Gauntlett on Intellectual Property/Antritrust Insurance : Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

After the jury in the patent infringement trial found against Hyundai, Hyundai brought suit against its insurers in the Central District of California seeking a declaration that the insurers had a duty to defend.

The district court granted summary judgment to the insurers. The Ninth Circuit reversed. It found the three-element test for proof of “advertising injury” coverage satisfied.

First, “advertising” was implicated rather than individualized solicitation because Hyundai’s BYO feature was widely distributed to the public at large as part of Hyundai’s dissemination of a product through its marketing methods and marketing systems.

The Court found that the insurers should have viewed the BYO feature on the insured’s website in making their determination whether to defend the underlying suit.

Second, the Court held the “misappropriation of advertising ideas” offense was satisfied where the patent was for a process or invention which reasonably could be considered an “advertising idea.”

The Court found that Orion did allege a violation of a method patent involving advertising ideas. There need not be a suit by a competitor since the misappropriation of advertising ideas could injure an NPE (non-practicing entity) as the policy did not limit the identity of the claimant by its specific language.

Third, the Court found that a causal connection arose because of the linkage between the “advertisement” and the “advertising injury” offense of “misappropriation of advertising ideas” where an advertising idea was itself patented.

In noting that there may be situations where an advertisement induces another to infringe a patent, the Court left open the question of whether a causal connection could be established in such a situation.

Thus, for patent infringement suits alleging that websites or other types of marketing methods/systems infringe a patent, defendants may be entitled to a duty to defend from their insurers under the standard “advertising injury” provisions of their policies. So long as the alleged wrongful acts constituting patent infringement potentially occur during a policy period where no patent infringement exclusion is in force, this analysis clarifies a pathway to coverage in a number of patent infringement lawsuits.

In the underlying suit Multi-Vet alleged that Premier manufactured and sold dog training collars bearing the designations “Gentle Spray Bark Citronella Anti-Bark Collar” and “Gentle Leader Spray Sense Anti-Bark Collar,” in competition with Multi-Vet's products, which bear the trademarked name, “GENTLE SPRAY®.” Id. at *2.

The pertinent claims were unfair competition of common law, trademark infringement in violation of the Lanham Act § 1114 and false designation of origin and violation of the Trademark Act, 15 U.S.C. § 1125(a).

At issue were alleged false association with the attributes and characteristics of Multi-Vet’s products with the dog training collars originating from Premier. The three part test adopted from a district court decision in Virginia, Solers, Inc. v. Hartford Cas. Ins. Co., 146 F. Supp. 2d 785, 793 (E.D. Va. 2001), included its third element advertising activities that caused harm. However, neither harm nor damages is the focus of offense-based coverage. The question the policy asks is where there’s a causal relationship between the advertising activities and the advertising injury offense and not the ultimate injury. Since Travelers’ policy language only requires that the “advertising injury” must be “caused by an offense committed in the course of advertising your goods, products or services … .” the Court’s construction adds words of limitation that are not in the policy. Id. at *2.

Following the eight corners rule, the Court ignored any facts not set forth in the complaint in its coverage analysis pursuant to a recent Fourth Circuit case – CACI Int’l, Inc. v. St. Paul Fire & Marine Ins. Co., 566 F.3d 150, 155 (4th Cir. 2009) (“CACI”), applying Virginia law, purportedly relying on Brenner v. Lawyers Title Ins. Corp., 397 S.E. 2d 100, 102 (Va. 1990). Id. at *5.

While not entering the fray as to whether the term “title” was as limited as Travelers urged “the title of the distinguishing name of the written, printed, or finished production;” “a similar distinguished name of a musical composition or a work of art,” or any form of business name as urged by the insured, the court found there was no causal nexus because Premier’s alleged activities did not occur in the course of advertising, or in the alternative, cause harm.

Adopting the Solers definition, claiming it was based on what the majority of cases have determined and finding the term “advertising” refers “unambiguously to the widespread distribution of promotional material to the public at large, or least to widely disseminated solicitation or promotion.” Id. at *7.

The court found these risk tests not satisfied.

The Multi-Vet Initial Complaint seeks an injunction against advertising in its prayer for relief, but it fails to allege any facts as to advertising at all, much less harm from advertising, in the allegations it placed before the New York federal court. In Solers, the Court found that solicitation did not constitute advertising. Id. at 795. Given this precedent, this Court finds that “sale” and “use,” which the Mutli-Vet Initial Complaint alleges without any further context, could not constitute advertising, or “widespread promotion” (as opposed to sale) of goods.

Id. at *8.

It did not consider it was implicit in the allegations that wrongful use occurred in connection with sale that that use would necessarily implicate advertising and was unwilling to look beyond the four corners of the complaint to evidence how the actual goods were sold, see evidence of advertising. Nor did the court agree that use of trademark applies advertising.

The court observed that in many cases where a trademark infringement action was asserted, courts readily found the causal nexus met because the factual allegations evidenced advertising.

Distinguishing the Fourth Circuit’s seminal decision, applying North Carolina law, State Auto Prop. & Cas. Ins. Co. v. Travelers Indem. Co. of America, 343 F.3d 249, 259 (4th Cir. 2003), the court observed:

Even in State Auto, where the Fourth Circuit held that the use of the “Nissan” name on a website for a computer company owned by Mr. Uzi Nissan invoked a duty to defend because Nissan was a “quintessential example of a trademark functioning to advertise a company’s products,” State Auto, 343 F.3d at 258 . . . .

Id. at *9.

The court also found it significant that the complaint alleged that the “offending websites” were used “for advertisement purposes.” fn13, id. at 259, citing underlying complaint. Id. at *9. It was concerned that finding the advertising nexus met by mere claims of sale over importation was improper.

Absent reliance on CACI, reference to defendant’s website revealed advertisement of products that was readily available to the claimant as well as the court’s complaint. The court’s reliance on a narrow construction of duty to defend means that the duty to indemnify may be broader in this action since the website advertising might create ultimate liability and be a basis for judgment. Cases have readily found that scenario is an inappropriate one in which to deny a defense, and thus the impact of the rigorous application of the complaint allegations rule per CACI is to improperly address coverage in many scenarios where indemnity will thus be broader than defense duties.

The pertinent coverage, an exception to the IP exclusion under which Microsoft need establish liability, was “infringement of copyright . . . in your ‘advertisement.’ ” Id. at *5.

To trigger coverage under the advertising injury provisions of the Policies, the Underlying Lawsuit must have alleged, and judgment must have been entered, on the theory of potential for liability on one of the listed offenses and the offense was committed in the course of advertising the insured's goods, products or services. See Bank of the West v. Superior Court, 2 Cal.4th 1254, 1277 (1992). The California Supreme Court in Bank of the West held that there can be no coverage where the alleged injury had no causal connection to the insured's advertising activities. Id. at 1276.

Id. at *5.

As the court explained:

Here, the EEE Defendants' alleged copyright infringement did not have any causal relationship with its advertising as required to fall under the coverage for “advertising injury.” The allegations in Microsoft's complaint and the judgment entered in its favor concern merely the fact that the EEE Defendants infringed Microsoft's software copyrights by importing and selling the software in the United States when it was only licensed for sale abroad and to educational institutions. The judgment and the complaint upon which it was entered does not relate to any content in advertising or injury caused therefrom.

Id. at *6.

The other problem is that the alleged copyright infringement was deemed to be intentional, which is how the court characterized personal and advertising injury “arising out of an offense committed by, at the direction of or with the consent or acquiescence of the insured with the expectation of inflicting ‘personal and advertising injury.’ ” The court found that this implicated California Insurance Code § 533, precluding coverage for willful misconduct.

Clearly Microsoft could have planned against pirates in such a way that it could have obtained a judgment that was more likely to be enforceable against the insurer but elected not to do so. That decision was costly as it simply obtained the benefit of relief as a practical matter but no damages.

Court’s ruling in Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill.2d 352, 307 Ill.Dec. 653, 860 N.E.2d 307 (Ill.2006), which is inconsistent with the earlier Federal Court Order and superseded and controlled.

As the court explained,

To the extent that the federal courts' interpretation differs from that of the Illinois Supreme Court, the Illinois Supreme Court's ruling in Valley Forge controls. In the present matter, the only term in dispute is “right of privacy.” According to the analysis in Valley Forge, “ ‘right of privacy’ connotes both an interest in seclusion and an interest in the secrecy of personal information.” Since an unsolicited fax advertisement violates an individual's seclusion, TCPA claims fall within the “advertising injury” provision. Applying the present facts to the standard articulated in Valley Forge, plaintiff has satisfied its burden of proof that the Bernstein settlement comes within the “advertising injury” coverage. It is undisputed that the TCPA claim brought against plaintiff arose from an unsolicited fax advertisement. Although the complaint in the Bernstein action did not raise the issue of privacy, a violation of privacy is implicit in a TCPA fax-ad claim. Therefore, the Bernstein settlement comes within the “advertising injury” coverage in defendants' policies.

Id. at *5.

Thus, seeing an erroneous individual versus business exclusion raised by the insurer, the Court found it did not preclude reimbursement obligations for settlement.

Although defendants' policies specifically state that the “advertising injury” must arise from a violation of a “person's right of privacy,” the plain and ordinary meaning of the policies do not preclude coverage if the individual receives the unsolicited advertisement at his place of business. Since plaintiff has established that the TCPA action was filed by an individual, and because there is no evidence to suggest that any of the class members were business entities, plaintiff has met its burden. Therefore, plaintiff does not have to allocate between fax advertisements received on business faxes as opposed to residential faxes.

Id. at *5.

Relying on Judge Coar’s prior finding that “no presently admissible evidence in the record that claimants received faxes prior to the policy effective date” existed, it was of no moment that the settlement class was designated for a broader time frame, i.e., April 4, 1997 to December 8, 2004 whereas the policy period was February 3, 2002 to February 3, 2003. Id. at *6.

The court found no allocation necessary of the amount of settlement. With respect to an allocation between coverage types, the appellate court of Illinois recently concluded that

[An insured is] “not required to allocate [ ] liability within [a] settlement.” Relying on the reasoning formulated in U.S. Gypsum Co. v. Admiral Insurance Co. and Commonwealth Edison Co. v. National Union Fire Insurance Co., the court concluded that it was impossible to determine how much of the settlement was attributable to each claim without having a “mini-trial” and requiring the insured to “prove its own liability.” The court's finding in Binney & Smith can easily be applied to the facts in the instant matter. The underlying complaint against plaintiff alleged “property damage” and “advertising injury” through an unsolicited fax advertisement in violation of the TCPA. Neither the settlement agreement nor the complaint in that matter distinguished between the two claims.

Id. at *6.

The court determined that a sufficient showing was made. A settlement occurred in reasonable anticipation of liability for a coverage loss. It reasoned:

In the present matter, plaintiff notes that Bernstein's willingness to negotiate for $6 million, and eventually settle for $1.95 million, was reasonable in light of its potential exposure in excess of $300 million. Although plaintiff denies any wrongdoing, it points out that the “TCPA is essentially a strict liability statute” which suggests that it would have been difficult to prevail against the Bernstein class at trial. In addition, plaintiff's motion for summary judgment was denied by the Illinois state court on the TCPA claim. Finally, the third amended complaint in the Bernstein action appears to establish a prima facie case under the TCPA. In light of these facts, plaintiff has satisfied its burden of proof that it settled in reasonable anticipation of liability.

Id. at *8.

An award of damages of $1.95 million of which $1.085 million was distributed to charities as a cy pres award was still fully compensable is as the Illinois Supreme Court has defined the term “damages” as “money paid to make good an insured loss” and having a “remedial purpose.” Id. at *8.

The court left open the issue of whether the prior acts exclusion could bar the indemnification due to the production of three sales orders between facts Fax.com and plaintiff beginning on June 7, 2001 prior to the policy inception date. Although the documents’ authenticity was challenged as inadmissible hearsay, this arguably raised a genuine issue of material fact.

The new employer was advised by counsel that the nondisclosure agreement was not enforceable because ICS had failed to adequately compensate Osyka under the agreements.

A second action was filed against the corporate entity Indel for intentionally utilizing proprietary and trade secret information obtained from Osyka to the economic detriment of ICS.

Applying Kentucky law, the court found that a 1998 ISO provision did not compel a defense. The court reasoned:

At first blush, this does not appear to be an advertising injury. [The alleged damages caused by Indel’s use of ICS’s customer and pricing lists] did not create “a notice that [was] broadcast or published to the general public or market segments about [Indel's] goods, products or services for the purpose of attracting customers or supporters.” Moreover, there is no assertion that the advertisements of Indel slandered or libeled anyone or infringed upon another's copyright, trade dress or slogan. In fact, it does not appear that any “advertisements” caused ICS's alleged injuries. Rather, the injuries were caused by Indel's knowledge of ICS's proprietary information.

Id. at *3.

Asking a generalized not factually specific question as to whether trade secrets could constitute advertising injury, the court noted that Kentucky had not addressed the issue but contended other courts had and had rejected the concept, citing Holloway Sportswear, Inc. v. Transportation Ins. Co., 58 Fed. Appx. 172, 175 (6th Cir. (Ohio) 2003) and State Farm Fire & Cas. Co. v. Steinberg, 393 F.3d 1226, 1234 (11th Cir. (Fla.) 2004). The court found other cases referenced of no moment because they involved broader conduct than simply taking customer lists.

The court also found unpersuasive the mere mention of the word “obsolete” on Indel’s website, because it didn’t cause injuries to ICS, and it was not the gist of the complaint, which alleged instead unfair competition by misappropriation of trade secrets, such as customer and pricing lists.

The court reasoned:

Because “the injury for which coverage is sought must be caused by the advertising itself,” the use of the word “obsolete” does not require Capitol to defend or indemnify this suit. Pizza Magia Intern., LLC v. Assurance Co. of Am., 447 F.Supp.2d 766, 773 (W.D.Ky.2006) (quoting Hyman v. Nationwide Mut. Fire. Ins. Co., 304 F.3d 1179, 1192 (11th Cir.2002)).

Id. at *4.

The court noted that should there be any disagreement about this issue there is also an applicable exclusion for “personal and advertising injury arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. However, this exclusion does not apply to infringement, in your advertisement, of copyright, trade dress or slogan.” Id. at *4.

The court found that there was no exception to the exclusion for the tortious interference claims and that, to the extent they were based on trade secret misappropriation, they therefore triggered the exclusion.

A separate contract breach action arose out of trade secret infringement and that there was a breach of contract exclusion. A statutory violation of KRS 365.880 was a prohibition against misappropriation of trade secrets, and thus the exclusion applied to it, as well.

Wisconsin is a four-corner state looking rigorously at the allegation of the complaint and nothing beyond. Articulating the basis for a defense determination, the Court observed:

“The test is whether the complaint arguably asserts a form of liability covered by the policy.” Hamlin Inc. v. Hartford Accident & Indem. Co., 86 F.3d 93, 96 (7th Cir.1996) (applying Wisconsin law) . . . .

Id. at *5.

In analyzing the defense, the court observed:

Specifically, KI contends that S & P's amended complaint alleges injury arising out of the “[u]nauthorized taking or use of any advertising idea, material, slogan, style or title of others.”

Id. at *6.

Here, the plain language of the pertinent provision requires that St. Paul pay damages resulting from KI's advertising of its products that arise from misappropriating someone else's advertising. The word “advertising,” as used in this provision of the policy, is intended to modify not just “idea,” but each of the terms that follow. Otherwise, the enumerated offense would extend far beyond the area of advertising. Thus, St. Paul agreed to indemnify KI against liability for damages incurred where, in advertising its own products, KI misappropriated an idea, material, slogan, style or title from the advertising of another. In the context of this case, St. Paul would be required to indemnify KI for any damages KI incurred in advertising its own products if KI was found to have taken or used any of S & P's advertising ideas, materials, slogans, styles or titles without S & P's consent. Since S & P's lawsuit had nothing to do with its own advertising but was instead all about KI's alleged theft of its furniture design, it seems clear that no covered claim was alleged.

Id. at *7.

The court’s construction would add words of limitation not set forth in the policy to wit, that it is not possible to promote a product similar to that of a competitor, such that its mere promotion would be a misappropriation of an advertising idea, especially where the character of the liability as here, depended upon the content of advertising which would include physical display of furniture as an advertisement for the product itself on showroom floors falling within the broad meaning of the definition of the term “advertising” in St. Paul’s policy, which means, “attracting the attention of others by any means for the purpose of seeking customers or increasing sales or business.” Id. at *3.

Articulating the later argument, KI asserted:

First, . . . “S & P's allegations that KI took and improperly displayed CAMPUS in the KI showroom implicates coverage under the advertising materials language of the policy.” . . . Second . . . KI contends that “the aesthetic nature of [S & P's] design is the true advertising idea and style because it was designed to appeal to consumers through unique appearance,” . . . .

Id. at *7.

The court found that the physical display of the campus furniture in a showroom was made at a time when it purported to be representing the campus line and therefore could not be part of the misrepresentation conduct. Second, the court found that there is no evidence that the campus desk and chair that KI displayed at the showroom in 1995 were created by S & P for the purpose of advertising.

The court, thus, looks to the understanding that the claimant had in using materials misappropriated, not the effect of what the defendant did with those materials, which could be deemed to implicate advertising material. As liability attaches for the defendant’s conduct that could be actionable, the court’s focus appears improper.

The court specifically rejected the notion that the product itself by virtue of its design constitutes advertising, even under St. Paul’s broad definition of that term.

Instead, advertising is communication about a product, and as such it cannot logically be the product itself. This distinction is implicit in St. Paul's definition: “Advertising means attracting the attention of others [to the product] by any means for the purpose of seeking customers or increasing sales or business.” The advertising-the means or act of attracting attention-needs an object; it is not itself the object.

Id. at *9.

The addition of the bracketed phrase “to the product” is but one possible meaning. It does not look at all possible meanings of the term advertising, which is required in a duty to defend analysis nor the potential that a product can logically be an advertisement for itself in some circumstances. As these possibilities are not even examined by the court, and the court takes what it believes is the most logical understanding of how advertising is to be understood, it has only shown that there is one possible reading of the policy under which coverage would not arise, not that it couldn’t occur potentially herein. Although the court cites a number of cases for the proposition that the product cannot be in advertising for itself, they are an equally significant number and more of them recent than the court’s opinion, embracing the contrary view.

The court’s citations include Westport Reinsurance Management, LLC v. St. Paul Fire & Marine Ins. Co., 80 Fed. Appx. 277, 279 (3rd Cir. 2003) (product itself is not advertising); Green Machine Corp. v. Zurich-American Ins. Group, 313 F.3d 837, 841 (3rd Cir. 2002). (Marketing strategy or style of attracting customers was theft of underlying method, not an advertising idea.); Accessories Biz, Inc. v. Linda and Jay Keane, Inc., 533 F. Supp. 2d 381, 388 (S.D.N.Y. 2008) (“Advertising idea” does not include product itself, thus samples could not be a form of advertising.); Hosel & Anderson, Inc. v. ZV II, Inc., 2001 WL 392229, *2 (S.D.N.Y. 2001) (“[t]he product itself is not an advertisement within the meaning of the policy”).

Specific language of the policies could be determinative in each of these cases and the court does not cite it thereby running afoul of the rule that a policy must be interpreted in light of particular language not purported general rules instructions may not have application therein.

The court distinguished Fireman’s Fund Ins. Co. v. Bradley Corp., finding there that the court found that express coverage for trademark encompassed trade dress fact allegations. Consumer confusion caused by the mistaken impression through presentation of a product could be an advertising idea as the court noted. Indiana Ins. Co. v. Super Natural Distributors, Inc., 2003 WI App. 244, 2003 WL 22336427, *10 (Wis. Ct. App. 2003); Superformance Intern., Inc. v. Hartford Cas. Ins. Co., 203 F. Supp. 2d 587, 597 (E.D.Va. 2002).

The court distinguished Acuity Mutual Ins. Co. v. Bagadia, 750 N.W.2d 817 (Wis. 2008) because there, sending of copyrighted software samples and advertising of trademarked software was part and parcel of the injury alleged. The absence of alleged injury based on consumer confusion or any advertising of the product, even though it is implicit from the fact allegations referenced. The fact that in both Bradley and Bagadia, the claimant was a competitor of the insured defendant and the court’s view was noteworthy. It characterized a section of the complaint referring to display or advertising of the products as surplusage, as they were “not a component of any injury (since they do not relate to the merits of any of the claims).” Id. at *11.

The court seems fixated on whether the fact allegations support the theory of damages as articulated in the complaint, not as the court was compelled to do under applicable Wisconsin law, whether the facts could support recovery under any theory that might implicate possible coverage. Thus, the court cites, but does not consider the import of Curtis-Universal, Inc. v. Sheboygan Emergency Services, Inc., 43 F.3d 1119, 1122 (7th Cir. (Wis.) 1994). Skipping in its citation the part of the Seventh Circuit’s opinion that emphasized that the theory of relief, which it described as a legal label, was of no moment.

The same analysis was apropos as to Federal’s policies where “infringement of copyrighted advertising materials” was the offense analyzed.

[E]ven if the complaint in the underlying action could be read to allege copyright or trademark infringement based on KI's alleged misappropriation of S & P's furniture designs, there is certainly no allegation that KI made infringing use of copyrighted advertising materials, unless one regards the design itself as advertising, an argument that I have already fully addressed and rejected above.

Id. at *13.

• St. Paul’s payment of $780,000 in defense fees and $315,000 to settle a lawsuit was no small matter and that it entitled St. Paul to potential reimbursement if issues could be factually addressed to the court’s satisfaction.

• There was no authority for the proposition that reimbursement is not permitted even though Wisconsin law may stay proceedings in the underlying claim until the coverage question is resolved, since there is a direct action statute permitting that remedy.

• The complexity attending resolution of commercial general liability coverage issues made this an inappropriate policy.

• The right to reimbursement was a majority position, even though that appears not be true anymore with the recent spade of cases, including General Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods, Co., 828 N.E.2d 1092, 1101 (2005). Id at *18.

• A motion for leave to amend to file a counterclaim seeking reimbursement remains.