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

Also of interest was an intellectual property laws and rights exclusion applicable to both policies. The underlying lawsuit in San Francisco Superior Court entitled Align Technology, Inc. v. Ortho Clear, Inc., et al., No. CGC-05-438361 asserted 15 causes of action including unfair competition in violation of CBC § 17200 misappropriation of trade secrets, breach of contract, common law and fair competition, intentional interference with economic advantage, conversion, unjust enrichment and civil conspiracy.

Allegedly, former Align employees attempted to “unlawfully utilize Align’s intellectual property, confidential information and employees to start a competing dental device company.” Litigation was one including five lawsuits in total and one ITC action. The cross-complaint against Align asserted 17 causes of action including unfair competition in violation of Cal. Bus. & Prof. Code § 17200, common law and fair competition, intentional interference with respect to economic advantage, defamation (libel), defamation (slander) and breach of contract.

Align allegedly “embarked on a deliberate strategy to destroy OrthoClear … before its first sale was ever undertaken. This strategy manifested itself in a pattern of misconduct, of which the Align lawsuit itself is but a small part. Align’s misconduct encompasses threatening employees that they would be sued personally and destroyed financially if they joined OrthoClear, holding a press conference in which Align defamed the founding members of OrthoClear, instituting the present lawsuit to preclude competition slow [sic] an emerging company from entering the marketplace, and interfering with potential investors interested in OrthoClear.” Id. at *3.

The libel and slander counts arose from communications to other Align employees and the general public who were the recipient of defamatory statements. A number of communications were referenced. These included a series of questions implying that

“(a) OrthoClear's product was ‘merely a copycat’ that infringed on Align's patents, (b) OrthoClear could not possibly compete lawfully with Align and that its founders had violated noncompetition and nonsolicitation agreements, (c) OrthoClear's sources of funding were suspect, and (d) OrthoClear's stock options granted to its employees would not be valuable.”

Id. at *3.

In addition,

On or around February 5, 2005, Align issued a memorandum to its non-management employees which “grossly misrepresented the value of the stock options OrthoClear had promised .... [and] implied that OrthoClear would never go public, would not survive litigation with Align, and would never become profitable.” Id. ¶ 53. The memorandum “specifically maligned Chishti's track record during his tenure at Align.”

Id. at *4.

Settlement of the matter thereafter arose including a one-time payment of $20 million from Align to OrthoClear. Following a February 17, 2005 tender a March 10, 2005 denial was issued.

The court relied on the intellectual property laws or rights exclusion to bar a defense. Bad faith allegations were asserted because Federal was fully aware that none of the exclusions decided came even remotely close to eliminating potential for coverage which is clearly evident on the face of OrthoClear’s cross-complaint.

Align asked the court to follow KLA-Tencor Corp. v. Travelers Indemnity Company of Illinois, 2003 WL 21655097 (N.D. Cal. Apr. 11, 2003) rather than Molecular Bioproducts, Inc. v. St. Paul Mercury Ins. Co., 2003 WL 23198852 (S.D. Cal. July 9, 2003). Id. at *9.

The court found neither Molecular Bioproducts or KLA-Tencor controlling. It noted that the present IP exclusion was neither as narrow as that in KLA-Tencor nor as broad as that in Molecular Bioproducts. It noted that unlike the facts in Molecular Bioproducts a singular intellectual property claim does not automatically disqualify the entire suit for coverage.

Following applicable rules of California Insurance Coverage Law, which required them to be interpreted based on the ordinary understanding of a lay person and exclusionary clauses be interpreted narrowly and requirement that they be “conspicuous, plain and clear,” Federal’s language did not put an insured reasonably on notice that Federal will not cover claims in a lawsuit whenever that lawsuit also includes a claim for intellectual property. Id. at *9.

Looking at the history of California’s interpretation of the term “unfair competition” the court concluded:

The only reasonable interpretation of the phrase in context is that it refers to statutory law to the extent it concerns piracy, common law unfair competition, and similar practices. Thus, some claims under § 17200 may trigger the exclusions, but the determination must be made based on the factual allegations. See CNA Cas., 176 Cal.App.3d at 606 07.

Id. at *11.

The court rejected Federal’s argument that regardless of whether the alleged defamatory statements referred specifically to intellectual property rights all arose out of the Align’s dispute with OrthoClear since it was, at heart, a dispute over intellectual property and all of Align’s statements were made in an attempt to protect its intellectual property from OrthoClear.

Accepting Federal's argument would allow it to cobble together the most favorable allegations from both parties and disregard the rest. Such an approach defies the public policy of strictly construing exclusionary clauses. At best, the conflicting allegations might create a factual issue as to whether injury from each statement was related to an alleged intellectual property dispute. Since a factual dispute does not completely eliminate the possibility of coverage, it does not relieve Federal of its duty to defend. Mirpad, LLC v. California Ins. Guar. Ass'n, 132 Cal.App. 4th 1058, 1068 (2005) (“If coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend.”).

Id. at *12.

The court concluded:

The Cross-Complaint alleged that, in addition to accusing it of violating intellectual property laws, Align was liable for defamation because, among other things, it accused OrthoClear of making false promises to prospective employees, insinuated that former Align executives breached non-competition agreements, maligned Chishti's management of Align, and accused OrthoClear of recruiting its entire sales force and unlawfully soliciting its employees. On their face, such alleged statements bear no relation to the assertion of intellectual property rights. Nor did OrthoClear allege that these were part of any intellectual property dispute. Rather, OrthoClear alleged that Align was engaged in “a deliberate strategy to destroy OrthoClear ... of which the Align lawsuit itself is but a small part.”

Id. at *12.

The court found that the settlement was covered so long as it was reasonable since a wrongful denial of a defense entitled the insured to make such a settlement which could be used as presumptive evidence in the insured’s liability on the underlying claim, including the amount of such liability. Citing Isaacson v. California Ins. Guar. Assoc., 44 Cal. 3d 775, 791 (1988). Id. at *13.

Some portions of the settlement may be covered. It also delayed resolution of that issue to a later adjudication. The court concluded that Federal’s reading is a result out of an exclusion for “intellectual property laws or rights” was in bad faith, particularly if Align is able to prove its other allegations, finding the genuine issue rule did not preclude any possible bad faith action as a matter of law.

Continental’s arguments were misleading in seeking to narrowly interpret its trademark exclusion.

In arguing that the trademark exclusion relieves it of its duty to defend, Continental-in its own motion papers-uses the terms “trademark” and “trade name,” interchangeably. Curiously, trade name is a term of art that neither appears nor is defined in their policy. More baffling still is the policy's use of the term trademark, which is not defined therein. Is the Court to assume that the terms trade name and trademark are synonymous? While they may be in the minds of the defense team, they certainly aren't synonymous under the law. . . .

Professor McCarthy aptly describes the semantic confusion surrounding the basic legal terms used in trademark and unfair competition law as “Alice's Wonderland.” . . .

When faced with this “Alice's Wonderland” area of the law, Continental chose not to define the terms, “trademark” and “other intellectual property rights,” in its policy. Now, Continental argues that the terms trademark and trade name “clearly” apply to the claims at hand.

Like Humpty Dumpty, Continental wants to choose the meaning of its words to suit its own purposes. Such an approach is inconsistent with simple logic, principles of fairness, New Mexico law, and the Federal Rules of Civil Procedure. The Court declines to follow Continental down the rabbit hole. On this side of the looking glass, it is not clear that the trademark exclusion applies. Continental has failed to meet its burdens under New Mexico law and Fed.R.Civ.P. 56(c).

Id. at *3.

Concluding that the duty to defend survived, the court reasoned:

The trademark exclusion only applies to infringement claims. Yet, Continental fails to acknowledge that the counterclaims are not limited to infringement claims. The Pimentel Co-defendants sued, inter alia, for violations of the New Mexico Unfair Trade Practices Act [as well as other asserted claims]. . . .

The trademark exclusion does not apply to non-infringement claims. . . . Although the pleadings of the Pimentel Co-defendants are not models of clarity, some of the claims are non-infringement claims.

Id. at *2-3.

This Order, following the earlier favorable decision on the duty to defend as of November 16, 2005, reasserted the trademark exclusion. This subsequent case was brought after the underlying case led to issuance of an injunction by Judge Browning against the co-defendants for violating an earlier 1989 order respecting the Pimentel Marks.

Contrary to the views expressed by the insurers, the court found that Judge Browning did not determine that the “Marks” were exclusively trademarks. The court found it was equally possible that the registration referred to by Judge Browning was a trade name, which was distinct from a trademark and not within the scope of the exclusion. The court also suggested that the potential infringement of slogan claim outside the scope of the exclusion still created a defense as it did not apply the non-infringement claims.

insured in an underlying suit asserting mislabeling of products and trademark violations. This because all of the underlying complaints were based on the insured’s use of the trademark.

The court also noted Parameter Driven Software, Inc. v. Mass. Bay Ins. Co., 25 F.3d 332, 337 (6th Cir. 1994), Global Computing, Inc. v. Hartford Cas. Ins. Co., No. 05-C-6753, 2007 WL 844618, at *4 (N.D. Ill. March 14, 2007) as well as Greenwich Ins. Co. v. RPS Prods., Inc., 882 N.E.2d 1202, 1212 (Ill. Ct. App. 2008) but a different result attended in NGK Metals Corp. v. Nat’l Union Fire Ins. Co., No. 1:04-CV-56, 2005 WL 1115925, at *15 (E.D. Tenn. Apr. 29, 2005). Although the court did not note this fact, the applicable Illinois or Michigan law cases cited, all apply a four-corners doctrine while Tennessee does not.

P & W’s complaint in the underlying action alleges two causes of action: the first for common law trademark infringement and the second for dilution and diminishment of P & W’s “famous mark” in violation of the Lanham Act.

The exclusion did not enumerate all intellectual property rights encompassed because it referenced the phrase “any intellectual property rights” citing Bragdon v. Abbott, 524 U.S. 624, 639 (1998) (noting that “the use of the term ‘such as’ confirms [that] the list is illustrative, not exhaustive”).

The question was whether the unfair competition count alleging infringement of common law rights also fell within the exclusion. The court took comfort from the reference in the exclusion that injury “arising out of any violation of any intellectual property rights” was excluded.

Federal trademark law does not preempt Maryland’s “broader consumer-oriented remedies provided by the common law of unfair competition.” Barnett v. Maryland State Bd. of Dental Examiners, 293 Md. 361, 379 (1982).

Id. at 437.

But for the alleged trademark violation, there would be no unfair competition claim. Notably, the court did not examine or evaluate whether there could be liability for unfair competition under the asserted claim, even if the trademark infringement claims were deemed not viable because the trademark rights did not vest in the claimant as asserted or the trademark was found to be invalid as presumably the answer to the complaint asserted as affirmative defenses.

The court also did not address with any clarity whether the mere use of P & W’s registered name, “Marvin J. Perry & Associates,” logo, website and subsequent launch of a similar-sounding website, www. marvin j perryinc. com “could be viewed as disparagement of P & W’s separate identity from MJP.”

Id. at 437.

No fact allegations of tarnishment associated with claims of trademark dilution were specifically alleged or referenced by the court and the presumption of disparagement argued by the insured was not even evaluated by the court following a brief mention.

There could be no tortious interference claim because there was no contract involved and tortious interference for business relationships required some underlying factual assertions equivalent to defamation, injurious falsehood, fraud, etc., which the court found absent.

The court deduced that the interference count was solely based on alleged misrepresentations that MJP was the same entity as P & W through its use of P & W’s trade name and trademark, in effect blurring, not tarnishment as the wrongful act was based purely on alleged wrongful use of trademark rights.

The cases cited by the insured were inapposite because they did not address the applicability of analogous intellectual property exclusions. To wit State Auto. Prop. & Cas. Ins. Co. v. Travelers Indem. Co. of Am., 343 F. 3d 249, 253, 260 (4th Cir. 2003) and AMCO Ins. Co. v. Lauren-Spencer, 500 F. Supp. 2d 721, 729 (S. D. Ohio 2007).

The mere use of a letterhead and logo were no more than directed solicitations to the United States Department of State which are not considered “widespread dissemination.” See Monumental Life Ins. Co. v. U.S.F. & G., 94 Md. App. 505, 526-27 (1993). And in any event, the advertisements that fall within the exclusion for use of a “trademark, trade name … or other designation of source” thereby relieving Hartford of its defense duty.

must be read expansively.

The expansiveness of the phrase “any claim arising out of” obviates the need to specify that the exclusion applies “whether committed by or at the direction of the insured or third parties.” Liquor Liab. Joint Underwriting Ass’n of Mass. v. Hermitage Ins. Co., supra at 320, 644 N.E.2d 964. Cases from other jurisdictions at in accord.

Id. at 697.

The insured’s objectively reasonable expectations in the court’s view were of no moment as there was no ambiguity. A.W. Chesterton Co. v. Massachusetts Insurers Insolvency Fund, 445 Mass. 502, 518, 838 N.E.2d 1237 (2005);1 B.R. Ostrager & T.R. Newman, Insurance Coverage Disputes § 1.03[b], at 34 (14th ed. 2008) (“The application of the reasonable expectations doctrine is typically limited to cases in which the policy is ambiguous and the mutual intent of the parties cannot be determined”).

Id. at 698.

Jones Day would not have incurred any loss in the absence of the nephew’s misappropriation and thus Jones Day’s claim arose out of same.

Thus, the AARP mark was used in an “improper way”.

Despite the fact that distinct claims for both trademark infringement and unfair competition in violation of 15 U.S.C. § 1125 were asserted, the court did not analyze – nor, apparently, did the parties raise – the potential argument that a defense could arise from the unfair competition claims in the event the trademark infringement claims were not held to be viable.

Applying Texas law, the court appeared to view each of the potential claims as so interrelated that the potentiality for a nonexistent trademark claim was not in play.

Judge Hilton, in Corporate Risk Int’l, Inc. v. Assicurazioni Generali, S.p.A., No. 95-1440-A, 1996 U.S. Dist. LEXIS 19720, at *8-9 (E.D. Va. Mar. 15, 1996), rejected an insurer argument that a broader exclusion than that in force here applied to false advertising and unfair competition claims because the underlying plaintiff’s claims went beyond the express terms of the exclusion.

After a reading of the underlying complaint, it is clear that the complained of conduct goes beyond trade or service mark infringement. . . . Each of the Lanham Act counts . . . complains of CRI’s conduct in the promotion, sale, and offering for sale of its corporate security services in conjunction with the allegedly infringing marks. Further, at paragraph thirty, the complaint asserted that CRI’s advertising activity was “in direct contravention of Plaintiffs’ CONTROL RISKS MARKS and other proprietary rights.” That reference to other proprietary rights is again made at paragraph sixty-five. Finally, . . . the Prayer for Relief asks that the underlying defendants be enjoined from “engaging in any conduct that tends falsely to represent that, or is likely to confuse, mislead, or deceive Defendants’ customers” into believing that CRI’s services were sponsored by Control Risks Group. The prayer also asks for damages resulting from CRI’s “unfair activities.”