Peerless Lighting Corp. v. American Motors Insurance Co., 7 a single customer was solicited and the court held that unfair competition was not committed in the course of advertising the insured s goods or services. In other words, soliciting and advertising were different activities. 5 ISO Form CG State Farm Fire & Casualty Co. v. Steinburg, 393 F.3d 1226, 1123 (11th Cir. 2004) Cal. Rptr. 2d 753 (Ct. App. 2000). 340

5 Coverage for Intellectual Property In Central Mutual Insurance Co. v. Stunfence, Inc., 8 the original plaintiff, Gallagher, alleged that the insured, Stunfence, had infringed upon the overall appearance of Gallagher s products by placing Stunfence signs on Gallagher s products. In finding that the display of a competitor signs on one s own product did not constitute advertising, the trial judge noted that while arguably some signs such as billboards would fit the policy s definition of advertising, signs on a competitor s products did not. 9 The universe of what might be considered advertising has been considerably narrowed as a result of the 1998 and 2001 policy text revisions. For example, the 1986 revision provided coverage for advertising injury caused by an offense committed in the course of advertising your goods, products, or services... Consequently, courts have used the in the course of language to find advertising activity. However, the 1998 revisions limited coverage to those offenses that took place in your advertisement. The more restrictive language significantly reduced the fringe areas within which some judges found coverage. The determination of what is and what is not advertising is by its nature an inherently fact intensive inquiry, and it will undoubtedly be the source of continued litigation. Direct mail solicitations aimed at a certain segment of the population may or may not be considered advertising. Another source of litigation may be promotional material distributed at conventions or trade shows. Many courts have confused prongs two and three, the cognizable advertising injury and the causal connection between the advertising injury and the advertising activity. It certainly may be argued that in order to have an advertising injury, there has to be a causal connection between the advertising activity and the resulting injury. Therefore, many courts have used a similar analysis in determining whether there was a cognizable advertising injury, or in the alternative, determining whether there was a causal connection between the advertising injury and the advertising activity itself. In State Farm Fire & Casualty Co. v. Steinberg, 10 Steinberg, an investment firm, was sued by a competitor for allegedly interfering with the original plaintiff s business relationships, misappropriating trade secrets, and misappropriating that company s client lists. Steinberg sought coverage under his State Farm CGL policy, claiming that the offenses set forth in the plaintiff s lawsuit constituted infringement of copyright, title, or slogan and/or misappropriation of advertising ideas or style of doing business F. Supp. 2d 1072 (N.D. Ill. 2003). 9 Id F.3d 1226 (11th Cir. 2004). 11 Id. at

6 FDCC Quarterly/Spring 2008 The trial court did not agree with Mr. Steinberg, and the appellate court affirmed the trial court s summary judgment in favor of State Farm. This court found that the misappropriation of confidential customer lists could not be held to fall within the policy language regarding misappropriation of either advertising ideas or style of doing business. 12 In Frog, Switch & Manufacturing Co. v. Travelers Insurance Co., 13 one of the insured s competitors filed suit claiming that the insured entered a particular product market by using the competitor s proprietary trade secrets, confidential business information, and technology misappropriated via a former employee. In considering whether this was an advertising injury, the court noted that allegations of unfair competition or misappropriation have to involve an advertising idea, not just a non-advertising idea that is the subject of advertising. 14 In other words, the injury occurred not because of the policyholder s advertising, but because of other conduct. The central question asked by courts in analyzing the issue of advertising injury/causation is: What caused the harm to the original plaintiff? Was the harm caused by misappropriation of advertising ideas, or was the true harm to the original plaintiff caused by other conduct, i.e., misappropriating customer lists, or copying the design of another product? As with most other issues, the establishment of the causal connection more often than not depends upon the philosophy of the judge before whom the matter is pending. IV. Treatment of Specific Intellectual Property Claims This section of this article will examine various intellectual property claims and the treatment these claims have received by courts. Most, if not all of the decisions referred to involve interpretation of pre-2001 CGL policies. Again, as noted above, the 2001 revisions significantly restricted coverage for intellectual property claims under CGL policies. A. Patents A United States patent is a property right that grants the owner of the patent the power to exclude others from making, using, selling, and offering to sell a new, non-obvious useful invention in the United States for up to twenty years. 15 Policyholders, on the whole, have been unsuccessful in obtaining coverage under the advertising injury provisions of CGL policies for patent infringement claims. 12 Id. at F.3d 742 (3d Cir. 1999). 14 Id. at James R. Warnot, Jr. & Daniel C. Glazer, Insurance Coverage for Intellectual Property and Cyberspace Liability, 652 PLI/Lit 407, 409 (2001). 342

7 Coverage for Intellectual Property The biggest problem that the policyholder has with patent claims is with the issue of causation. Courts uniformly reject arguments that the mere advertisement of an infringing product satisfies the casual connection requirement. In 1996, Congress amended 35 U.S.C.A. 271(A) to include an offer to sell an infringing product as a direct patent infringement. The law is unsettled under the 1998 and earlier versions of the CGL, but the 2001 revisions specifically exclude claims for personal and advertising injury arising out of patent rights. Thus, the possibility of success in obtaining coverage for patent infringement in connection with advertising is very remote. B. Trademarks and Trade Dress Trademarks and service marks are devices used in connection with the sale or advertisement of products or services of a particular merchant to distinguish them from similar products of services of others and to identify the source of the trademark products or service marked. The Lanham Act provides that the term trademark includes any word, name, symbol or device, or any combination thereof, adopted and used by a manufacturer or merchant to identify his goods and distinguish them from those manufacturers sold by others. 16 Although trademarks and service marks certainly may be trademarked for service-marked titles or slogans, they may also be symbols or emblems. 17 Trade Dress is the distinctive packaging, shape or overall appearance of a product, such as the design of the traditional Pepsi or Coca-Cola bottle. The 1976 broad form endorsement excluded coverage for infringement of trademark, service mark, or trade name. However, as referenced above, the 1986 revisions did not specifically exclude trademark infringement, and as a result many policyholders have been successful in persuading courts to find coverage under the Advertising Injury provision of their CGL policies for trademark infringement. Policyholders argued that claims of trademark infringement prompted coverage under either or both of the following areas: 1. Infringement of copyright, title, or slogan; or 2. Misappropriation of advertising ideas or style of doing business. The definition of title as it relates to infringement has also been the subject of judicial discussion. In Advance Watch Co. v. Kemper National Insurance Co., 18 one of the competitors of the policyholder filed a lawsuit alleging that the policyholder had diluted the distinctiveness of the competitor s trademark and therefore infringed upon its trademark. The Sixth Circuit Court of Appeals upheld a finding of no coverage, stating as follows: 16 L. Altman, Callmann on Unfair Competition, Trademarks and Monopolies, 17:1 (4th ed. 2002) U.S.C. 1127; Shakespeare Co. v. Silstar Corp. of Am., 802 F. Supp (D.S.C. 1992) F.3d 795 (6th Cir. 1996). 343

8 FDCC Quarterly/Spring 2008 In the present action, we conclude that the reasonable expectation of these parties as to coverage rests on the fact that misappropriation of advertising ideas or style of doing business refers to a grouping of actionable conduct fairly well delineated by case law, and does not refer to another, distinct grouping of actionable conduct which has come to be commonly referred to in case law and in legal treatises as trademark and trade dress infringement. 19 In other words, because the policy did not specifically state that coverage would be provided for infringement of trademark, such infringement was not a covered offense. However, the Advance Watch decision is the minority view. Most courts, in considering the pre-1998 advertising injury policy text, have found coverage for trademark infringement as a misappropriation of an advertising idea or style of doing business. For example, in Frog Switch, the court stated as follows: A trademark can be seen as an advertising idea : It is a way of making goods so that they will be identified with a particular source. 20 Finally, in some cases, the outcome has hinged up on the meaning of infringement of...title. In other words, what kind of title has to be infringed upon to trigger advertising injury coverage? A California court found the definition of title to be the name of a literary or artistic work. 21 The definition of title was given a much broader interpretation in Houbigant, Inc. v. Federal Insurance Co. 22 Houbigant, the fragrance manufacturer, claimed that one of its licensees had infringed upon Houbigant s trademark by selling a watered down version of one of Houbigant s trade secrets to competitors and by using Houbigant s name to sell non- Houbigant products. 23 The Third Circuit Court of Appeals held that the term title includes any name, appellation, epithet, [or] word by which a product or service is known. 24 C. Copyright Copyright protects the expression of an idea affixed in a tangible medium. The copyright of a work includes books, musical compositions, dramatic works, films, graphic and sculpture works, audio/visual works, sound recordings, and architectural works. Software 19 Id. at The Frog, 193 F.3d at 749; see also Northam Warren Corp. v. Universal Cosmetic Co., 18 F.2d 774 (7th Cir. 1927). 21 Palmer v. Truck Ins. Exchange, 988 P.2d 568 (Cal. 1999) F.3d 192 (3d Cir. 2003). 23 Id. 24 Id. at 198 (citing Villa Entrrs. Mgmt., Ltd v. Fed. Ins. Co., 821 A.2d 1174, 1187 (N.J. Super. T/ Law Div. 2002)). 344

9 Coverage for Intellectual Property programs are also protected by copyright law, although some software may also be entitled to protection under Patent and Trade Secret Laws as well. 25 Copyright was always included as one of the enumerated offenses through the 1998 CGL revision. Nevertheless, there is very little case law concerning copyright infringement. However, it should be noted that the intellectual property exclusions contained in the 2001 CGL revisions exclude personal and advertising injury arising out of copyright infringement, along with injury resulting from patent, trademark, and trade secret infringement. However, the exclusion does not apply to copyright if the infringement takes place in your advertisement. D. Trade Secrets Most of the litigation under advertising injury provisions of CGL policies pertaining to trade secrets relate to customer lists or advertising strategies. In Hayward v. Centennial Insurance Co., 26 Mr. Hayward, an employee of a San Francisco area pre-press service, left his employer and joined a competitor. His former employer, In Sync, filed a complaint alleging breach of contract, breach of fiduciary duty, and misappropriation of trade secrets. Hayward tendered defense to his insurance carrier, Centennial, and Centennial denied coverage. The trial court granted Centennial s motion for summary judgment and the appeals court affirmed the trial court s action. The court noted that In Sync alleged that Hayward had misappropriated trade secrets in bringing confidential information, marketing plans, data, and customer and supplier identities to his new employer. In Sync s complaint was limited on its face to allegations of solicitation of customers. Since In Sync s complaint alleged wrongful solicitation, not advertising, the complaint on its face absolved Centennial of the duty to defend Hayward. What appears to have doomed Hayward s claim was that there was very little concerning advertising which was involved in In Sync s claims against him. Because the 2001 ISO form specifically excludes trade secrets, it is now doubtful whether coverage can be found or liability allegedly arising out of misappropriation of trade secrets. 25 Warnot, supra note F.3d 989 (9th Cir. 2000). 345

10 FDCC Quarterly/Spring 2008 V. Conclusion The trend in CGL policies has been toward limitation of coverage for infringement of intellectual property rights. The complaint alleging intellectual property infringement must be scrutinized closely does the plaintiff claim injury as a result of advertising or marketing activities of your client? CGL policies should be scrutinized closely to determine which version of advertising injury coverage applies. As noted, coverage is much more expansive under the 1986 version than under the later versions. Finally, keep in mind that any attempt to invoke coverage under the advertising injury provision of the policy will most likely result in a flat denial of coverage, or a declaratory judgment sought by the insurer. Most of the cases cited above involve decisions in which the courts found only a duty to defend; they did not address actual coverage. It is reasonable to assume that some of the policyholders who prevailed in having the insurer assume their defense were later disappointed when it was decided that there was no coverage for the injuries alleged. Given the uncertainty of coverage for intellectual property infringements under CGL policies, the best advice you can give your business clients is to purchase insurance products specially designed to cover these risks. 346