What do automobile websites, twinkling Christmas lights, and education and therapy materials all have in common? More than you might think, as they have all been the subject of recent reported cases on the regularly recurring issue of insurance coverage for intellectual property claims. This issue has led to a "litigation explosion" over whether insurers have a duty to defend claims for intellectual property infringement under the "advertising injury" provisions contained in standard commercial liability policies. Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F.Supp. 1024, 1026 (N.D. Ill. 1998) ("An insurance company's duty to defend intellectual property claims under the rubric of 'advertising injury' is the subject of countless lawsuits – indeed, a recent litigation explosion – throughout the country."). As companies continue to invest in all forms of intellectual property, including patents, trademarks, and copyrights, and as they continue to use them on the internet and in social media, courts continue to adapt to a wide range of issues related to these matters.
Three recent cases discuss not only automobile websites, twinkling Christmas lights, and education and therapy materials, they also provide a particularly helpful snapshot of how the courts are addressing issues that regularly arise in duty to defend cases, including whether patent infringement claims can be covered, the interplay between intellectual property exclusions and exceptions to those exclusions, and how the courts are addressing basic issues of coverage for trademark infringement claims.
Although most readers will be familiar with the interplay between underlying litigation and collateral or subsequent litigation concerning insurance coverage, a basic overview will help frame the issues. Cases regarding an insurer's duty to defend against intellectual property claims arising from an advertising injury typically involve two actions: (1) an underlying action against the insured for intellectual property infringement and (2) an action between the insured and the insurer to determine whether the underlying action involves an "advertising injury" as defined in the policy. This second action can be brought by the insured after the insurer's refusal to defend or indemnify the insured, or can take the form of a declaratory judgment action brought by the insurer prior to disposition of the underlying suit. Determining whether the insurer bears a duty to defend its insured against intellectual property infringement actions is critically important to insureds and insurers alike because the defense of such claims is universally expensive.
Reported cases regarding intellectual property infringement coverage most often involve the duty to defend rather than the duty to indemnify because this issue is raised prior to the resolution of the case and because intellectual property actions often settle. In intellectual property infringement cases, insureds often rely upon their commercial general liability policy, particularly the provisions regarding advertising injuries, to invoke their insurer's duty to defend. A commercial general liability policy typically insures a business against bodily injury, property damage, personal injury, and advertising injury. There are many types of advertising injuries potentially covered under a commercial general liability policy, including defamation, violation of the right of privacy, piracy, unfair competition, false advertising, deceptive trade practices, misappropriation of ideas or styles of doing business, and infringement of copyrights, patents, trademarks, titles, or slogans. See Elizabeth D. Lauzon, Annotation, Advertising Injury Insurance, 98 A.L.R.5th 1 (2002). Courts must closely scrutinize and interpret a policy's provisions and construction to determine if the intellectual property infringement as alleged falls under the scope of the policy. Three notable recent cases discussed below demonstrate how courts are addressing an insurer's duty to defend against a variety of intellectual property infringement claims under the rubric of an advertising injury.
When Can Patent Infringement Be an "Advertising Injury"?
Courts often face the issue of whether patent infringement claims, as opposed to claims of trademark or copyright infringement, are covered as "advertising injury" claims. Recently, the Ninth Circuit addressed this issue and found an insurer did have a duty to defend against a patent infringement claim. In Hyundai Motor America v. Nat'l Union Fire Ins. Co. of Pittsburg, 600 F.3d 1092 (9th Cir. 2010), an insured sued its liability insurers seeking declaratory relief and to recover reasonable costs of its defense in a third-party action brought against it for alleged patent infringement. The Ninth Circuit concluded that, in spite of a history of rejecting claims that patent infringement constitutes an advertising injury, coverage applied here because it involved infringement of a patented advertising technique. The third-party complaint contained allegations of misappropriation by Hyundai of a patented advertising method, which were covered as advertising injuries under the applicable commercial general liability policies. Hyundai, 600 F.3d at 1101.
At issue in this case was a "build your own vehicle" function on Hyundai's website. Hyundai, 600 F.3d at 1094. Orion IP, a patent holding company, held the right to two patents concerning a method of generating productions of customized automotive products for potential customers. In 2005, Orion sued Hyundai for patent infringement alleging that Hyundai's "build your own vehicle" feature on its website infringed the patents held by Orion. Id. at 1096. Because Orion's complaint alleged "[m]isappropriation of advertising ideas," Hyundai sought a defense from its insurers under the advertising provision of its general commercial liability policy. Id. The insurers, National Union Fire Insurance Company of Pittsburgh and American Home Assurance Company, disputed coverage under the general commercial liability policy and declined to defend Hyundai in the underlying action. Hyundai undertook its own defense in the Orion action and a jury awarded Orion $34 million in damages.
The Ninth Circuit began by repeating the principle that "[l]iability insurers owe a duty to defend their insureds for claims that potentially fall within the policy's coverage provisions." Hyundai, 600 F.3d at 1097. Accordingly, if the allegations contained in Orion's complaint potentially constituted an advertising injury as provided for in the commercial general liability policy, the insurers' duty to defend Hyundai against Orion's patent infringement actions would be invoked. However, in order for Hyundai to have a reasonable expectation of coverage under the policy for such advertising injuries, it was required to show that:
(1) [it] was engaged in "advertising" during the policy period when the alleged "advertising injury" occurred;
(2) [Orion's] allegations created a potential for liability under one of the covered offenses (i.e., misappropriation of advertising ideas); and
(3) a causal connection existed between the alleged injury and the "advertising."
Id. at 1098. As the parties disputed all three elements, the court examined each one in turn.
First, the court noted that Orion's complaint alleged that Hyundai's "build your own vehicle" feature constituted "making and using supply chain methods, sales methods, sales systems, marketing methods, marketing systems, and inventory systems." Hyundai, 600 F.3d at 1098. Because Orion suggested that Hyundai was engaged in such "marketing methods" and "marketing systems," the court found that Hyundai's actions constituted advertising as defined as "widespread promotional activities usually directed to the public at large." Id. Though the insurers claimed that Hyundai's "build your own vehicle" feature was actually solicitation rather than advertising, the court concluded that because "the BYO feature is widely distributed to the public at large, to millions of unknown web-browsing potential customers, even if the precise information conveyed to each user varies with user input, [a]ll of the users are still using the same BYO feature." Id. at 1099-1100. Accordingly, the court concluded that Hyundai engaged in "advertising" through its use of the "build your own vehicle" feature on its website.
After determining that Hyundai engaged in advertising, the court next addressed whether the patent infringement claim constituted a "misappropriation of advertising ideas" as provided for in the policy. The court employed the California "contextual reasonableness" analysis put forth in Mez Indust. Inc. v. Pacific Nat'l Ins. Co., 76 Cal.App.4th 856, 90 Cal.Rptr.2d 721, 722 (1999), to determine if "in the context of the case and in light of common sense, whether a lay personal reasonably would read the phrase 'misappropriation of advertising ideas' to include the patent infringement claim at issue." Hyundai, 600 F.3d at 1100. The Ninth Circuit held, in spite of precedent suggesting that patent infringement does not constitute an advertising injury, that based on the context of the facts in this case, the patent could be considered an advertising idea capable of misappropriation. Id. at 1101. ("Orion patented a process or invention which could reasonably be considered an 'advertising idea' and Orion alleged violations of a method patent involving advertising ideas."). Specifically, the patent holder had alleged violation of a method patent that related specifically to advertising techniques, creating a potential for liability under the commercial general liability policy.
Lastly, the court analyzed whether a causal connection linked the advertisement and the alleged advertising injury. The Ninth Circuit noted that "courts have found no causal connection when the patents that the insured allegedly infringed concerned the underlying product for sale." Hyundai, 600 F.3d at 1102. However, the court determined that this case was factually distinguishable as the patent concerned the method of advertising rather than a product for sale. The court stated "the use of the BYO feature in the website is itself an infringement of the patent because it is the use of the BYO feature that violates the patent." Id. at 1103. As a result, the use of the "build your own vehicle" feature employed on Hyundai's website caused the injuries complained of by Orion. As Hyundai established that the third-party patent infringement claims constituted allegations of "misappropriation of advertising ideas" contained in the insurance policy, the Ninth Circuit reversed the grant of summary judgment to the Insurers and directed that summary judgment be granted to Hyundai on its claim for declaratory relief on the duty to defend. Id. at 1104.
The Hyundai decision illustrates that, despite the conventional wisdom that patent infringement claims typically do not fall under coverage for "advertising injury" claims, sometimes a duty to defend can exist, especially where the patent itself relates to advertising methods and ideas.
Exclusions, Exceptions, and Twinkling Christmas Lights
Other federal court cases recently addressing the issue of an insurer's duty to defend intellectual property infringement actions provide guidance on how courts interpret exclusions and exceptions to exclusions in policies. In Santa's Best Craft, LLC v. St. Paul Fire and Marine Ins. Co., __ F. 3d __, Nos. 08-3572, 3573, 2010 WL 2605874 (7th Cir. July 1, 2010), the insured, Santa's Best Craft ("SBC"), brought an action against its insurer seeking a declaratory judgment that the insurer had a duty to defend them in a competitor's suit for trademark infringement. SBC, a manufacturer of twinkling Christmas lights, allegedly copied the third party's packaging design and sold the product using false and deceptive language. Santa's Best Craft, 2010 WL 2605874 at *1. SBC sought a defense under its commercial general liability policy from its insurer, St. Paul Fire and Marine Insurance Company, and sued St. Paul when no defense was forthcoming. St. Paul counterclaimed with a declaratory judgment action regarding its duty to defend. The district court determined that the insurer had a duty to defend, but did not breach it. The district court also made other rulings concerning apportionment and other related issues.
On appeal, the Seventh Circuit began its analysis by determining whether the intellectual property infringement contained in the third-party complaint "allegedly falls within at least one of the categories of wrongdoing listed in the policy." Santa's Best Craft, 2010 WL 2605874 at *3. The court compared the third-party complaint's allegations that SBC had copied its slogans to St. Paul's commercial general liability policy provision providing coverage for "unauthorized use" of a "slogan" and concluded that the complaint triggered St. Paul's duty to defend. In reaching this initial conclusion concerning "slogans," the court emphasized that its inquiry was "based on the allegations in the complaint, not the legal labels attached to them," and provided a helpful analysis based not only on the applicable Illinois law, but on law from other states. Id. at *4 (relying on Illinois, Michigan, and Vermont case law).
Because SBC successfully proved that the complaint alleged an advertising injury under the policy, the burden shifted to St. Paul to demonstrate that an exclusion contained in the policy applied such that St. Paul had no duty to defend. Id. at *4. St. Paul first pointed to an intellectual property exclusion in its policy disallowing coverage for trade dress and trademark violations. Id. at *5. St. Paul suggested that, because all of the alleged conduct of infringement of a "slogan" "result[ed] from" the trade dress claim, the intellectual property exclusion precluded coverage. The court disagreed, and explained that "the fact that the trade dress allegations are a subset of those alleging infringement of slogan does not eliminate coverage under the policy." Id. In other words, because the slogan infringement claim did not arise "but for the trade dress violation claim (or necessarily arose out of the trade dress violation claim)," the exclusion for trade dress claims did not excuse the insurer from its duty to defend the underlying action.
The court also concluded that even if the intellectual property exclusion applied, it contained an exception that permitted coverage for "unauthorized use of … [a] trademarked slogan…of others in your advertising." Id. at *5. St. Paul argued that the underlying plaintiff's slogans were not "trademarked," so that the exception would not apply. The court, however, "agree[d] with the district court that, even if the IP exclusion applied, the trademark exception would require St. Paul to defend the action given the uncertainty whether the court in the underlying action would have decided the slogan qualified as trademarkable." Id. (noting, however, that this alternative holding was not necessary because St. Paul had failed to establish that the exclusion applied).
The court examined one other exclusion, a "material previously made known or used" exclusion, to determine if St. Paul was absolved of its duty to defend SBC. Id. at *6. The commercial general liability policy contained an exclusion for an advertising injury that resulted from "any material that was first made known before this agreement begins" and "any advertising idea or advertising matter, or any slogan or title, of others, whose unauthorized use in your advertising was first committed before this agreement begins." Given that both parties agreed that the third-party complaint alleged violations by SBC in the years from 2002 to 2004, the Seventh Circuit held that coverage was barred under the 2003-2004 policy but not under the 2002-2003 policy. Accordingly, St. Paul's duty to defend SBC was only applicable under the 2002-2003 policy.
Ultimately, the court found that St. Paul did not breach its duty to defend SBC against the third-party action because it timely filed a declaratory judgment action to determine its responsibilities. Because St. Paul filed the declaratory judgment action before the underlying suit with the third party was resolved, prior to imminent settlement or trial, and within a reasonable time of being notified of the suit, the Seventh Circuit concluded that St. Paul did not breach its duty to defend SBC against the intellectual property infringement action.
How the "Majority of Courts" Handle the Duty to Defend Trademark Claims
Insurance coverage for advertising injuries was also recently discussed in a case decided by the South Carolina Supreme Court on questions certified by a federal court. See Super Duper Inc. v. Pennsylvania Nat'l Cas. Mut. Ins. Co., 385 S.C. 201, 683 S.E.2d 792 (2009). Super Duper presented a number of issues concerning whether the applicable commercial general liability policies' provision covering advertising injuries encompassed trademark infringement claims. Super Duper, 385 S.C. at 204. While the Court did not definitively determine coverage issues amongst the parties in the case, it did conclude that based on the terms of the policies presented, trademark infringement claims have the potential to constitute an advertising injury. Id. at 214.
Super Duper brought suit in federal district court to determine if its trademarks on certain educational and therapeutic toys infringed competitor Mattel's trademarks. Id. at 204. Mattel counterclaimed against Super Duper asserting trademark infringement among other claims. Super Duper properly notified its two insurance carriers, Pennsylvania National Mutual Casualty Insurance Company and Travelers Indemnity Company, of the trademark infringement counterclaims and requested coverage under the commercial general liability policies' provisions for "advertising injury." Both Travelers and Penn National denied coverage under the policy and failed to provide a defense for Super Duper. Super Duper consequently defended itself on the trademark infringement claims. Subsequently, Super Duper brought an action, again in federal district court, seeking declaratory judgment and damages for failure to defend or indemnify, breach of contract, and bad faith. The district court certified questions to the South Carolina Supreme Court concerning these issues.
The South Carolina Supreme Court focused on the provisions of the policies defining an "advertising injury" and concluded that between the two policies, an "advertising injury" as covered under the policies constituted (1) misappropriation of advertising ideas or style of doing business, (2) infringement of copyright, title or slogan, (3) use of another's advertising idea in your 'advertisement,' or (4) infringing [upon] another's copyright, trade dress, or slogan in your 'advertisement.' Super Duper, 385 S.C. at 205-208. The court then sought to determine if the allegations contained in Mattel's complaint qualified as an injury arising out of the above-covered advertising injuries.
The court examined each of the four covered advertising offenses in turn, beginning first with "misappropriation of advertising ideas or style of doing business." Specifically, the South Carolina Supreme Court drew upon the case of State Auto Prop. & Cas. Ins. Co. v. Travelers Indem. Co. of America, 343 F.3d 249, 255-258 (4th Cir. 2003), which analyzed the same policy language under North Carolina law. Though the insurers contended that the undefined term "misappropriation" referred to the narrow common law tort of misappropriation, the court determined that because the term was not defined or limited by the policy, the term's common law meaning would apply. Super Duper, 385 S.C. at 209. In so doing, the court noted that cases of ambiguity are construed in favor of the insured as the insurer has both the means and the responsibility to restrict language. Id. at 210.
Concluding that a trademark has the potential to constitute an advertising idea or a style of doing business, South Carolina "join[ed] the majority of courts" in finding that misappropriation may include trademark infringement. Id. at 210-211 ("[M]isappropriation may encompass a claim related to the wrongful use of a trademark, and a trademark may constitute an advertising idea or a style of doing business.") (citing cases from other jurisdictions). Through similar analysis, the South Carolina Supreme Court concluded that coverage for the intellectual property infringement alleged by Mattel could exist under the other three certified questions. Super Duper, 385 S.C. at 212-214 ("[C]overage for 'infringement of copyright, title or slogan' may envelop trademark infringement"; "[T]he use of another's advertising idea may include trademark infringement because to infringe upon someone's trademark, which is an advertising device, one improperly uses another's advertising idea to draw the consumer's attention to a product"; "[T]rademark infringement may occur when a party infringes upon another's trade dress or slogan in its advertisement."). Although the court ultimately withheld judgment regarding the overall coverage issues in the case, it provided a thorough analysis of how the "majority of courts" are handling these issues.
As illustrated above, courts have felt the impact of the recent "litigation explosion" of cases regarding an insurer's duty to defend its insured against intellectual property infringement actions. The increasing accessibility and usage of the internet and social media will likely only serve to increase litigation on the topic of advertising injuries. As Hyundai indicates, the internet only further complicates the determination of whether an insurer has a duty to defend against intellectual property infringement actions stemming from an insured's advertising activities. The increased presence of webpages, emails, and internet broadcasts will likely lead to increased litigation and may broaden the interpretation of "advertising" and perhaps even result in the development of entirely new forms of coverage.
About the Authors
Tom Vanderbloemen and Laura Figueroa represent clients in business and commercial litigation matters at Gallivan, White & Boyd, P.A. in Greenville, South Carolina. For further information, please contact them at TVanderbloemen@gwblawfirm.com, LFigueroa@gwblawfirm.com, or 864-271-9580.